GDP and Its Limitations It is highly recommended that you review the Seminar pre
ID: 1197055 • Letter: G
Question
GDP and Its Limitations It is highly recommended that you review the Seminar presentation located in the Seminar area before beginning the Discussion. Gross Domestic Product (GDP) measures the market value of the final goods and services produced within a country during a given period of time. In other words, GDP measures continuous flow of money from households to firms and then back to households in the macroeconomy. (Refer to Chapter 25) The trend of the GDP growth rates is the key indicator of macroeconomic fluctuations (business cycles), which include expansion, boom, contraction, and recession. Thus the real GDP is used to explain how well the overall economy of a country is performing whereas GDP per capita is used as a natural measure of the economic well-being of the average individual in a given country. But GDP has limitations and it is not a perfect measure of the economy and economic health. In spite of the limitations (shortcomings), why is the GDP used as a measure of national income as well as a measure of national economic wellbeing? Is the GDP measure underestimating or overestimating national production and total income in the economy during various business cycles? Why? What are the limitations of the GDP in measuring total output and national welfare? What products (services) are excluded from the GDP computation? What are the impacts of the shortcomings of the GDP as a measure of the national product and national economic welfare (wellbeing)?
Explanation / Answer
National income is also measured as a value of output produced in a country during a specific time period. Calculation of this national income is named as GDP. GDP calculation takes care of output produced in an economy. Further, GDP is basic measure. After that, many other indicators are identified such as personal income, disposable income among the others. That’s why, GDP is used as a measure of national income. GDP reflects the status of national wellbeing because GDP id directly correlated with many other indicators, such as:
1. An increase in GDP reflects the increase in demand
2. Increase in demand takes place due to increase in disposable income
3. Increase in disposable income brings a higher level of wellbeing in a family
4. An increase in GDP increases the employment also
GDP measure underestimates the national income during a period of boom and expansion and overestimates the national income during contraction and recession. Approach of estimates change as many other activities such as household production or black market activities vary with the change of various business cycles. Also, inflation plays an important role in the estimation of GDP. Overestimation of inflation will give underestimate figure of real GDP and vice versa.
GDP calculation is also based on estimates such as inflation. That can put a doubt on its accuracy. Also, it gives a generic idea of average wellbeing. It cannot measure the true impact upon the life of an individual.
GDP calculation does not properly estimate the following:
1. Leisure activity
2. House Hold production activities
3. Underground Economy
Impacts of the shortcomings are as follows:
1. No proper policy planning for the development & welfare of economy, such as poverty reduction, employment schemes
2. Erroneous GDP estimation can lead to masking of inherent problems in the economy
3. No proper control upon development
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