Limitations of GDP
If a country is in need of economic improvement, reasonable and tangible goals must be formulated in order to successfully bring about positive change. Gross Domestic Product (“GDP”) is a useful tool that should be used by policymakers to set economic goals and measure economic progress and overall financial prosperity.
GDP is useful to monitor changes in the condition of an economy, because it is a measurement, in the currency of a country, the total output of all goods and services, including the recorded output of all sectors of the country’s economy. This output can be compared from month to month and from year to year in order to gauge whether an economy is improving or declining. Government fiscal policy and monetary policy can then be adjusted to suit the needs of the economy. In addition, GDP per capita (GDP divided by the total population) provides a measurement of the average economic prosperity of the citizens of a country. This provides a means of roughly measuring average standards of living and quality of life, and positive or negative changes to this value. There are, however, a number of imperfections associated with using GDP as an indicator of economic prosperity. For example, GDP is a single financial measurement, which may not accurately reflect social progress and the public welfare. GDP per capita does not take account of possible concentration of wealth in the hands of a relative few, that is, a disparity in incomes between the rich and poor. It does not measure the happiness of people, nor is it the only factor that indicates quality of life. GDP also does not account for household domestic and volunteer work, which benefit the economy. In addition, if there is an underground cash economy, and the cash transactions are not reported to the government, these transactions are not included in the GDP of a country. As a result, GDP balances can be significantly understated.
While there are a number of limitations...
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