which of the following is a limitation of using gross domestic product to measure economic development?
There are several limitations of using gross domestic product (GDP) to measure economic development. Some of the prominent limitations are:
1. Ignores Non-Market Activities: GDP only considers market activities, i.e., the value of goods and services produced for sale. It fails to account for non-market activities like household work, volunteer work, and do-it-yourself activities that contribute to the well-being of a society. As a result, it may not accurately reflect the overall economic development and quality of life.
2. Neglects Income Inequality: GDP measures the overall economic output but does not take into account how the income is distributed among the population. A high GDP growth rate may coexist with a significant wealth gap, indicating unequal distribution of wealth. Thus, GDP alone might not give a complete picture of economic development and social welfare.
3. Fails to Capture Informal Sector: GDP calculations largely focus on formal sectors of the economy, while omitting the informal sector, such as small-scale businesses, street vendors, and self-employed individuals. Therefore, it may underestimate the overall economic activity and development, particularly in developing countries with substantial informal sectors.
4. Ignores Environmental Costs: GDP does not consider the environmental costs associated with economic activities, such as pollution, depletion of natural resources, and environmental degradation. It does not differentiate between sustainable and unsustainable economic growth. As a result, GDP might overestimate economic development while ignoring the negative impact on the environment and long-term sustainability.
5. Overemphasis on Material Production: GDP primarily measures economic output in terms of goods and services produced and consumed. However, it fails to account for productive activities that contribute to well-being, such as education, healthcare, and social services. The overemphasis on material production might overlook the importance of human development and social welfare within an economy.
6. Limited to Monetary Transactions: GDP mainly focuses on monetary transactions and does not consider other factors that contribute to economic development, such as education levels, health outcomes, or technological advancements. Therefore, it might provide an incomplete representation of a nation's overall progress and development.
It is crucial to consider these limitations while utilizing GDP as a measure of economic development. Many alternative measures, such as the Human Development Index (HDI) and Genuine Progress Indicator (GPI), have been developed to address these shortcomings and provide a more comprehensive view of economic development.