Drawbacks of measuring economic growth in GDP

Although the GDP is a pretty good indicator of the economy, there are some disadvantages of the GDP, including the concepts that the GDP does not take into consideration. 

  • Rising GDP of a country does not necessarily mean the rise in the welfare of citizens. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms.  
  • GDP does not reflect inequality present within the economy. Economic inequality is not revealed by GDP figures. 
  • Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example, domestic services women perform at home are not paid for. This is a case of underestimation of GDP. GDP ignores voluntary and charitable work, social service as it is unpaid. 
  • Externalities: 
    Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized). Externalities do not have any market in which they can be bought and sold. For example, output of oil refinery is taken into GDP calculation but pollution and ill effects are not deducted from GDP. This is the case of overestimation of GDP. 
  • Underground Economy: The underground economy (or black market) refers to cash and barter transactions that are not formally recorded and are often used to support the trade of illegal goods and services (i.e., drugs, weapons etc). Some nations’ economic output may be understated by GDP. 
  • GDP does not value intangibles like leisure, quality of life etc. 
  • GDP does not take into account the economic value of the environment. Rather it neglects services provided by ecosystems and incentivizes economic activities causing environmental degradation by counting them. 
  • Gender disparities are not reflected through GDP measure. 
  • Barter exchanges are also not taken care of. 
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