Question

In a summary, explain the limitations of the Gross Domestic Product measure as an indicator of the economic performance of a country.

Answer 1

GDP is a useful indicator of the economic performance of a nation, and is the measure of well-being that is most used. It does have some important limitations, however, including:
Excluding non-market operations
Lack of accounting for or reflecting the degree of income inequality in society
The failure to state whether or not the nation's growth rate is sustainable
The failure to account for the costs of negative externalities placed on human health and the environment resulting from the processing or use of the nation's resources

The underground (or black market) economy refers to cash and barter transactions that are not publicly documented and are mostly used to finance the trade in illegal goods and services (i.e., drugs, weapons, prostitution, etc). The size of underground economies varies greatly among nations, and in some cases they constitute a significant percentage of the economic production of a country. The underground market is nearly impossible to keep reliable accounts on, and is rarely incorporated into the published GDP figure of a nation due to its illegal nature. So the economic performance of certain nations can be underestimated by GDP.

As technology progresses, producers are in a position to sell ever better goods for the same amount of money. Smartphone manufacturers, for example, could produce phones with better cameras, more advanced processors, and higher-quality displays. Consumers therefore experience higher utility than before, without being confronted with prices that are proportionately inflated. Such advances are not counted in GDP, as relative utility gains are hard to quantify.

Non-market production refers to goods and services produced for private consumption, and for which no official production record exists. Think of people who grow their own food or produce their own electricity, for example.

Compared to the black market economy, it is almost difficult to hold credible records on the scale of this business. Size of the sector also varies greatly from country to country. The GDP in countries with more subsistence farmers would be understated, for example, while GDP will not be affected as much in economies with less subsistence farming.