Question

Gross Domestic Product (GDP) only measures the value of marketed goods and services for a country during a given period of time.

1. Is the GDP measure underestimating or overestimating national production and total income in the economy? Why?
2. What are the limitations of the GDP in measuring total output and national welfare? What products (services) are excluded from the GDP computation?

Answer 1

1.

The GDP measure is underestimating the national production and total income in the economy. this is because the GDP is not taking into account quality improvements, value of household produced goods, black market goods etc.

2.

One major limitation of GDP is that it does not take into account the quality factor. If the same amount of goods are being produced in 2 countries, with one country producing a much better quality good with warranty and guarantee services to the consumers, the GDP would still be counted as same for both.

Products excluded from GDP computation: Non-market transactions like household work, household produced goods and services etc. are not taken into account