Principle of Macroeconomics

Karl E. Case-Ray C. Fair

Limitations of the GDP concept

We generally think of increases in GDP s good. (or preventing its decrease) is usually considered one of the chief goals of the government's macroeconomic policy. Because some serious problems arise when we try to use GDP as a measure of happiness or well-being, we now point out some of the limitations of the GDP concept as a measure of welfare.

GDP and Social Welfare

If crime levels went down, society would be better off, but decrease in crime is not an increase in output and is not reflected in GDP. Neither is an increase in leisure time. Yet, to the extend that households desire extra leisure time. (İnstead of having it forced on them by a lack of jobs in the economy), an increase in leisure is also an increase in social welfare. Furthermore, some increases in social welfare are associated with a decrease in GDP. An increase in leisure during a time of full employment, for example, leads to a decrease in GDP because less time is spent on producing output.

Most non-market and domestic activities, such as housework and child care, are not counted in GDP even though they amount to real production. However, if I decide to send my children to day care or hire someone to clean my house or drive my car for me, GDP increases. The salaries of day care or hire someone to clean my house or drive my car for me, GDP increases, The salaries of day-care staff, cleaning people, and chauffeurs are counted in GDP, but the time I spend doing the sas same thing is not counted, A mere change of institutional arrangements, even though no more output is  produced, can show up as a change GDP.

Furthermore, GDP seldom reflects losses or social ills. GDP is accounting rules do not adjust for production that pollutes environment. The more production there is, larger is GDP, regardless of how much pollution results in the process.

GDP also has nothing to say about the distribution of output, individuals in a society.İt does not distinguish, for example, between the case in which most output, goes to a few people and the case in which output is evenly dividend among all people. We cannot use GDP to measure the effects of re distributive policies ( which take income from some people and give income others.) Such policies have no direct income on GDP. GDP is also neutral about the kinds of goods an economy produces. Symphony performances, handguns, cigarettes, professional football games, Bibles, soda pop, milk, economics textbooks, and comic books all get counted.

İn spite of these limitations, GDP is highly useful measure of economics activity and well-being. If you doubt this, answer this simple question: Would you rather live in the United States of 100 years ago, when rivers were less polluted, and crimes rates were less polluted, and crime rates were probably lower, or in the United States of Today? Most people say they prefer the present. Even with all the “negatives” GDP per person and the average standard of living are much higher than 200 years ago.