Flaws of GDP
As a measure of economic development, GDP is a useful but fundamentally flawed statistic. Some examples of the deficiencies of GDP as a measure of economic development are detailed below.
When computing GDP, goods and services sold in the marketplace are valued at market prices. However, some goods are not sold in the marketplace, and these do not have market prices. Thus the value of these items has to be estimated, or imputed. This is especially true of
middle of document…
This type of economic activity is known as the ‘informal economy.’ According to Ireland (2012), informal economic activity accounted for between 50 and 75 percent of non-agricultural employment in developing countries. The same paper goes on to state that such activities are not confined to the developing world either, with considerable portions of economic activity occupied by the informal economy in developed countries such as Finland (18.3 percent), Germany (16.3 percent), France (15.3 percent), and the United States (8.8 percent).
If GDP continues to omit such a significant portion of economic activity, then it is missing out a sizeable chunk of the value produced in the economy. This is especially the case in developing countries, where the well-being of many households depends on informal economic activity, e.g. odd jobs carried out by rural migrants in urban areas or second jobs held by farmers to supplement farming income. If this is not being measured, then GDP is again understating economic development, as well as failing to capture the differences between households who participate in the informal economy and those who don’t.
GDP increases not related to economic welfare
The current section details ways in which GDP may overstate the economic well-being of an economy.
The expenditure on, and the income derived