Question

The most important use of gross domestic product (GDP) is as an indicator of economic growth, living standards, and the economy’s position on the business cycle. Although GDP information can be very enlightening, its measurement of economic activity is not perfect.in  one paragraph, addressing the following:

1. What are some shortcomings of GDP information? Does it tell us everything we need to know? Justify your answer.
2. What does the measurement fail to include? Or does it include everything we need to measure within the economy?
3. Is GDP a sufficient measure of human welfare or the quality of life? Explain.
4. Pose a question to the class about GDP. Make it an insightful one that can start a discussion.

Answer 1

GDP although being widely used measure to compute a nation's development is an incomplete measure as it tends to omit certain aspects of economy which equally contribute to an economy's growth as the production of goods and services which are accounted for in GDP calculation

The shortcomings of GDP calculation are

1. Exclusion of informal sector or non market transactions like services of a baby sitter, mowing the grass etc.

2. Sustainable growth - whether the economic activity is sustainable or not is not considered while calculating GDP

3. Doesn't consider the income inequality- A nation's GDP will still show an increase if the rich gets richer and poor gets more poor. But the actual growth in these type of economy declines even after GDP rises.

4. The negative externalities arising out of economic activity which deteriorate the human and plant life are not an indicator while calculating GDP

5. Doe not represent what is being produced in the economy and weather the produced commodities lead to social welfare of not Eg a country involved in increased production of arms and amunitions and low on consumer goods will still rank high on GDP growth.

Thus gdp fails to measure

1. Happiness of people

2. The contribution of informal workforce

3. Sustainability of developmental activities

4. Increasing income inequality

Some countries have started to include other growth measures such as happiness index, human welfare index along with GDP index.

The question for class could be

Does increased output or increase value of GDP always mean growth of the people of that economy?