Economics
 GDP Shortcomings

Posted by: Omar G. - September 15, 2019, 10:14 pm - Forum: Blog

Gross Domestic Product (GDP) is an accurate economic indicator and is the most used to weight economic grow in any country. It refers to the total economic output achieved by any nation over a specific period. But there are some shortcomings of GDP to consider in every economy as it doesn’t take into consideration some calculations of market and political (regulations) specific behavior.

Non-market transactions

Though most, if not all, market transactions are considered within the build of GDP, non-market transaction are not. This due primarily to the fact that no solid information is available for it to be accurately accounted for. Consider, for example, the income made by children doing chores for their neighborhoods or the produce being grown for personal consumption.

Leisure

Working hours reduction has been an ongoing movement around the world specially in leading economies such as the USA and France. Additionally, worker benefits have also grown, as might be sick leaves, as well as maternity and paternity leaves. Even though it might be clean that people is producing more in less time, the improvement in productivity is not accounted for in GDP calculation.

Improved product quality

GDP is lacking as a qualitative measurement indicator as it fails to property inform the increase on product and service quality. Product and service quality measure has a big impact on economic wellbeing as customers might be more satisfied with current but cheaper products than before just because of its quality improvement.

The underground economy

Non-market transaction can also refer to the trade of illegal goods and services, such as prostitution, gambling, and drugs, etc. These are not recorded and thus not taken into consideration while building the official GDP. But underground economy might also refer to non-illegal activities which citizens or residents decide not to report, such as informal jobs and informal exchange of services between economic agents (ex. “repair this for me and I repair that for you”).

Environmental abuse

Sometimes production might be increased at the expense of environmental damage. While production might be highly regulated in developed nations developing ones might rely heavily on environmental exploitation to support their growth. Green Gross Domestic Product (GGDP) is a formula that aims to penalize such counties by offering a more accurate measurement of economic grown by considering the implementation of manufacturing practices that harm the environment.

Here you can find an article which shares possible alternatives to GDP as a measurement of wellbeing. Even so I recommend you to do your own and extensive research in the matter.

Source: SHORTCOMINGS OF GDP - MBA Tutorials, What is Gross Domestic Product (GDP)? - CFI
Graphic source: G20 GDP Growth - Second quarter of 2019, OECD