GDP, Uses And Limitations
Economists use many different methods to measure how fast the economy is growing. The most common way to measure is Real GDP (Gross Domestic Product). GDP is the value of everything - Goods and Services produced in the economy.
The idea of GDP came up with a basic concept by William Petty to attack landlords against unfair taxation during warfare between Dutch and English between 1654 and 1676. Charles Davenant developed the method further in 1695. The modern concept of GDP was first developed by Simon Kuznets for a US congress report in 1934. GDP measures output of goods and services produced by labour and property located within U.S. during a given time period. However, GDP is a measure of raw economic activity, not a complete picture of economic progress.
GDP is (like a speedometer of a car) which tells you whether economy is going faster or slower, but it does not tell whether it is overheating or running out of fuel as also whether or not you are going in the right direction. If you suggest to car driver that you might be on the wrong road, and the response is " Then we must go faster", you might think that's pretty stupid. Yet this is what happens whenever complaints about the state of economy elicit a commitment to boost growth. So, a good economy meet everyone's basic needs. It means people are healthy and happy with life.
It is hard to capture everything that matters in one metric and psychological research states that people struggle to hold more than five things in their heads at once, which are -
1. Well Being.
2. Environment
3. Good jobs.
4. Fairness.
5. Health.
Increase in GDP may be influenced by inflation but not the rise of wealth. Since GDP measure value of total production. GDP measure does not include many things that do not have monetary value attached to it. Economists measure total production by GDP.
Limitations of measuring economic growth are -
1. Measuring economic growth in GDP gives only quantitative picture and does not reveal qualitative aspects of the life of people. For example, a higher per capita income may not always have a well
educated population or a satisfactory level of educational development.
2. It does not count free goods or non-market goods and services, thus ignoring household activities
and assigns Zero values to activities such as: Domestic work, House keeping work by women,
care for children and elderly, cleaning, food preparation etc. In this sense, it's not gender neutral
also and neglects women's contribution to economic activities.
3. Economic growth is the single parameter to understand and analyse the overall improvement in
the lives of people of a country.
4. It ignores distribution of income and the qualitative aspects of human life. This apart, events such
as Crime, Pollution, Natural Disasters, Depletion of Natural Resources, Accidents, Diseases are
counted as positive transactions because they lead to increased spending.
Thus, GDP figures would ignore the welfare loss resulting from these activities.
The idea of GDP came up with a basic concept by William Petty to attack landlords against unfair taxation during warfare between Dutch and English between 1654 and 1676. Charles Davenant developed the method further in 1695. The modern concept of GDP was first developed by Simon Kuznets for a US congress report in 1934. GDP measures output of goods and services produced by labour and property located within U.S. during a given time period. However, GDP is a measure of raw economic activity, not a complete picture of economic progress.
GDP is (like a speedometer of a car) which tells you whether economy is going faster or slower, but it does not tell whether it is overheating or running out of fuel as also whether or not you are going in the right direction. If you suggest to car driver that you might be on the wrong road, and the response is " Then we must go faster", you might think that's pretty stupid. Yet this is what happens whenever complaints about the state of economy elicit a commitment to boost growth. So, a good economy meet everyone's basic needs. It means people are healthy and happy with life.
It is hard to capture everything that matters in one metric and psychological research states that people struggle to hold more than five things in their heads at once, which are -
1. Well Being.
2. Environment
3. Good jobs.
4. Fairness.
5. Health.
Increase in GDP may be influenced by inflation but not the rise of wealth. Since GDP measure value of total production. GDP measure does not include many things that do not have monetary value attached to it. Economists measure total production by GDP.
Limitations of measuring economic growth are -
1. Measuring economic growth in GDP gives only quantitative picture and does not reveal qualitative aspects of the life of people. For example, a higher per capita income may not always have a well
educated population or a satisfactory level of educational development.
2. It does not count free goods or non-market goods and services, thus ignoring household activities
and assigns Zero values to activities such as: Domestic work, House keeping work by women,
care for children and elderly, cleaning, food preparation etc. In this sense, it's not gender neutral
also and neglects women's contribution to economic activities.
3. Economic growth is the single parameter to understand and analyse the overall improvement in
the lives of people of a country.
4. It ignores distribution of income and the qualitative aspects of human life. This apart, events such
as Crime, Pollution, Natural Disasters, Depletion of Natural Resources, Accidents, Diseases are
counted as positive transactions because they lead to increased spending.
Thus, GDP figures would ignore the welfare loss resulting from these activities.
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