Write down the limitations of gdp in measuring total output

Reference no: EM13451839

Gross Domestic Product (GDP) measures the market value of all final goods and services produced within a country in a given period of time. In other words, GDP measures continuous flow of money from households to firms and then back to households in the whole economy. (Refer to Chapter 24)

The trend of the GDP growth rates is the key indicator of macroeconomic fluctuations (business cycle), which include expansion, boom, contraction, and recession. Thus the real GDP is used to explain how well the overall economy of a country is performing whereas GDP per capita is used as a natural measure of the economic well-being of the average individual in a given country.

However, there are limitations (shortcomings) in using the GDP as a measure of national income as well as a measure of national welfare.

1. What are the limitations of the GDP in measuring total output and national welfare? What products (services) are excluded from the GDP computation?

2. Is the GDP measure underestimating or overestimating national production and total income in the economy? Why?

3. What are the impacts of the shortcomings of the GDP as a measure of the national product and national welfare?

Reference no: EM13451839

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