Question

What are the pros and cons of using GDP as a measure an economy’s output performance and as a measure of its standard of living. Please give several examples.

Answer 1

GDP:

• GDP is an indicator of a society’s standard of living, but it is only a rough indicator because it does not directly account for leisure, environmental quality, levels of health and education, activities conducted outside the market, changes in inequality of income, increases in variety, increases in technology, or the—positive or negative—value that society may place on certain types of output.The standard of living is all elements that affect people’s happiness, whether these elements are bought and sold in the market or not

STRENGTHS/PROS OF GDP

• GDP provides a better analysis or measure of economy activity through its growth rate and changes in an economy than any other existing measure. It summarizes a whole range of economic information in and determines the comparative strengths and weaknesses of various sectors.

• GDP helps policy-makers and analysts to easily guide, adjust and implement economic policy.

• GDP serve as accurate barometer of the business climate, where it provides the government and business useful information to adjust in different kinds of contingency problems like recession and depression.

• GDP serve as a simple proxy for social and economic welfare.

• GDP is widely used in different parts of the world that give economist studies in comparing countries.

    WEAKNESSES/CONS OF GDP

• GDP does not include non-market activities. These activities are based on production and consumption that occur outside the market economy that does not have a price attached like unpaid house workers, volunteer work, barter and the illegal drug trade.

• GNP does not include domestic household products or black market.

• GNP does not consider how the wealth of a nation is distributed equally. For example GDP provides an estimate of each person share of the market economy but in reality some people share of the economy is greater than others. This level of unequal distribution of incomes and consumption and the incidence of poverty cannot be determined by tracking the GDP.

• Some GDP measured expenditures do not contribute to Economic Welfare. It does not account for any welfare loss or any negative events that results from an event such as a natural disaster environmental cleanup or reconstruction effort contributes to welfare and the GDP.