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GDP is a flawed indicator of economic growth as it only measures goods and services sold through markets, ignores the shadow economy, and does not account for social welfare. It also fails to include non-traditional economic activities and illegal transactions. GDP only measures materialistic growth and does not reflect social welfare.
Gross Domestic Product (GDP) is the most commonly used indicator of a country’s economic growth, but there are a number of issues related to the way GDP is calculated that need to be kept in mind. One major problem with GDP is that it measures goods and services sold through markets but doesn’t take into account everything that is produced but not sold. Also, this value does not take into account a country’s shadow economy of tax evaders and criminal enterprises. Above all, GDP purports to determine a country’s growth and living standards, but it does so only from a material perspective and does not take into account real social welfare.
A country is concerned about its economic growth rate because it predicts its people’s ability to produce and consume goods and services in the future. Consumption, or the demand for goods and services, in turn drives job creation, which in turn drives the country’s standard of living. The rate of economic growth is measured by monitoring GDP or the total value of goods and services produced. This number is calculated by the government based on the sale of goods and services in the market, which can be determined by looking at government transactions such as sales and income taxes.
One of the problems with GDP is that it only takes into account the goods and services that an economy produces and sells in a legitimate market. This is only a fraction of the total economic activity that takes place in a country. In areas where bartering is still in use, GDP is particularly unsuitable as an economic indicator. Even the value of economic output that isn’t traded in the traditional sense isn’t counted, such as the work done by a stay-at-home mom.
Problems with GDP also arise when you consider that there is a part of a country’s economy that doesn’t flow through legitimate government channels. This “underground” economy can be significant. If this were a true unbiased indicator, all production would be valued, regardless of the legality of the transaction. GDP alike ignores the person working off the books, illegal immigrants working without paying taxes, corporate tax hoaxers and criminal masterminds.
Perhaps, one of the most significant problems with GDP is its framing paradigm. This value is used to indicate a country’s standard of living or how well its citizens compare to other citizens of other countries. The indicator uses market sell-offs solely to reach its conclusion, however, that they are mostly driven by a profit motive. As an indicator, GDP really only measures how well a country is materialistically and how capable its population is at shopping. It does not truly measure the increase in social welfare, which is a multifaceted approach to analyzing living standards.
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