Question

What is GDP? What is real GDP? What are the problems in taking real GDP as an indicator of well-being? How and why is the measurement of real GDP ambiguous.

Answer 1

Ques: GDP is the market value of final goods and services produced by all the sectors of an economy during an accounting year while Real GDP is the GDP calculated as constant prices or base year prices.

There are several reasons for which Real GDP is not a good indicator of well being.

1. It does not take into account pollution. For example, GDP takes a positive count of the cars we produce but does not account for the emissions they generate; it adds the value of the sugar-laced beverages we sell but fails to subtract the health problems they cause.

2. It does not capture income distribution in a society.

3. It does not account for social welfare. For example, if there more expenditure is done on the production of defense goods, the nation's GDP will increase but these are not meant for consumption. Hence there is no social welfare but GDP is rising.

Real GDP is ambiguous as for calculating real GDP we need a base year price which is quite difficult to decide. As base year price will not be so high as it overpredict the GDP nor it will be too low as it undervalued the GDP.

Also, there exist some of the activities which we can not add in GDP as they are not Quantifiable for example Services that mother gives to their family, etc. these are some of the problems in calculating GDP