In: Economics
Discuss in detail two (2) problems with GDP measurements and explain how those problems impact the economy.
Gross Domestic Product (GDP) is a measure of total goods and services produced in a country in a given year. While GDP is generally used to measure the well being of an economy as well as how it is growing, there are certain problems with the way the GDP is measured.
Problem 1: GDP covers only those goods and services that are part of the official organized market. So, it leaves goods and services that are produced at home for personal consumption as well as those that are exchanged in the black market. This problem becomes even more acute in the case of developing countries where a lot of exchange takes place in informal way or in many cases through barter. Moreover, when such activities are brought within the real of organized market for example the profession of maids, it gives an impression that the GDP has increased, while in reality something that was earlier hidden has simply come out.
Problem 2: GDP only focuses on the total goods and services that are produced, it does not deal with the issue of distribution. It might be the case that the GDP of Country A is 5 times that of Country B, but more than 90% of the income in Country A is concentrated in the hands of richest 5%, while in Country B the income is equally distributed across the population. So, if one uses only GDP then Country A looks more prosperous than Country B, but in reality it is Country B where people would like to live.