Question

Outline the main problems associated with determining national output (Gross Domestic Product, GDP).

Answer 1

Probelms associated with GDP:
- GDP includes the spending done on the domestic infrastructure. But does not talk about the reasons behind such spending. For example, a storm can damage the infrastructure badly. The Government tries to build new roads, lights etc. after the storm is gone. However, this spending raises the GDP measure and gives the false proof that the economy is improving.

- GDP does not take Work-Leisure factor into consideration which is quite important for the individuals. For example, Country A required 8 hours for a desk job while Country B requires 12 hours. People will always choose Country A as a better option but GDP value does not reflect such trait.

- GDP does not include the home services or the activities of the black market. So, it only gives the rosy picture of the nation.

- GDP does not include positive or negative externality.