Real GDP is a pretty accurate measure of the output rate in the economy and how that output rate is changing. However, GDP is not a measure of economic welfare.
Contribution of GDP
GDP data provides information required to track the performance level of the economy, and thus allows us to compare levels of output across time periods. Without GDP data, policymakers id not be able to adopt productive policies, and business decision makers would not be able to determine future demand.
Major Limitation of GDP
GDP does not count goods and services that are not sold for money (known as nonmarket production). A good example is household services. If you take care of your own baby, it is not counted as GDP; if you hire someone to do it, it is.
GDP does not count underground economy, including: Unreported legal activities that intend to avoid taxes Illegal activities such as drug trafficking. GDP does not count the value of leisure activities. GDP does not fully adjust for the improvement of product quality and the introduction of new products. GDP does not adjust for harmful economic side effects such as air and water pollution.
Five Alternative Measures of Domestic Output and Income
- GDP: The total market value of final goods produced within a country, regardless of the citizenship of the producers.
- Net domestic profit (NDP): GDP less depreciation.
- National income : The total income (domestic and foreign) earned by the citizens of a country. National income measures the income payments to owners of human and physical capital. National income includes five components: employee compensation, proprietors’ income, interest, rents, and corporate profits.
- Personal income: The total income received by individuals that is available for consumption, saving, and payment of personal taxes.
- Disposal income: Personal income minus personal taxes. Such income can be either spent or saved.