Question

What omissions or inclusions are likely to affect the measurement of GDP, moving away from a true calculation of the value of real goods and services produced in the economy? Do you think estimates of GDP are likely to over or under estimated what is produced? Do these problems affect estimates of the GDP growth rate?

Answer 1

The biggest omission in GDP calculation which leads to undervaluation is Underground economy. Especially in developing economy where underground economy forms a major part of economy and income of a whole strata, GDP is grossly miscalculated and hence, undervalued. Another omission is Leisure. GDP only calculates or includes factors which have an implicit monetary value. Due to this inherent calculation flaw , GDP is often undervalued. The utility that people derive from leisure cannot be completely calculated. The extent of rejuvenation during leisure time can only be calculated or included in GDP if it features in tourism expenditure. Another omission from GDP calculation is Depletion of Natural Resources and Cost of pollution. Pollution and depletion of Natural Resources levy a huge cost on economy as well as ecology and this cost does not feature in the calculation directly. Only indirect methods of ecological pollution estimation can vaguely calculate the cost which can then be counted in GDP calculation. Another omission is other non market activities like NGO services etc. All these activities have a direct impact on economy still do not feature in GDP calculation.

Currently GDP is underestimated, primarily because inefficient estimation of underground economy and under estimation of utility generating activities. Hence, the estimates of GDP are likely to stay underestimated. And these undervaluations definitely affect estimations of GDP growth rate.