Question

Discuss the limitations of GDP as a measurement tool.

Answer 1

Gross Domestic Product (GDP) measures the value of all the final goods and services produced in an economy during a given period of time. It is used as a meaure of economic development and welfare of the society.

However, GDP as a measurement tool suffers from some limitations, some of which are:

i) Underground economy:

GDP only measures the output produced and sold in legal markets. It does not include activities which are conducted in the underground economy i.e. black market economies.

ii) Non-market production:

GDP does not include productive activity that does not have a market transaction. Eg. Mowing your own lawn, services of a home maker etc.

iii) Increase in product quality:

GDP does not count relative utility gains due to advacncement in technology etc.

Eg. Better mobile phone experience increases utilityof the consumers but is not reflected in the GDP

iv) Quality of Environment

GDP does not measure the quality of environment. for example. An economy might be able to increase its output , and hence GDP, by easing its pollution control measures which are detrimental to the environment