GDP and Its Limitations

Gross Domestic Product (GDP) measures the market value of the final goods and services produced within a country during a given period of time. In other words, GDP measures continuous flow of money from households to firms and then back to households in the macroeconomy. (Refer to Chapter 27)

The trend of the GDP growth rates is the key indicator of macroeconomic fluctuations (business cycles), which include expansion, boom, contraction, and recession. Thus the real GDP is used to explain how well the overall economy of a country is performing whereas GDP per capita is used as a natural measure of the economic well-being of the average individual in a given country. GDP has limitations, however, and is not a perfect measure of the economy and economic health.

• In spite of the limitations (shortcomings), why is the GDP used as a measure of national income as well as a measure of national economic well-being?
• Is the GDP measure underestimating or overestimating national production and total income in the economy during various business cycles? Why?
• What are the limitations of the GDP in measuring total output and national welfare? What products (services) are excluded from the GDP computation?
• What are the impacts of the shortcomings of the GDP as a measure of the national product and national economic welfare (well-being)?

Do the discussion first with reference and citations then do the response theposted below.

Posted 1

Gross Domestic Product (GDP) measures the value of output in monetary terms (McConnell, Brue, & Flynn, 2018). Despite any limitations, GDP is used because it shows the size of the economy and how it is performing (is it growing or shrinking) (Callen, 2020). It is this trend of growth or reduction that show the well-being of a national economy.

GDP does not include any of the transactions from the “underground economy” which, for the most part, are legal work activities that are kept off the books (McConnell, Brue, & Flynn, 2018). This exclusion would underestimate national production and total income. However, GDP does not take into consideration inflation, so if not using the “real-GDP” measurement it would overstate the growth (Leading Development, 2013).

GDP is a monetary measurement of productivity only. Productivity is not the only measure of national welfare. Quality of life and social well-being are ignored by GDP figures which would be important to factor in when measuring national welfare (Ivkovi?, 2016). Other things that the GDP fails to take into consideration are environmental impact, profitability, happiness, and product quality.

Without taking all these things into consideration, just using the GDP as a measure of national welfare would be like total sales as the only measurement of success for a business. Without looking at profit and other metrics, total sales doesn’t tell the whole story.

Posted 2

The GDP is used as a measure of both national income and national economic well being because higher the GDP the better the quality of life, and gives the best accuracy in income and expenditure for an average person in society than any other measure.

The GDP measure is underestimating national production and total income because firstly, GDP does not account for inflation; a problem that has plagued our nation for decades with no real end or solution in sight. This leads to falsified numbers. GDP also does not take into account income equality, which is currently at the highest it’s ever been in the United States. Even if an employee’s wages were raised by a certain percentage the standard of living has skyrocketed (rent, food, insurance, etc) so did the standard of living really rise even though the GDP has increased? There can sometimes be too many variables that the GDP measurement does not take into account.

There are many shortcomings on GDP and they don’t include non-market activities, leisure, underground economics (Under the table work), environment and environmental protections, composition and distribution of output, non economic sources of wellbeing and importance of intermediate output. This quote by Robert Kennedy in 1968 during his run for senator sums it up nicely:

“[Gross domestic product] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans.”

The shortcomings of GDP is that at the end of the day, it does not always accurately reflect the majority of society or their well being. Sure GDP has increased but people’s standard of life and quality of life may have decreased if they are at work more hours, have less time off, etc. This creates an image that does not accurately reflect the reality of production and society.

References:

McConnell, C.R., Brue, S.L., & Flynn, S.M., (2021). Economics: Principles, Problems and Policies. McGraw-Hill Education

Posted 3

An indicator of a county’s economic performance is its gross domestic products (GDP). This is the total monetary/market value of all the finished goods and services produced in a country within a certain period. GDP has several limitations which include the exclusion of non-market transactions, failure to account for the cost imposed on the health of residents & the environment due to negative externalities caused by the production/use of the country’s output, a failure to account for the country’s production & total income distribution and the failure to incorporate measures of economic welfare. Overall, it does not reflect all the contents of a country’s economic welfare, instead it reflects capital and consumption goods while overlooking nonproduction transactions and intermediate goods thus understating production and total income (McConnell, et. al., 2021).

Despite the numerous limitations however, it is still used as a measure of national income as well as a measure of national economic well-being. Unlike other numbers, GDP can measure the productive capacity of the country within its borders. Also, with the use of different approaches such as the Human Development Index (HDI), Gross National Happiness Index (GNH) & Social Progress Index (SPI), it enables the government, policymakers & financial institutions to evaluate the economic social welfare, it helps assess whether a boost or restraint is needed, and project threats such as a recession or inflation (Zeder, 2020).

An example of the impact of the shortcomings of GDP is that it can make a country look poor when it isn’t. Suppose many of the country’s workforce is employed in the informal sector, the income of these workers would not be reflective in the country’s GDP, thus the GDP would appear smaller than if all the economic activities were added (Khan Academy, 2018).

References

Khan Academy, (2018). The limitations of GDP. Khan Academy. https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/economic-iondicators-and-the-business-cycle/limitations-of-gdp/a/lesson-summary-the-limitations-of-gdp