Question

Real GDP is a good measure of our economic activities. It is also a good proxy to measure our welfare. However, it is not a perfect measure. List and explain briefly at least two limitations of GDP as a measure of our economy and/or welfare.

Answer 1

GDP gives us the final value of goods and services produced within a nation's borders during a given period of time.

The limitations of GDP is that it does not take into account externalities like pollution into account. Another limitation of GDP is that it does not taken into account the services of unorganized sector, whose services are not reported to the government. In some developing countries, the organized sector forms a huge part of the economy, over 50%, This is excluded when calculating GDP.