2.2: Limitations of GDP
There are 4 main areas of the limitations of GDP (Gross Domestic Product). In order to remember these we use the acronym P-I-E-S.
When populations are different from country to country and the countries are producing a similar amount of a product than it gives us an inaccurate picture of the standard of living because one country is taking the same amount of production and distributing it amongst a larger population. For example, if one country is producing 15 million computers but has a population of 15 million than each person only has access to 1 computer but if another country produces the same amount of computers but has a population of 3 million than each person in that country has access to potentially 5 computers. This is why economists use GDP per capita as a better measure of standard of living.
Inequality is also a limit to the use of GDP to measure the standard of living. Two countries can have the same GDP per capita but if income is not evenly distributed to all families then it is not an accurate measure of production and economic stability. In the unequal society, the market will be less resilient and the governing bodies will be less sustainable due to famine, conflict, and unemployment.
Another limitation regarding using GDP as a measure of the health of our economy is with regard to the various environmental situations. For example, if a factory is polluting during production they are still adding to GDP but GDP does not separate out the costs of this pollution from the actual production, even if the pollution is negatively impacting human life and ecology.
4. Shadow Economy
The final limitation has to do with the shadow economy. The shadow economy involves the production of items that are not reported so they are not counted in GDP. This shows us that GDP is not always accurate because there are some things not counted. An obvious example of the shadow economy is the black market which are aspects of the economy deemed illegal and therefore excluded from formal reporting, but there are many other aspects of the shadow economy that are perfectly legal.