Question

6. Limitations of GDP 

Although GDP is a reasonably good measure of a nation's output, it does not necessarily include all transactions and production for that nation. 

Which of the following scenarios are either not accounted for or measured inaccurately by either the income or the expenditure methods of calculating GDP for the United States? Check all that apply.

 The value of babysitting services, when the babysitter is paid in cash and the transaction isn't reported to the government.

 Expenditures on federal highways.

 The costs of overfishing and other overly intensive uses of resources.

 The variety of goods available to consumers 

When a U.S. company purchases and imports automotive parts from Canada to use to build cars within the United States, this purchase increases the _______ component of GDP while also _______ net exports by the same amount. Therefore, the purchase of automotive parts from Canada causes _______  in US GDP.

Answer 1

The value of babysitting services, when the babysitter is paid in cash and the transaction isn't reported to the government is not accounted for in any method of GDP calculation. The fact that it isn't reported to the government explains this.

Expenditure on federal highways is accounted for in the GDP calculations as it is an expense incurred by the government.

The costs of overfishing and other overly intensive uses of resources are either not accounted for or measured inaccurately in most cases and hence, lead the GDP to be misrepresentative. Such costs of over utilisation of resources are often not borne by those who create them but by others in society.

The variety of goods available to consumers implies the consumers would choose and then consume and hence, these goods are accounted for in the GDP calculations.

When a US company purchases and imports automotive parts from Canada to use to build cars within the United States, this purchase increases the consumption component of GDP while also reducing net exports by the same amount. Therefore, the purchase of automotive parts from Canada causes no change in US GDP.

The reason for this is that when a country imports, whatever is imported is essentially domestically consumed and hence is added as a part of consumption. This however, is a misrepresentation of the GDP as that part of the consumption wasn't domestically produced. To neutralise this, the same value of imports is deducted from the exports, bringing the net effect of the imports on the GDP to zero.