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

The Gross Domestic Product (GDP) is considered an imperfect measure of economic well-being for several reasons, with three main points standing out:

1. GDP does not consider changes in the quality of goods and services over time: While GDP measures the total value of goods and services produced, it doesn't account for improvements in quality. For example, a better-quality car sold at a higher price contributes more to GDP than a lower-quality car, even if the overall use and satisfaction derived from both are similar.

2. GDP does not account for the distribution of income within a country: GDP measures total economic output but doesn’t provide insights into how that output is distributed among individuals or households. A country could have a high GDP while having significant income inequality, meaning that a substantial portion of the population may not share in the economic prosperity.

3. GDP does not include the value of intermediate goods in the production process: This point is actually incorrect or misleading—GDP specifically measures final goods and services to avoid double counting the value of intermediate goods.

Given these points, the factors most commonly accepted for GDP's shortcomings in measuring well-being are related to quality changes and income distribution.