Economics Question

Question

If gross domestic product increases by 10 percent over a year, are we better off? Why or why not

 

Looking for some ideas on my Econ paper.

 

Thanks

Answer 1

There are two parts of this question. First, are you talking about nominal or real (inflation adjusted) GDP? Nominal GDP increases are partially driven by inflation. If the increases are mostly driven by inflation, there really isn't an improvement. So you really want to talk about real terms as much as possible to remove the inflation factor.

 

The second part of the answer is about what is driving the increase. GDP increases can be temporary depending on what is driving it. For example, if the government passes a stimulous package, it may be a temporary effect, which would not be fully felt in subsequent years (ie cash for clunkers). If, however, increased GDP is driven by more exports or more productivity, that is good for the economy. 

 

So the short answer to your question is, for the most part, GDP increases are good for an economy because it shows an expanding economy. 

Answer 2

If GDP increases by 10% then the economy has expanded but prices have also gone up. If wages have not increased along with the GDP increase of 10% then workers may be worse off.

 

If prices rise by 10% and workers don't see a 10% increase in wages then their real wages have fallen.

If prices rise by 10% and workers see a 10% raise in their wages then they are at the same place before the increase in GDP.

If prices rise by 10% and workers get a 20% raise in wages then their real wages have increase by 10%.

 

Nominal wages = real wages + Inflation rate

Real wages = nominal wages - Inflation rate

Nominal = real (with zero inflation)