Talk about the drawbacks of utilizing GDP to gauge a nation’s level of prosperity.
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period, typically a year. GDP, by expenditure method, is calculated as: GDP = Private consumption (C) + Government spending (G) + InvestmenRead more
Gross domestic product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period, typically a year. GDP, by expenditure method, is calculated as: GDP = Private consumption (C) + Government spending (G) + Investment (1) + Exports (X) Imports (M).
- Payment of pensions to retired government employees: It is included in the GDP as it is a deferred wage. It is part of payment for factor services rendered by the recipients prior to their retirement. However, old age pension is not included in the GDP accounting as it constitutes transfer payments.
- Income from the sale of an old car: It is not included in the GDP since its value has already been included in the GDP of the year in which it was produced. Including it in the GDP will be equivalent to double counting. However, commission earned on the sale of the old car by agents will be included in GDP accounting of the current year.
- Interest on national debt: It is not included in the GDP as interest is paid upon the borrowing/loans taken by the government to fund its consumption expenditure and no productive activity is linked with such loans.
- Foodgrains produced by farmers for their own consumption: Foodgrains used for own consumption form a part of the private consumption. Producing foodgrains has an opportunity cost in terms of factors used for production. Equivalently, it would have generated income, had the same foodgrains been sold in the market. So, an imputed value of foodgrains used for own consumption is included in the GDP.
- Services provided by housewives: These are not included in the GDP because they constitute personal services rendered within the household or family. These services are not marketed and it is hard to assess monetary value of such personal services.
Thus, GDP is limited in the sense that it only measures the market value of final goods and services produced in an economy in a given period of time.
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Gros Domestic Product (GDP) is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. It is usually taken as an indicator of the well-being in the context of per capita income suggesting the prosperity of the people. It may indicate mRead more
Gros Domestic Product (GDP) is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. It is usually taken as an indicator of the well-being in the context of per capita income suggesting the prosperity of the people. It may indicate more income and capacity to buy more goods and services among the people. However, there are some limitations of using GDP as an indicator of economic welfare of a country:
In addition to this, GDP also does not take into account economic inequality, loss of jobs and opportunities and level of health and education and quality of choices in an economy. Therefore, new concepts like Gross National Happiness (GNH), Human Development Index (HDI) and the Social Progress Index (SPI) are often discussed as the better alternative to assess the well-being of society.
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