Flaws of GDP

As a measure of economic development, GDP is a useful but fundamentally flawed statistic. Some examples of the deficiencies of GDP as a measure of economic development are detailed below. Imputations When computing GDP, goods and services sold in the marketplace are valued at market prices. However, some goods are not sold in the marketplace, and these do not have market prices. Thus the value of these items has to be estimated, or imputed. This is especially true of housing. When people rent housing, their rent is counted as part of GDP, as it is both income (for the landlord) and expenditure (on the part of the tenant). For people who live in their own homes, an estimated market value for the rent that would be paid for the property if they were renting it is computed and a part of GDP. However, there are limits to imputations. Whilst the value of housing services are imputed, the value of other durable goods, e.g. the cost, or ‘rent paid’ towards running cars, fridges and other durable goods are not accounted for in GDP. Additionally, if outputs are produced which do not make it to the marketplace, such as meals cooked at home, these are not included in GDP either. The fact that these items are not included means that GDP may understate economic well-being. For example, a meal produced at home is no different from meals cooked in a restaurant, but the latter is included in GDP whilst the former is not. Therefore GDP is deficient at showing the full gamut of what people in an economy may produce, thus understating the level of economic well-being. The ‘black’ economy There is one sector of the economy where there are no imputations for the value of goods and services supplied. This is the black economy (otherwise known as the shadow or underground economy). This is the sector of the economy where activities are hidden from the