Economic Essay

What does GAP Stand for? What does it capture? What are its strengths and weaknesses as an indicator of economic activity? HAS/Business school Pre Entry Access Course Economic Essay Juan Carols Sauna Samurai 201495595 16/11/2014 Tutor: Ms. Jacqueline Gilded This essay explains the strengths and weaknesses of the GAP as an indicator of economic activity. It describes the meaning of the abbreviation and what it measures. It explains when it was created, why and where.

The objective of this piece of work is to introduce the reader to the fascinating world of economics through its most important abbreviation. One of the most common uses of its shortened form by economists is GAP, “which stands for gross domestic product” (Called, 2008, p. 48). It is an economic indicator created by the united States of America as a result of the Great Depression of the 1 ass’s. Prior to the economic developments that happened during that time, the States did not have proper measures to manage their economy efficiently.

The results of their efforts created the efficient innovations that made a more stable economic environment (Survey of Current Business, 2000). In fact, “depressions that were recurring problems before World War II became a thing of the past. The business cycle was not eliminated, but its severity was curtailed” (Survey of Current Business, 2000). The GAP “is usually calculated by the national statistical agency which compiles the information from a large number of sources. In making the calculations, however, most countries follow established international standards.

The international standard for measuring GAP is contained in the System of National Accounts, 1 993, compiled by the International Monetary Fund, the European Commission, the Organization for Economic Cooperation ND Development, the United Nations, and the World Bank”. (Galen, 2008, p. 48). The analysis of the word GAP can be broken down into three words, each having its own special meaning. Firstly, domestic, means that it is a domestic product, and more specifically that, “the exclusion of income generated by overseas assets explains why it is called “domestic” product”.

Gross refers to a gross of depreciation. What that means is that, “the term “gross” refers to the fact that there is no deduction to reflect the depreciation or wearing out of fixed assets”. Product refers to an item which, “can be calculated at market rises or factor costs”. “GAP can be calculated by adding the sales values of all finished goods produced during the year, which is the same as totaling expenditure on finished goods, as explained above. This sum will produce a figured called “GAP at market prices”. As the measure is expenditure based, it is not affected by the problems of double counting income tax payments that are simply transfer of income within the economy. However, it is affected by expenditure taxes, such as VAT, and subsides. Market prices include these taxes and subsidies” (Kaplan Publishing, 2008, p. 191). After this essay disclosed the meaning of this well-known abbreviation, it is convenient to explain what it captures. “GAP measures the monetary value of final goods and services-?that is, those that are bought by the final user-?produced in a country in a given period of time (say a quarter or a year).

It counts all the output generated within the borders of a country’ (Called, 2008, p. 48) “and excludes any income generated by assets held by the country s residents abroad” (Kaplan Publishing, 2008, p. 191). “GAP is composed of goods and services produced for sale in the market and also include some market production, such as defense or education services provided by the government” (Called, 2008, p. 48). In fact, “GAP aims to best capture the true monetary value of our economy’. Khan, 2014) This important economic indicator does capture the economic value of the economy of a country. As it is stated in the title of one of the articles from the Bureau of Economic Analysis U. S. Department of commerce, “GAP: one of the Great Inventions of the 20th century’. It is indeed a great invention with the following positive points: ; GAP is the best known abbreviation in economics. “This is the mother of all economic indicators and is the most important statistic to come out in any given quarter” (Bamboo, 2008, p. 07) ; It gives the size of an economy and how it is performing. “An increase in real GAP is interpreted as a sign that the economy is doing well”. “When real GAP is growing strongly, employment is likely to be increasing”. (Galen, 2008, p. 49) ; As it is a worldwide indicator, international organizations like the MIFF calculate and publish global and regional measures of real GAP growth. “These give an idea of how quickly or slowly the world economy or the economies in a particular region of the world are growing’.

Galen, 2008, ; Since the creation of the economic indicators, the GAP being the most important of them, the recessions have been shorter and shallower. (Bamboo, 2008, p. 1 08) One of the more relevant quotes the researcher of this essay founds about the strengths of the GAP as an economic indicator is in the book Economics by Nobel Laureate Paul Samuelsson and his co-author William Northwards in the 1 5th edition of their textbook where it states, “Much like a satellite in space can survey the weather across an entire continent so can the GAP give an overall picture of the state of the economy.

It enables the President, Congress, and the Federal Reserve to judge whether the economy is contracting or expanding, whether the economy needs a boost or should be reined in a bit, and whether a severe recession or inflation threatens”. (Survey of Current Business, 2000). This quotation is important because it gives to the reader an idea of what is the GAP, for what it is used and why the government use it. Despite all the arguments and quotes in favor of the GAP as an indicator of economic activity.