What are some criticisms of GDP as a measure of economic activity?

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GDP was originally developed as a way of understanding manufacturing output in the period between World War I and World War II. The problem with GDP, though, is that it is a fairly narrow metric, originally developed for economies where goods were more important than services. Now, economies have changed,...

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GDP was originally developed as a way of understanding manufacturing output in the period between World War I and World War II. The problem with GDP, though, is that it is a fairly narrow metric, originally developed for economies where goods were more important than services. Now, economies have changed, especially in developed countries, changed, and GDP by its very nature neglects those things which are not paid for with money.

Take, for example, cooking. If a person buys fresh ingredients and spends an hour cooking a meal for himself and his family, that activity is not included in GDP. However, if the same person were to buy a takeout meal, the value added by the restaurant in producing the meal would be part of GDP. In reality, though, equal value is added in both cases. Many types of domestic labor, including child-rearing and housework, are not included in GDP and yet have value, as can be determined by the fact that families may opt to pay for nannies or daycare or cleaning services.

Next, GDP does not measure things that are difficult to quantify. For example, the major services provided by Facebook and Google are free. While one can measure the value of the advertising sold by both companies, it is difficult to measure the value of a free search engine. Quality of life is also not measured by GDP, nor are costs such as pollution and depletion of nonrenewable resources.

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There are some criticisms of using the gross domestic product as a measure of economic activity. One issue is that is hard to consider all of the goods and services that actually exist in the economy. For example, taking care of aging, adult parents would be considered a service. It is difficult to determine how much of a value to assign to that service. It is also important to define what production actually is.

A second issue is that, in order to gather data, it is necessary to have accurate statistics. Sometimes, it is difficult to measure some aspects of economic activity, such as the activity that might occur on the black market.

A third issue is that a really good system is needed to add all of the components of the economy. It is hard to measure the value of some government services, such as public education. Additionally, the gross domestic product doesn’t fully take into account the measure of wellbeing. It does measure the wellbeing of the goods and services that are produced, but that is all it will measure as far as wellbeing is concerned. It also doesn’t measure any costs associated with the harmful effects of production, such as pollution.

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There are many criticisms of gross domestic product (GDP) as a measure of economic activity.  Let us look at some of the most important of these.

  • GDP does not account for harm done by economic growth.  The classic example of this is pollution.  GDP looks only at the value of goods and services that are produced.  It does not look at the impact of the production of those goods.  Therefore, if an industry produces a great deal of pollution, the costs of that pollution are not taken into account.  The pollution can decrease quality of life and can even decrease economic activity in other sectors (such as fishing or tourism), but GDP does not account for those losses.
  • GDP does not account for the value of work done outside the marketplace.  The classic example of this is work that is done at home.  If I send my children to a babysitter and I buy my family dinner at a restaurant, those are counted as economic activity.  If I care for my children at home and I cook dinner myself, those are not counted as economic activity.
  • GDP does not account for the distribution of wealth, economic security, or any other factor like this.  GDP does not measure the actual well-being of people in a country.  Instead, all it measures is production.  
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