3.3 Part 3: Limitations of GDP as a measure

Limit 1: Non market production is excluded
1. the value of some types of non market production is excluded as its too difficult to calculate
2. eg) black market, volunteer work, gardening.
Limit 2: Imputed production involves error
1. value that needs to be used is often estimated because its not actually sold in normal ways.
2. eg) cost of providing government services that are subsidised or provided free of charge.
Limit 3:Quality changes may be ignored
1. quality changes are not reflected in the changes of chain volume GDP
2. in some cases increase quality and the price paid or production costs come down.
3. eg) air tickets.
Limit 4:Calculating and using the chain price index involves possible error
1. needs to be statistically altered to remove exaggerations or underestimations
2. process of converting the GDP at current prices to GDP at constant prices requires the construction of an accurate chain price index.
3. Difficult to accurately reflect changes in the price of all goods and services entering GDP.
Limit 5: the distribution costs and benefits of economic growth are not considered
1. eco growth leads to increased production and consumption of goods and services
2. Not everyone benefits from this due to income inequality.
3. The negative externalities of economic growth is not shared evenly either
  1. Some groups suffer more than others
4. Chain volume GDP fails to shed light on these problems.
Limit 6: GDP on its own tells us very little about our living standards
1. misconception that the bigger a countries chain volume GDP and the faster the rate of eco growth, the better off people are
2. Chain volume GDP fails to measure how well of people are.
  1. meaningless unless we take into account the population size.
    1. Once taken into consideration we end up with an average GDP per capita that is GDP per head or per person.
Overview
1. Remember GDP is only estimation of the annual value of a nations output.
2. limitations to what GDP actually tells us about the economy and our level of wellbeing.
3. GDP should give an average estimate of our material living standards provided that there is a fairly even distribution of goods and services produced.
4. Rising GDPs are often associated with better education, increased life expectancy, more employment opportunities etc. This helps improve both aspects of living standards
  1. don't assume that better economic growth means better living standards.
5. Labour hours have increased meaning people are working longer and producing more. GDP takes this as a plus but forgets to take into account the reduced family time.
6. GDP also fails to distinguish good economic activity from bad economic activity or negative externalities.
7. In the end GDP gives us no indication of living standards.
Alternative ways of measuring Australia’s living standards
1. main reason for goal raise societies living standards and satisfy their unlimited needs and wants.
2. chain volume GDP is the easiest and most commonly used measure it gives us no indication of a countries living standards.
3. other methods to use that try and take living standards into consideration.
  1. Genuine Progress Indicator (GPI)
  2. Measuring Australia’s Progress (MAP)
4. Genuine Progress Indicator (GPI)
  1. GPI - uses GDP data but makes both negative and positive changes to reflect the good and bad effects on societies welfare of different types of activity and spending, thus taking some negative externalities into account.
  2. Some deductions from GDP to arrive at GPI reflect the costs that lower our wellbeing. Things such as family breakdown, reduced leisure time due to increased hours of work, road accidents and crime rates.
  3. Some additions to GDP to arrive at GPI are contributions to production derived from performing house work and parenting work, unpaid community or voluntary work and public infrastructure such as highways.
  4. Value of GPI reflects society’s overall wellbeing both material and non material. Some people argue that this is a much better measure because of this factor.
  5. Sustainable = highest current level of production possible that does not undermine the wellbeing of future generations of people. Therefore if the GPI increases it means that the present generation are improving and that future generations will not suffer.
    1. GPI decreases so too does the welfare and sustainability of economic activity.
  6. GPI has its weaknesses like the positive and negative adjustments are rate subjective in nature. The accuracy of the data that is used to make the positive and negative changes is also questioned.
5. Measuring Australia's Progress (MAP)
  1. MAP - involves using a range of measures of progress to build up a picture of changes in material and non material wellbeing.
  2. Three main categories used in this publication; society, economy and environment. It is important to note that not everyone thinks that all measures are important to progress.
  3. weaknesses are
    1. living Standards cannot be condensed into a single statistic or figure. The data shows what factors have progressed and what have regressed. Don't get to see what happened overall. Problem with combining measures into a single number is that some indicators are more important and reliable than others so the system of weighting would also need to be worked out and will cause subjectivity.
    2. The selection of specific measures is subjective - specific indicators make up the progress measures which are subjective and up to a point, based on personal values.
    3. Inadequate statistical data - limited range of indicators available to the ABS upon which to determine progress. They do not measure all aspects and in addition some data has not been collected for a long time so we cant make comparisons.

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3.3 Part 3: Limitations of GDP as a measure

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