Question

Examine the shortcomings of GDP in measuring a country’s economic health?

Answer 1

Whenever an economy is to be measured, GDP is the first thing that is assessed. However, GDP does not give a complete picture of an economy, this is because:

Inefficient parameter for measurement of welfare

GDP is the sum total of the value of all finished goods produced within an economy over a set period of time. It does not measure the well being of the people,social benefits, standard of living of all people in the economy. It also does not correctly determine the income inequality.

GDP only includes market transactions

Non-market transactions such as black marketing and other illegal activities such as terrorism is not taken into account. They can affect the welfare of an economy adversely.

Income inequality is not calculated

An economy may be developing in terms of infrastructure but it may not necessarily lead to reduction in income inequality as it is the rich only who release the funds required for investment. This may lead to a case where the rich get richer, GDP ignores this aspect.

GDP does not emphasize on what is produced

Since GDP measures the value of all finished goods and services within an economy, it also includes products like unproductive assets or goods that may have negative effects on social well-being.

GDP ignores externalities

Externalities refer to the situation when the activities done by a person affect other person as well(eg. pollution). They also create a massive impact in the welfare of an economy,which is ignored by GDP.