Why is the GDP used as a measure of national income as well as a measure of national economic well-being?
Gross domestic product measures national income and wellbeing because it essentially adds up total production and weights it against the willingness of consumers to purchase goods and services. When computed per person, GDP shows the total income and expenditure of a person compounded to provide a national economic outlook (Jones and Klenow, 2016). In essence, the incomes received by households are used to access better healthcare services, education, and housing. The economy is perceived to grow when people spend their incomes to improve their lives.
Is the GDP measure underestimating or overestimating national production and total income in the economy during various business cycles? Why?
Gross domestic product overestimates and underestimates national production and income. GDP overestimates production and total income if negative externalities like unsustainable use of economic resources are included in the GDP. For example, if a country uses all its mineral resources in a given period, the GDP will be higher. However, the GDP will drastically drop following because there is no mineral resource to mine. Conversely, GDP underestimates production and income if technology use and improvement in product quality is not included in as part of the production when computing the GDP.
What are the limitations of the GDP in measuring total output and national welfare?
There are varied limitations of GDP in measuring total output and national welfare. The GDP fails to include non-market transactions and does not exhibit the degree of income inequality in a nation (Aitken, 2019). Additionally, the GDP fails to show the level of a nation’s economic growth and sustainability of natural resources. Gross domestic product does not include popular goods and services, and volunteer work is perceived to increase life satisfaction translating to welfare improvement.
What are the impacts of the shortcomings of the GDP as a measure of the national product and national economic welfare?
The limitations of GDP impact on policy formulation and setting priorities relating to national production and economic welfare. The policy making is flawed because GDP leaves out certain economic indicators critical in providing the accurate state of national economic welfare, income and production (Aitken, 2019). The metrics left out of GDP include poverty rates, income inequalities, and sustainable natural resource use. Otherwise, formulating policies and setting priorities using a flawed GDP data shows that a country’s economy is developing albeit with minimal welfare progress.
Aitken, A. (2019). Measuring welfare beyond GDP. National Institute Economic Review, 249(1), 3-16.
Jones, C., & Klenow, P. (2016). Beyond GDP? Welfare across countries and time. American Economic Review, 106 (9), 2426-2457.