Question

Discuss the advantages and disadvantages of the definition of GDP and using GDP as a measure of the standard of living, i.e. what GDP can capture and what it cannot capture 750 words

Answer 1

Gross Domestic Product ( GDP) is an economic indicator of the total revenue and output of a country for a given period of time ( usually one year). Economists use GDP to measure the relative wealth and prosperity of various nations, and measure the overall economic growth or decline of a country. Sadly nothing is flawless. And GDP is certainly no exception. As much as economists like using GDP as a measure of production, or even as a measure of the well-being of a country, GDP has some limitations when attempting to address those questions. In an economy, GDP leaves out some development, like your mom's squash could grow in the backyard, or other non-market products. While GDP is often used to measure a society's well-being, it was never meant to do so, leaving important aspects of well-being, such as pollution or even happiness, out of the way.

Advanatages are:

Given the shortcomings in GDP, it is valuable because of the way it breaks down an economy into a single figure. It's a raw figure showing just how much money an economy generates. This does not show as much detail as other metrics do, but is also easier to understand than other metrics.

GDP, is an measure of the well-being of an economy because of its relation to the goods and services of that country. If GDP is high so high production means people have the resources to purchase goods. That in effect means companies are given the resources to hire workers. A big benefit of GDP, though, is that it offers a simple measure of how well an economy performs.

Use GDP as an economic well-being and efficiency metric has its advantages and disadvantages. GDP is a well-respected, straightforward measure of the economic prosperity of a country. Measurement from official government statistics is fairly uncomplicated to determine. In addition, the Government's inclusion of goods and services in GDP leads to a country's welfare.

Disadvantages are:

GDP doesn't count voluntary volunteer work: GDP doesn't take into account the work people do for free, from an afternoon spent cleaning up trash on the roadside to millions of man-hours spent on free and open source applications (like Linux). Indeed, when volunteers do work that would otherwise have gone to a paying employee or contractor, voluntary work will potentially lower GDP.
Disasters will increase GDP: wars need troops, oil spills need clean-up, and natural disasters need emergency workers, engineers, and all kinds of hands to help. Rebuilding can significantly increase economic activity after a disaster or war, and raise GDP.

GDP does not compensate for consumer quality: Customers can repeatedly purchase inexpensive, low-quality, short-lived products instead of purchasing more costly, longer-lasting consumer. Over time , buyers could spend more on replacing cheap products than they would if they had bought products of better quality first, and GDP would rise as a result of waste and inefficiency.

GDP only counts monetary transactions, omitting certain things, such as leisure time, that people appreciate. Thus increases in real income may be understated. Long working hours and short holidays needed to increase the production of the economy limit leisure opportunities, impacting worker health and family life. Certain unreported practices include 'non-market development,' people doing their own jobs or supporting others. Furthermore, voluntary work, which is not included, will reduce GDP due to the hours that people spend free work while they could be paying to do another job. Such practices fulfill people's wishes that the figures will not appear.

GDP can rise due to inefficiency, because the metric varies between the value of the traded goods, because buyers can buy several low-quality items instead of a one-off purchase of a high-quality good, increasing the amount spent. For fact, new items also replace older ones, so it doesn't indicate new goods being sold on the market.

Many people falsely assume that a higher income (and greater GDP) is associated with a higher quality of life and more happiness, but only to a certain level of income. In addition, several studies have shown that more wage rises above a certain level of income are no longer associated with higher quality of life. Alternatively, other non-economic variables (such as wealth distribution fairness and access to education and health care) align more strongly with a wealthier, healthier community.

Yes, some of the world's poorest countries may seem poorer than they actually are if we just consider their official GDP statistics. When the informal sector employs a significant percentage of the workforce then their income will not be reflected in the GDP of the country. As a result, the nation's GDP would be lower than it would be if it covered all economic activity.