Question

List and discuss 3 reasons why officially measured gross domestic product might understate the well-being of underdeveloped countries relative to the well-being of developed countries.

Answer 1

GDP only counts goods that pass through official, organized markets, so it misses home production and black market activity. This is a big omission, particularly in developing countries where much of what's consumed is produced at home (or obtained through barter).

GDP isn't adjusted for pollution costs. If two economies have the same GDP per capita, but one has polluted air and water while the other doesn't, well-being will be different but GDP per capita won't capture it.

GDP doesn't adjust for the distribution of goods. Again, imagine two economies, but this time one has a ruler who gets 90 percent of what's produced, and everyone else subsists -- barely -- on what's left over. In the second, the distribution is considerably more equitable. In both cases, GDP per capita will be the same, but it's clear which economy I'd rather live in