Shortcomings of GDPThis is a featured page

Nonmarket transactions:
  • Some productive activities don't take place in the market, and as the GDP only measures the market value of output, these activities don't show up in the GDP.
  • Thus, GDP understates a nation's total output
  • Example of such activities are services of homemakers, labor of carpenters who repair own homes, black markets
  • One exception: Portion of farmers' output that the farmers consume themselves is included in the GDP
  • GDP only takes the market value of output, therefore, LEISURE(paid vacation, holidays, leave time), which shows increase of well-being, satisfaction, and 'psychic income' is excluded in the GDP.

Improved product quality:
  • GDP is a quantitative measure, and thus does not capture the value of improvements in product quality
    • eg. a $200 dollar phone costs the same as a $200 dollar phone 10 years ago
      • technological improvements such as greater memory capacities, viewing screens, and enhanced capabilities is not included in GDP

The Underground Economy ("black market"):
  • Embedded in the economy is a flourishing and productive underground sector
    • include gamblers, smugglers, drug dealers, etc.
    • However most participants engage in perfectly legal activities, but choose illegally not to report their full incomes and therefore is not counted in the GDP
    • Most of these transactions would help to increase a countries GDP as they would increase the money flow; thus, this is a downfall.
    • Example: A woman who tutors a student in math is earning money legally, but she doesn't report it to the government and therefore the money involved in the transaction is not counted in GDP. On the other hand, a factory employee, whose economic status is chartered, has an income counted in GDP
    • Value of underground transactions in a country is often very large.
  • understates GDP

GDP and the environment
  • The growth of GDP is inevitably accompanied by "gross domestic by-products" (i.e. dirty air, polluted water, toxic waste, congestion, and noise)
  • the social cost of the negative by-products reduce our economic well-being.
  • Costs of environmental harm are not deducted from GDP
    • Therefore GDP overstates national well-being in this aspect
  • Ironically, costs of cleaning up the environment are included in the GDP.
  • Negative and Positive Externalities are misrepresented or ignored.

Composition and Distribution of output
  • GDP does not tell us what mix of goods and services benefit or harm society because it assigns equal weight to products of the same price
    • some goods/ services are enriching, or potentially detrimental to society
    • Ex. As long as they are of the same price.. Assault Rifle = Book
  • GDP does not reveal anything about how output is distributed (therefore, GDP does not tell us the well-being of a society because distribution makes a big difference).
  • Society better off if there is less gap between wealthy and poor, but GDP does not represent this aspect of well-being

Per capita output
  • GDP itself does not reflect the well being of people in the nation, it is the GDP per capita that is important.
  • E.g. China's GDP in 2004 was $1938 billion and Denmark's $220 billion, but Denmark's GDP per capita was $40,750 while China's was $1500. The living standards in Denmark are superior to those in China, since the average income for each person in Denmark is much higher.
  • An increase in GDP could actually be accompanied by a decrease in GDP per capita, and vice versa, depending on population growth.

Noneconomic sources of well-being
  • Just as a household's income does not measure its total happiness, a nation's GDP does not measure its total well-being.
  • There are many things that could make a society better off without necessarily raising GDP, e.g. crime reduction, peaceful international relations, greater civility among the people, less drug & alcohol abuse, etc.
  • GDP merely reflects the trade going on in the country's markets

Latest page update: made by julie.lin , Feb 16 2008, 10:54 PM EST (about this update About This Update julie.lin Edited by julie.lin

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