Shortcomings of GDP - Essay Example

SHORTCOMINGS OF GDP GDP is the monetary value of the end products of goods and services in a country within a period of one year. It is calculated by summing up the public and private consumption to the government spending and capital investments in the country. In addition to the total, net exports are added to complete the equation. The net exports are calculated by deducting earnings from imports to those of exports. Gross domestic product is used to monitor a country’s economic stability.

GDP is limited as a measure of production because it does not reflect on all well being of the economy. It only sums up the outputs of production and does not include intermediary goods and those consumed households (Tyson and Lund 2014). As a result, it does not measure the social welfare and their lifestyles. A country may have high GDPs annually, but there are still cases of increased poverty among its citizens. Additionally, GDP does not include incomes from black markets and other nonmarket activities that are sources of employments and better economic welfares.

Lack of including economic activities that directly contribute to an individuals welfare has become a major setback especially in the United States (Tyson and Lund 2014). GDP includes gross incomes and does not account for economic factors such as depreciating capital stocks. On the other hand, solutions have been introduced to modify GDP as a measure of economic welfare. They include the introduction of indexes in the environmental and personal welfare sectors. The Human Development Index (HDI) and Environmental Sustainability Index (ESI) have been introduced to provide for omissions that the GDP does not cater for in the economy.

Since GDP does not account for social welfare, the HDI can be used as a measure of individual qualities of life and later be included in the GDPs final tally. GDP can also be modified by including other measures of income such as the Gross National Product.ReferencesTyson, L., & Lund, S. (2014, May 21). Global flows and global growth. BusinessDay |. Retrieved May 24, 2014, from http://businessdayonline.com/2014/05/global-flows-and-global-growth/#.U4Dw8XKSwoI