Question

What are some of the shortcomings of our current GDP measure?

Considering all of the shortcomings of GDP, if you could change the measure to include one of the categories that are currently not included in GDP, which would you choose and why?

Answer 1

GDP is one of the most important macroeconomic variables because, on a basic level, it measures economic growth on a macro scale. Nonetheless, measuring GDP is a system that is borne with many faults.

One major shortcoming of GDP is that nominal GDP takes into consideration of current year prices. As a result, comparison of GDP figures over successive years becomes difficult because it is hard to differentiate between increase in output and increase in price level. For example, if GDP measured at current prices increase from one year to the next by 10%, it cannot be known what proportion of this increase is due to an output increase and what proportion is due to inflation. To accommodate for this issue we also have real GDP. Real GDP is a measure of output of a certain period valued at the prices prevailing at some base price year. For example, all GDP is calculated with 2015 prices.

However, real GDP still has its problems. Official GDP measures in many countries understate the true level of economic activity because of underground economies (black market). Black markets are usually created to avoid taxation. More so, activities that are done by individual themselves are not included in real GDP. As a result, economic activity is not truly measured for all the activities that people participate in that do not involve the market. Finally, data collection in may underdeveloped and developing countries is poor and unreliable.