GDP as a measure of development Essay Example | Topics and Well Written Essays - 2000 words

GDP as a measure of development - Essay Example Todaro and Smith elaborates that GDP is â€Å"the total final output of goods and services produced by the country’s economy, within a country’s territory, by residents and non-residents, regardless of its allocation between domestic and foreign claims† (815). GDP is different from the gross national product or GNP in this sense: while the GNP refers to the final value of goods and services produced by citizens of a country, the GDP refers to the final value of goods and services produced by a territory or the country. Thus, the GDP includes all outputs of goods and services in the territory of the country, whether that output were from aliens or citizens. In contrast, the GNP covers only the output of goods and services of citizens whether that output was produced inside or outside the territory of a country. The term â€Å"final goods and services† are meant to emphasize that the concept of the GDP seeks to avoid double counting of goods and services. Fo r example, if a certain input is part of a certain output, the value of the input is not counted but only the value of the final output. The GDP count only the output currently produced (Dornbusch, 36). Thus, for example, the value excludes older houses but includes new house construction (Dornbusch, 36). Dornbusch et al. noted the following difficulties of GDP measurement (36-38): 1. GDP is unable to measure some of a territory’s outputs because they are not traded in the market. 2. GDP does not subtract anything for environmental pollution. Goods and services may have been produced but at high costs to the environment of the nation. 3. GDP does not factor the quality of goods or the improvements in the quality of goods. Baumol and Binder defined GDP as â€Å"a measure of the size of the economy† or the total amount it produces in a year and noted the following limitations of GDP as a measure (23, 90-91): 1. GDP is not a measure of a country’s well-being but, a t the same time, it was never intended to be one. 2. Only market activity is included in the GDP and this explains why African countries can survive on $ 5 per week. 3. International comparisons can be misleading if we use GDP because we are not comparing the same economic activities: many things that are counted in the GDP of the rich countries are not counted in the GDP of the poor countries. 4. GDP places no value on leisure. Baumol and Binder argued that as a country gets richer, its citizens acquire more leisure time and the value of the leisure goes up. 5. GDP can also overstate how a country is well-off because even the bads are counted in GDP accounting. According to Baumol and Binder, even disaster can bloat the GDP as houses or properties are reconstructed once a natural or man-made disaster strikes similar to the 9/11. Hall and Lieberman enumerated the following problems with regard to measuring the GDP (539-540): 1. GDP statistics can be inaccurate, especially among deve loping countries. 2. Many countries, especially developing economies have an underground economy. The underground economy includes hidden economic activity. The hidden economic activity can also include illegal economic activities, especially those involved in drugs, prostitution, many gambling activities, and those that seek to avoid taxes. 3. Many countries, especially the developing economies, have large areas where food is grown and consumed by farmers and many goods do not enter the market. 4. Household activities are also not included in GDP accounting. Parenting is not counted in the GDP unlike daycare programs. Takeouts are counted in the GDP but not homecooked food. Therapy is counted in the GDP but not talking to a friend. For Scott and Miles, there are at least two issues in using GDP as a measure. The first