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Why are there limitations to calculating national GDP (national income...

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isabella0927 | Student, Undergraduate | (Level 3) Honors

Posted November 9, 2010 at 7:05 PM via web

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Why are there limitations to calculating national GDP (national income accounting)?

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epollock | (Level 3) Valedictorian

Posted November 11, 2010 at 4:55 PM (Answer #1)

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All movements in the business cycle are measuredby the rate of growth ofthe real gross domestic product (GDP). A nation’s nominal GDP measures its economic output; the real GDP is the nominal GDP adjusted for inflation. Three limitations to calculating GDP are: The first limit centers on random, external shocks to the economic system. These so-called “exogenous shocks” include both negative, recession-inducing events as well as positive, expansionary-enhancing “productivity shocks.” The second limit is typically viewed as inherently stable. Yet the value can be off base due to policy errors and miscalculations or, in the worst case, by Machiavellian politicians using the powers of incumbency to enhance their re-election fortunes. The third limit relies on much more complex and systemic view of the economy. It is characterized by the “co-movements” of many variables.

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