Incapability of GDP

May 19, 2014 § Leave a comment

The word “GDP” (gross domestic product) itself has become well-known worldwide and also been used to measure economic growth. GDP is, without a doubt, a powerful and useful tool to provide a country’s production, expenditure, and income streams, as well as the flow of goods across borders. Additionally, it has provided essential guidance to countries in the sense of helping them to track economic gains that have improved citizens’ quality of life considerably. For instance, GDP per capita is often employed to measure citizens’ well-being.

The concept of GDP sounds perfect, however, it fails to measure crucial factors. GDP fails to account for changes in a country’s stock of assets. In this regard, it is difficult for policymakers to balance economic, social, and environmental concerns. In short, policymakers need to apply other measures such as health, education, and the state of the natural environment in order to attain the long-term health of the economy.

The national income total is thus an amalgam of relatively accurate and only approximate estimates rather than a unique, highly precise measurement. In view of the approximate character of the national income figures small differences or changes should not be taken an unequivocal indications that differences actually exist or that changes have actually occurred (Kuznets, 1934, p.12).

As a result, the incapability of GDP has been widely discussed and subsequently “sustainable development” has been introduced in the mid-80s. However, most of the countries in the world still largely rely on GDP although they are aware of the need for more thorough and extensive measures for development. In order to challenge the sole dependency on GDP, it is crucial to change our education systems, political structures, and institutions.

Reference:
Kuznets, S. (1934) ‘National Income, 1929-1932’, The National Bureau of Economic Research, pp.1-12

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