Shortcomings in the GDP - Economics

INTRODUCTION

Economics is all about how  to fashion lives of people so as to improve their lives in a better way. For any nation the rate of growth of economy is duly measured in terms of G.D.P.

G.D.P is the Gross Domestic Product which denotes the Economic value of a nation or in other words it is the measure of growth of economy.

STATEMENT OF PROBLEM

The shortcomings of G.D.P as a tool to measure growth come in limelight on the topic of Nominal Vs. Real Income. Expenditure measure of G.D.P states that if I have spent, someone must have earned.

So the G.D.P does not report income neither does it count performance of a particular individual.

SCOPE OF EVALUATION

G.D.P tells the state of health of the Machinery of Growth Engine. Even though the Goal of a nation is not to keep increasing its G.D.P but the goals are to

- eradicate poverty and hunger

- achieve decent employment

- develop goals and increase resources

- provide sustainable development and improvisation and so on…

 OUTLOOK ON MEASURE OF ECONOMIC ACTIVITY

Dollar is calorific values to measure world development. It is an indicator for measuring the economies of the world.

Different set of commodities used to measure the economic growth as because only one item is not a good measure of inflation.

1.     GDP does not take into account the sustainability of future GDP

Example - If a forest is cut and timber is sold in Arunachal Pradesh – it adds to GDP of India in the current year but significantly reduces the chance the economy can have the same performance in the future years.

i.e.- GDP does not differentiate between depleting assets or generating incremental wealth.

2.     GDP does not take into account the value of non-monetized activity

Example – Mothers working at home as housewife in most of the Indian homes. Although there is no monetary gain, the activities performed by her are treated as economically null.

3.     GDP does not differentiate between more or less productive economic activity

Example – Crime is an excellent example of the third criticism.

Crime is great for GDP of India as it necessitates monetary transactions such as hiring guards, buying security systems, purchasing insurance, paying lawyers, building prisons, etc. However, isn't this overstating of the economic growth?

4.     It treats all spending as economic gain

Example – Rebuilding structures and building after a natural disaster is treated as growth and is added to economy – which does not take into account the loss incurred.

Which means after an earthquake in Surat, the reconstruction amount will add to GDP.

5.     It ignores income distribution.

Example - The Indian economy has posted an average growth rate of more than 7% in the decade since 1997 – a remarkable boom.

 However we still are home to a third of the world’s poor.

6.     It treats all spending as paid-for

Example - The real estate boom is actually a borrowing boom. Therefore the purchase of house by Indian middle class is not booming in economy – it is actually borrowed growth.

7.     It pretends all resources are infinite.

Example - Fossil fuels & non-renewable resources which are depleting at such a rapid rate in India.