Question

Two of the most frequent measures of economic activity we see in the news are GDP and stock market performance. What are some downsides associated with focusing on these measures when evaluating the economy's health?

Answer 1

Okay, GDP refers to Gross Domestic Product which shows the final value of goods and services produced within a country during a particular year. So, GDP basically reflects four components Consumption, Investment, Government Sector, and Net Exports of any country.

Stock market performance also reflects the country's health and how the shareholders are gaining or loosing.

Drawbacks of using GDP for evaluating economy's health:

1. Gdp does not account for self production done by the farmers or any household. For example, if you are growing any vegetable in your garden area, then it is not a part of GDP. As GDP cant be calculated for each household such self production activities.
2. GDP ignores non monetary values or services of any housewives which boost the economy. Like, a mother teacher her child at home is not accounted under GDP calculation.
3. Externalities like if some production factory is causing pollution in the nearby community, it acts as a negative externality on the people living in that area. In terms of bad air quality or any air bourne disease. GDP does not account such activities.
4. GDP never reflects the inequalities in income distribution among rich and poor section of the society.

Drawbacks of stock market on country's health:

1. Stock market is only for those who are a part of it and not for others who do not invest in them.

2. It does not reflect a permanent picture of country's health, as it keeps on fluctuating a lot.

3. Stock market affect business investments and shatters the confidence of investors in any country's economy.