Question

Can I have a short 200 words paragraph about following? Thank you! Gross Domestic Product was designed as a measure of economic activity, specifically a measure of national production. Despite this intent, GDP is widely interpreted as a measure of economic welfare or standard of living (when measured in per capita terms). What are the shortcomings of using GDP as a measure of economic welfare? What would you like to add to (or subtract from) GDP to make it a better reflection of how well people are doing in a nation?

Answer 1

Gross Domestic Product (GDP) is the final value of goods and services produced within the geographical boundary of a country.

The shortcomings of using GDP as a measure of economic welfare are:

(1) GDP does not take into account income inequality : GDP measures the total value of goods and services produced in a country and accordingly if output increases, it concludes that people in the country are better off than before. But, this can be wrong. Suppose the richest 5% in the country are only benefitting from producing those increased goods and the rest are not, there would arise an income inequality problem.

(2) GDP does not take into account the quality of good and services produced : There might be increase in the output but the quality of the goods can depreciate than before. This is not taken into account in the GDP.

(3) GDP does not take into account all data in the nation : In most economies, there are two sectors, the formal sector and the informal sector. GDP cannot take the informal sector data in most cases. It also cannot take the data for illegal activities such as black markets. So, the data is not accurate.

(4) GDP does not take into account the negative and positive externalities : While producing some goods and services there might arise good or bad externalites. For example, if a factory produces a good but releases lots of harmful smoke into the air, the people living around it can feel uncomfortable breathing. This is a negative externality.

I would you like to add to (or subtract from) GDP to make it a better reflection of how well people are doing in a nation by:

(1) Incorporating the income inequality data of the nation into GDP.

(2) Taking into account the quality as well as the quantity of the goods and services produced in the nation.

(3) Try to take into account the data of the informal sector and the illegal activities data and add it to the GDP.

(4) Adding the positive externalities and subtracting the negative externalities that arises from producing those goods and services from the GDP.