GDP is an imperfect indicator of economic growth as it only measures goods and services sold in markets, ignores the underground economy, and does not take social welfare into account. It is used to predict a country’s ability to produce and consume goods and services, but it only measures materialistic success and does not truly measure social welfare.
Gross Domestic Product (GDP) is the most commonly used indicator of a country’s economic growth, but there are several problems involved in calculating GDP that must be kept in mind. One of the main problems with GDP is that it measures goods and services sold in markets, but does not take into account anything that is produced but not sold. Furthermore, this figure does not take into account a country’s underground economy of tax evaders and criminal enterprises. Most importantly, GDP is intended to determine a country’s growth and standard of living, but it only does so from a material perspective and does not take real social welfare into account.
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 tracking 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 just a part of the total economic activity that takes place in a country. In areas where the exchange is still in use, GDP is particularly inadequate as an economic indicator. The value of economic output that is not exchanged in the traditional sense is also uncountable, such as the work done by a stay-at-home mother.
Problems with GDP also arise when you consider that a portion of a country’s economy does not flow through legitimate government channels. This “underground” economy can be significant. If this were a true unbiased indicator, all production would be evaluated, regardless of the legality of the transaction. GDP also ignores the person who works the books, illegal immigrants who work without paying taxes, corporate tax statutes 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 the quality of its citizens compared to other citizens of other countries. The indicator utilizes market sells exclusively to reach its conclusion, however, which are primarily driven by a profit motive. As an indicator, GDP really only measures how well a country is materialistic and how capable the population is of shopping. It does not truly measure the increase in social welfare, which is a multifaceted approach to a standard of living analysis.
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