Question

Give at least three problems of GDP to explain why a rise in a nation's GDP does not necessarily mean an increase in the "material welfare" of the concerned nation's individuals. Include your reasoning in your essay

Answer 1

Gross Domestic Product (GDP)  is a monetary measure of the market value of all final goods and services produced in a particular period of time within the geographical boundaries of a country . GDP is not a good measure of a country's welfare or economic health . Three associated problems with GDP are as follows :

a) GDP will count both bad and good situation . Suppose there is a flood which destroys many property and crops . So rebuilding is done . This rebuilding increases GDP . When someone gets sick and money is spent on their care, it's counted as part of GDP . But natural calamities or diseases do not make us better off rather it is an indication of poor economic and social health and prosperity .

b) GDP makes no adjustment for leisure time . Imagine two economies with identical standards of living, but in one economy the workday averages 12 hours, while in the other it's only eight . Leisure time is also important for self development and indicates savings in human capital invested . GDP just calculates the goods produced not the time taken to produce them .

c) GDP only takes into account goods that pass through official, organized markets, so it avoids home production and black market productions . In developing countries black markets and home productions play a major role .

GDP increases when we hire someone to do home chores instead of soing it ourselves , which actually does not cause any increase in production . GDP does not include external costs incurred by pollution .