We often use the size and growth a country’s Gross Domestic Product (GDP) as an indicator of its progress in national development. But GDP, or the measure of the monetary value of goods and services produced by a country, doesn’t fully reflect the reality.
Here are some reasons why GDP is considered a poor measure of development:
1. GDP cannot take into account the social and environmental impacts of human activities. While the measure captures increased sale of cars and gasoline, it ignores the impact of the overuse of these on the quality of life, such as pollution and global warming.
2. It doesn’t capture inequality. GDP rises even if the income of-of only a minuscule section of the population is rising. That is, the gap between the average (mean) income and the median income (that of the “typical” person, whose income lies in the middle of the distribution of all incomes) does not get captured.
3. GDP was created to suit industrial era of mass-produced, homogeneous goods, simply valuing the production of more stuff. It is a far less useful guide in situations where the quality of goods and services more valued.
For instance, if the quality of medicines in a country improves, even when their prices fall or remain the same, it can not be captured by GDP. Similarly, if cars produced there become of better quality, that too cannot be captured. Similarly, quality fall also cannot be accounted for in GDP calculation.
4. In this digital era, GDP cannot measure services that are offered at no cost such as those by Google and Facebook. Also because of this, things such as maps, encyclopedias and music recordings that are now available for free, which were previously valued and counted in GDP, have fallen out of GDP measurement.
5.GDP usually measures output. But when it comes to government, a key sector, it cannot do that. So it often measure the output of the government simply by the inputs. This means even poor, inefficient government spendings result in a rise in GDP, giving a very incorrect picture. [Note that between six decades ending in 2009, the share of government in GDP changed from 21.4% to 38.6% in the US, from 27.6% to 52.7% in France, from 34.2% to 47.6% in the UK, and from 30.4% to 44.0% in Germany.]