Answer to Question #141199 in Macroeconomics for aqsa

Question

what are the common misconceptions/ misinterpretation of GDP (gross domestic product) as indicator for economic growth?

Answer 1

Solution:

It is often misinterpreted that GDP represents the best measure of a nation's economic welfare, which is not normally the case. GDP has its own limits since it does not adequately quantify a nation's welfare from an economic point of view. GDP does not incorporate environmental as well as social components in its construction, which are important aspects in determining the health of a country's economy.

GDP also fails to fully capture the benefits of technology, which contributes to economic growth. GDP does not measure the wealth of a country at all, but rather it measures the value of goods and services produced in a given period. It doesn't tell you whether you can produce the same amount of goods and services in the next future period. GDP only takes account of goods that pass through official means and organized markets hence overlooking home production and black market activity, which are essential in determining the total production of goods and services. It also does not adjust for the distribution of goods and services hence producing inaccurate results to a nation's economic growth.