Question

What kinds of problems arise from the focus on standard GDP measures in discussing economic policy? Discuss briefly

Answer 1

• The exclusion of non-market transactions - economic activity that takes place in the informal sector (from babysitting, to lawn mowing, to illegal drug sales), sometimes called the gray market or the black market economy; non-market transactions are not recorded, taxed, or officially monitored by the government. Because of this, the output and income generated is not included in the calculation of a nation’s GDP.
• The failure to account for or represent the degree of income inequality in society - when a disproportionate share of a nation’s income is earned by a small minority of households; for example, when the top 10%, percent of households earn 80%, percent of the total income in a country, there is a high degree of income inequality; GDP does not account for income distribution in any way.
• The failure to indicate whether the nation’s rate of growth is sustainable or not -the ability of a system to endure indefinitely into the future; an increase in GDP will only be sustainable as long as it does not deplete natural resources too rapidly nor exploit the environment in a way that diminishes the quality of life of the nation’s households over time.
• The failure to account for the costs imposed on human health and the environment of negative externalities arising from the production or consumption of the nation’s output - any outcome from economic activity that creates negative value for society, such as air pollution from cars that harms human health and the environment; unsustainable economic growth may diminish the quality of life of a nation’s people. GDP does not include this.
• Treating the replacement of depreciated capital the same as the creation of new capital - the decrease in the value of a nation’s capital stock over time; GDP accounts for investment in new capital but does not subtract the lost value of depreciated capital. Because of this, GDP may overstate the amount of economic activity in nations with rapidly depreciating capital stocks.