A Closer Look at GDP’s Reliability

One common notion often heard is that GDP can determine the economic growth of a certain nation. However, some experts contradict the idea, and branded it as misleading that may even even be damaging to development and progress. So, how come some are claiming that what the book often states is in fact quite inaccurate?

If you go back to browsing the main definition of gross domestic product, you are likely to encounter the phrase "amount of all goods and services exchanged within a specific period of time." Using this as basis, what these figures actually gauge is the monetary value of everything purchased by individuals over the course of one year, which covers all sectors be it private, nonprofit or governmental areas. To give you the simplest example, if you buy a ham for $10, GDP also increases by the same quantity.

It also has two categories: real GDP and GDP per capita. The first one refers to adjustments in case there are increases in the cost of living while the latter pertains to a division of the total output by the population in a given geographic location. It gives a more precise data of how well off the average individual is within a certain place.

This is probably where the concept of a higher GDP being equal to a relatively healthier economy originated since many tend to conclude that since spending is high, it means that majority of the people are financially stable. This is not exactly the case at all times.

First of all, this metric does not only jump when you have a shopping spree, or purchase a new house. It also climbs in the wake of calamities, wars, and terrorist attacks, as greater expenditures are inevitable to compensate for the affected crowd. So while you are under the impression that many are enjoying a comfortable lifestyle, the presence of a much catastrophe is actually taking place.

It’s also not an indicator for social welfare for it covers only the sum of expenses, not the distribution. This means that GDP may rise amid a deteriorating standard of living. Moreover, it does not determine environmental well being especially since nowadays, a big chunk of funds that causes it to rise is due to long term conflicts in the environment, which results to a insufficient resources.

Another important factor to remember is not all local products are equal meaning, if the administration spends a particular sum of money for a new aircraft, the same volume of cash will also be taken out for the establishment of a hospital, or devising a new software.

Overall, the belief that a GDP boost is equivalent to prosperity, is instead a signal of a fallacy that leads many to regard it as an expansion rather than something that overshadows the occurrence of a decline.