Limitations to Calculating GDP

Posted: October 17th, 2013

Limitations to Calculating GDP

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Limitations to Calculating GDP

The market value of all final recognizable services and goods produced within a particular period in a particular country is referred to as the Gross Domestic Product (GDP). There is the Real GDP and the nominal GDP. The real GDP is the value of the final services and goods expressed in the base year prices, which were produced in a particular year while the services and the goods of the nominal GDP were represented in the same year prices. A number of factors limit calculating GDP (Krugman & Wells, 2006).

One of the factors includes errors in measurement. This is because the underground economic activities and the black market are not added to the calculations of the GDP. There is no particular way of measuring the activities going on in the black market therefore it makes it hard to depict them in the GDP calculations. In the cases concerning the developing countries, the activities in the black market can constitute up to 70% of a country’s GDP (Krugman & Wells, 2006). Failing to depict such a high percentage of a country’s GDP brings forth a very high difference in the actual GDP.

Misrepresentation of subcategories is another limitation to calculating a country’s GDP. The government has constant discussions on the factors to be included or eliminated in government spending or consumption (Krugman & Wells, 2006). These discussions lead to discrepancies, which make it hard for the GDP to portray an actual depiction of a country’s GDP. However, the government makes sure that the discrepancies are as few as possible so that the difference is limited.

The calculations can only measure the monetary economic activities but they cannot measure the welfare (CMEPSP, 2010). A country’s welfare may fall contrary to a country’s GDP growth. There are situations that may a cause people to increase their spending thus the increase in GDP but they may not be monetary measured.

References

Commission on the Measurement of Economic Performance and Social Progress (France), Stiglitz, J. E., Sen, A., & Fitoussi, J.-P. (2010). Mismeasuring our lives: Why GDP doesn’t add up : the report. New York: New Press.

Krugman, P. R., & Wells, R. (2006). Macroeconomics. New York: Worth.