Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 8 The Data of Macroeconomics
Chapter 23 of 36 Measuring A Nation’s Income
Section 13 of 15
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Gross Domestic Product (GDP) does not directly measure things that make life better, but it does measure our ability to obtain the inputs that help make life better.
Leisure, a major part of a good life, is left out of GDP.
Suppose everyone in the economy started working every day of the week and not take Saturday and Sunday off for leisure.
More goods would be produced and GDP would rise.
Despite the increase in GDP we would not conclude everyone is better off.
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GDP uses market prices to value goods and services, so it excludes the value of activity outside markets.
GDP omits the value of goods produced at home.
When a chef prepares a meal and sells it at his restaurant, the value of the meal is included in GDP.
If the chef prepares the same meal at home for his family, the value he has added to the raw ingredients is not included in GDP.
Child care provided in daycare centers is part of GDP, but child care by parents at home is not.
Volunteer work contributes to society well-being, but GDP does not include this work.
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GDP excludes environment quality.
Suppose the government eliminated all environmental regulations.
Firms could then produce goods without considering pollution.
Product costs and prices would be lower so firms would produce and sell more, increasing GDP.
But because of the increased pollution society well-being would fall.
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GDP does not consider distribution of income.
Two societies have GDP of $5,000,000 and population of 100 people, therefore average annual income of $50,000.
In society #1 everyone has an annual income of $50,000.
In society #2 ten people have income of $500,000 and the other ninety have no income.
GDP per person tells us income of the average person, but nothing of income distribution.
We can conclude GDP is a good measure of economic well-being for many but not all purposes.
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