What are the flaws of a gross domestic product as an economic measure?


What are the flaws of a gross domestic product as an economic measure?

Gross Domestic Product:

Gross domestic product (GDP) is a commonly used measure of economic development. Countries with a higher GDP tend to have a higher wage, higher standards of living and better economic development. GDP, however, is not a complete measure of economic welfare.

Answer and Explanation:

Gross domestic product (GDP) is the total market value of goods and services produced for the market in an economy over a period of time. Though GDP is commonly used as an indicator of economic development, it is subject to limitations, such as:

1) GDP does not measure non-market activity. By definition, GDP measures only the value of goods that are produced for the market. In an economy where there is a substantial non-market sector, such as underground economy, illegal activity and home production, GDP could systematically and significantly under-estimate the real output of the economy.

2) GDP does not measure the distribution of income. In simple languages, GDP only measures the size of the pie, but not how the pie is shared. Therefore, GDP does not necessarily indicate the welfare of citizens in an economy. For example, citizens in a country with a higher GDP, which is owned mostly by a dictator, might be worse off than citizens in a country with a smaller GDP but a fairer distribution of income.

Learn more about this topic:

Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3

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