QUESTION 2/3

Question

Why is the Gross Domestic Product (GDP) considered an imperfect measure of economic well-being?

GDP does not measure how much is produced in a country in a given year

GDP does not consider changes in the quality of goods and services over time

GDP does not account for the distribution of income within a country

GDP does not include the value of intermediate goods in the production process

Answer 1

GDP is considered an imperfect measure of economic well-being for several reasons, primarily including:

1. Quality Changes: GDP does not consider changes in the quality of goods and services over time. Improvements in quality can enhance well-being, but GDP figures may not accurately reflect these improvements.

2. Income Distribution: GDP does not account for the distribution of income within a country. A rise in GDP may not imply improved well-being for all citizens, especially if the gains are concentrated among a small portion of the population.

3. Non-Market Transactions: GDP excludes non-market transactions, such as household labor and volunteer work, which contributes to well-being but may not be captured in GDP calculations.

4. Negative Externalities: GDP does not consider negative externalities, such as environmental degradation, which can detract from overall well-being despite economic growth.

5. Underground Economy: GDP may underestimate economic activity by excluding the informal or underground economy, where transactions are not reported.

Among the options listed, the statements that most directly highlight GDP's shortcomings in measuring economic well-being are:

• GDP does not consider changes in the quality of goods and services over time.
• GDP does not account for the distribution of income within a country.

Both of these factors contribute to the argument that GDP does not fully capture the economic well-being of a nation's citizens.