Sunday, August 24, 2008

Limitations of Using GDP as a Measure of Quality of Life

Gross domestic product and its related concepts (such as real GDP, per capita GDP, and per capita real GDP) are incomplete measures of a country’s standard of living. There are many productive activities that are not included in GDP because it only measures output produced and sold in legal markets. It does not include productive activity that does not have a market transaction.

Although GDP and its related concepts are useful in measuring a country’s output, income, and standard of living, they are not perfect measures of quality of life. Quality of life refers to the amount of fulfillment people have in life. There are also many aspects of the quality of life that are not considered in the calculation of output, such as leisure, the environment, and the quality of people’s health.

Criticisms of GDP data as measurements of quality of life include:

1. GDP only measures the output produced and sold in legal markets.
It does not include productive activity that does not have a market transaction.

Some Economic Activity Does Not Occur in Legal Markets and thus is Not Included in GDP

Activities INCLUDED In Gross Domestic Product (GDP)Activities NOT INCLUDED In Gross Domestic Product (GDP)
Hiring a lawn service to mow your yard.Mowing the lawn yourself.
Taking your children to a day-care center.Caring for your children yourself.
Hiring a plumber to fix a water leak at your house.Fixing the water leak yourself.
Prostitution in some counties of Nevada (where it is legal).Prostitution in most of the rest of the U.S. (where it is illegal).

2. GDP does not consider how output contributes to the quality of people’s lives.
It simply measures how much output a country produces. For example, people who live in urban areas spend a portion of their incomes on products to help them cope with urban problems. For example, urban residents buy more alarm systems for their homes and cars, self-defense classes, and stress medication. Some economists refer to these products as "bads" rather than "goods".

Suppose you live in a rural area. If you move into the city, you can change to a job that pays you $1000 more per year. Suppose urban life causes you to spend $1000 per year on things you did not need living in a rural environment. Even though your income is larger, has moving to the city improved the quality of your life?

3. GDP does not measure the quality of the environment.
A country might be able to increase its output (and GDP) if it eases pollution regulations. Yet, having higher per capita real GDP might not mean people have a better quality of life if the air, water, and other resources are more polluted.

4. GDP does not consider how leisure contributes to the quality of life.
A country could increase its output (and GDP) if its people worked 12 hours per day, seven days per week. However, having more products might not mean people are better off if they have no leisure time to enjoy it.

Virtually all data have limitations. Even though GDP data are not perfect measures of the quality of life in a country, they are still useful in measuring the standard of living.

Economic Growth - Topics


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  5. I think most of the shortcomings of GDP as a measure of quality of live arise because it is not supposed to measure quality of life in the first place.

    However, there are a number of alternative approaches out there to do just that. For example the Human Development Index, the Gross National Happiness Index, or the Social Progress Index. They are specifically designed to measure quality of life and well-being. They are described in more detail here:

    1. Good point... however, these approaches are not perfect either. Especially the GNH index. Check this Financial Times Blogpost for more info.

      PS: for anyone who is too lazy to copy&paste the link above - limitations of gdp. You're welcome.

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  7. thanks it has been very helpful

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  9. GDP measures often given the inaccurate representations of the country’s economic standing and more so in the global setting. It is true that the social economic activities are not included in the GDP records and thus the statistics given are biased. The system of finding the GDP need to be reevaluated and calibrated better. You can Buy Literature Review Rewriting service for business research projects.

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  13. post the limitations which is caused by
    using the methods of estimating national income