Q. 8.2 Define GDP and explain its limit... [FREE SOLUTION]

Chapter 8: Q. 8.2 (page 164)

Define GDP and explain its limitations

Short Answer

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GDP is a monetary measure of the monetary value of a country's final products and services (i.e., those purchased by the end-user) over time. The following are the limitations:

Non-market transactions are not taken into account.

Failure to account for or represent the magnitude of societal wealth imbalance.

Failure to determine if the country's current growth rate is sustainable

Step by step solution

Content Introduction

GDP is the total worth of products and services generated within a country's geographic limits over a given time period, usually a year. The GDP growth rate is a key indicator of a country's economic performance.

Content Explanation

The Gross Domestic Product (GDP) is a measure of overall economic activity.

GDP has a number of drawbacks as a measure of well-being- Even if domestic and voluntary work have a significant positive impact on social welfare because they supplement the market economy and hence increase the standard of living, GDP only accounts for market transactions.

GDP does not describe income distribution - When income distribution is extremely uneven, the majority of people do not benefit from the increased economic output because most products are unaffordable. As a result, in order to accurately describe social welfare, income distribution must be considered.

Externalities are ignored by GDP - Economic expansion is frequently accompanied by increased exploitation of both renewable and non-renewable resources. As a result of this overuse, additional negative externalities emerge, and social welfare suffers as a result.

GDP does not describe what is being produced - GDP includes things that may have negative social welfare repercussions since it measures the entire worth of all completed commodities and services in an economy. Consider a country with a robust armament sector that contributes a significant portion of its GDP.