Question

Discuss the limitations of GDP as a measurement tool. Discuss the limitations of GDP as a measurement tool.

Answer 1

1. GDP is an aggregate measure of economic activity. It does not provide information on the inequities. The economic welfare of the people depends on both GDP and inequalities.

2. GDP is only an imperfect measure of quality or life and happiness of people. Many non-economic factors also influence the quality of life and happiness. This is the reason Bhutan has moved to calculative happiness index rather than GDP.

3. GDP does not include many productive activities such as domestic work which leads to an underestimation of GDP. On this, Paul Samuelson, Nobel Laureate economist, famously joked that a professor married his maid and the GDP of the country dropped.

4. GDP is measured at constant prices so that the effect of price change can be removed. However, there is no way to adjust for the change in relative prices if we keep the prices constant.

5. Price changes are difficult to measure and adjust for services, improved products, and public services.

6. GDP also does not account for the sustainability of economic activity. It ignores the cost that the future generation has to bear for today’s production.

7. Many costs such as pollution (Negative Externalities and Public Bads) are not included in the GDP.