Question

Discuss the various shortcomings and omissions of the GDP calculation. Should we be overly concerned about these shortcomings? Is there any way to compensate for them? How important is the GDP calculation in measuring economic stability and health?

Answer 1

GDP is the accurate measure of economy it shows how well or how bad the economy is doing. True said, nothing is perfect in the world there are some shortcomings of GDP which are important to consider in the country economy. GDP calculate the transactions occurs in the market place other than that its out of its scope, non-market transaction are not occur in the market and no proof is available to make it part of GDP. Suppose, a motor mechanic repair his own car by working whole day, people do the job of gardening by themselves. These type of transaction never counted in the GDP, only the transactions occurs in the market are considered in GDP. In recent years, the working hours are reduced to great extent like in USA in few years weekly working hours reduced from 56 to 36 in addition to this increase in sick leaves, casual leaves, annual leaves, maternity and paternity leaves bring relief in people life. This leisure surely improve the employees performance but unfortunately the leisure is not part of GDP although its quite clear that people are working less and producing more output which shows improvement in productivity and well being of peoples. GDP is the quantitative measure of product and services rather than qualitative measure, it fails to gauge the quality improvement in the product and services such as computer are available on cheap prices than past but with more processing and storage. This improvement make people happy and satisfied than before because they are getting more on very nominal prices. The quality measure have a great impact on economic well being but again GDP ignores quality attribute entirely. The other aspect of economy which exist in every country with higher percentage in a hidden market. The underground economy is generated from illegal activities such as gambling, smuggling, robbery, prostitution and other. The people involve these type of business have a valid reason to not show their income to the government. Most people in the underground economy are doing legal activities but choose not to report their income to Government. The person receiving unemployment compensation benefits may take an “off- the-books” or “cash-only job”. A person give tuition to neighbor kids on behalf of free car repairing services for kids father. The improvement and increase in production of product and services improve the GDP of the country but without considering the environmental aspect. The dirty water, chemicals and noise coming out from factories have a negative impact on the society. The polluted environment cause health issue and reduce the average age limit of human beings. GDP ignores negative impact on environment and human life. When the money spent to clean the pollution, those expense are added in the GDP. The composition of products are important for well-being. it show whether the products have a positive or negative impact on society.GDP lacks to address the composition of output it only measures the monetary value of output. If the price of weapon and encyclopedias are equal it is considered same in the GDP without admitting the importance of encyclopedias on well-being. The distribution on income can make a lot of difference in people living standards. The total never tells the distribution of output among the people, it may be possible 90 percent of total output goes into 10% households. The higher value of GDP indicates the economy is doing well and people living standards are improving but if the major part of the output holds by the less percentage households then it results in higher poverty levels. For most reason per capita output is the accurate measure of economics performance. The per capita output gain importance in the measurement of economy because GDP only measure the magnitude of total output, it ignores change in the standard of living of individual and households. If GDP of country increase 3% in a year and its population rate grows at 5% percent per year, GDP consider it as improvement in economic performance of the country but actually the per capita output is decreased then before which shows downgrade in households and individual standards of living. The income of households never indicates the happiness, same for higher GDP never guarantee that individual and households are happy and satisfied. Some other factors can make the society better off without necessarily raising GDP. A reduction in crime and violence, peaceful relationship,better understanding of parents and children and a reduction in drug and alcohol abuse.

GDP is a measure of raw economic activity, not a complete picture of economic progress. GDP was never intended to become the sole measurement of the state of our economy, let alone a measure of societal progress. But in the decades after World War II, GDP has become the go-to metric for determining whether society is progressing. Our economic policy has been largely shaped by the end goal of maximizing GDP growth without consideration of what the figure does and does not measure. GDP calculation gives the monetary value of all the goods and services purchased within national borders by persons, businesses, governments and for-eigners. As a raw data analysis, GDP gives a good broad overview of the market economic activity that takes place within the U.S. However, because it does not differentiate between types of spending, and because it does not recognize non-market forms of production and values without market prices, GDP does not provide a complete picture of economic and societal progress. For example, GDP counts just broad categories of consumption and government spending. It cannot distinguish between “good” and “bad” spending. If government spending increases due to responding to a natural disaster, like Superstorm Sandy, or if it increases due to a substantial infrastructure expansion program, there is no distinction in GDP accounting. Yet, the infrastructure program is clearly better for our overall economy and society. Likewise, if personal consumption increases, GDP counts that as a positive sign, even if the personal consumption is financed by credit cards or other means that put households in debt.