Question

The gross domestic product (GDP) or gross domestic income (GDI), a basic measure of an economy's economic performance, is the market value of all final goods and services made within the borders of a nation in a year. GDP is widely used by economists to gauge the health of an economy, as its variations are relatively quickly identified. However, its value as an indicator of the standard of living is limited. What is a limitation of using GDP to measure the standard of living?

Answer 1

Limitation of using GDP to measure the standard of living :

GDP does not take into account the non marketed output : Example: Own work on repairing and improving one’s home.

GDP does not take include output sold in parallel markets which may be legal. Example- A plumber doing work in your house and does not report income. This additional income may improve standard of living but GDP may not count this.

GDP does not include quality improvements : With improvements in technology costs may reduce and this is not included in GDP.

GDP also does not consider how natural resources are depleted and hence environmental concerns remain as it is. Hence standard of living for people in primary sector may worsen and GDP may increase creating contrasts.

GDP does not indicate levels of education, health and life expectancy improvements.

GDP also does not indicate what kind of goods are produced in an economy. It is possible that country A produces weapons and has high GDP per capita and Country B focuses on education, health and has less GDP per capita. Actually country B may have better standard of living but GDP per capita figures may mislead.