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Chapter 19: Problem 3

Why is GDP an imperfect measure of economic wellbeing? What types of production does GDP not measure? If GDP included these types of production, would it still be an imperfect measure of economic well-being?

Short Answer

Expert verified
GDP is an imperfect measure of economic wellbeing because it does not include non-market transactions, underground economic activities, depreciation, or non-market external effects. Even if it did include these, it doesn't account for income distribution, quality and nature of goods and services, as well as non-economic factors significant to well-being.

Step by step solution

01

Understanding GDP

GDP is the sum of all market values of all final goods and services produced within a country during a specific period. It serves as a comprehensive measure for a nation’s total economic activity.
02

Types of production GDP doesn't measure

There are several types of production that GDP does not take into account. This includes non-market transactions - for instance, unpaid domestic or volunteer work, and underground economic activities, such as illegal trade or unreported incomes for tax avoidance purposes. Additionally, it does not deduct depreciation (wear and tear of capital assets over time), nor does it consider non-market external effects, such as pollution.
03

Understanding the limitations of GDP even if it measured all types of production

Even if GDP accounted for all types of production, it would still have limitations as a measure of economic well-being. Firstly, GDP does not take into account the distribution of income. A country can have a high GDP but if the income distribution is unequal, the majority of the population may not benefit from this. Secondly, it doesn't consider the quality of goods and services produced. Thirdly, it doesn't measure non-economic factors like happiness, health, leisure time, political freedom which significantly contribute to a person's wellbeing.

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Most popular questions from this chapter

What is the GDP deflator, and how is it calculated?

Briefly discuss the accuracy of the following statement: "Corporate profits are much too high: Most corporations make profits equal to 50 percent of the price of the products they sell."

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Assuming that inflation has occurred over time, what is the relationship between nominal GDP and real GDP in each of the following situations? a. In the years after the base year b. In the base year c. In the years before the base year
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