Limitations of GDP
Economics: IB Diploma, topic 2.1.3
Limitations of GDP
Gross Domestic Product ("GDP") is a commonly used measure of an economy's output and - by proxy - its well-being. However, it is not a perfect metric and has several limitations.
Non-market transactions
- GDP includes production that is exchanged in the market, but it does not cover production that is not exchanged in the market.
- For example, hiring someone to mow your lawn or clean your house is part of GDP, but doing these tasks yourself is not part of GDP.
Wealth inequality
- GDP has nothing to say about the level of inequality in society. GDP per capita is only an average.
- When GDP per capita rises by 5%, it could mean that GDP for everyone in the society has risen by 5%, or that GDP of some groups has risen by more while that of others has risen by less—or even declined.
- The Gini Coefficient is a measure of income inequality that is commonly used by economists.
Accounting for externalities
- While GDP includes what a country spends on environmental protection, healthcare, and education, it does not include actual levels of environmental cleanliness, health, and learning.
- GDP includes the cost of buying pollution-control equipment, but it does not address whether the air and water are actually cleaner or dirtier.
- GDP includes spending on medical care, but does not address whether life expectancy or infant mortality have risen or fallen.
Sustainability of growth
- Looking at the change in GDP over a one-year period will tell you how much the economy has expanded (or shrunk) in a given year.
- It will not, however, tell you anything about whether that level of growth is sustainable over the longer term.
Test yourself on Limitations of GDP
Which of these services would be counted as part of GDP?