Gross Domestic Product is the broadest measure of the quantity of activity in an economy. More specifically, it shows the financial value of the services and goods produced in a country for a period of time. It is actually calculated by adding up the government expenditures, with all the Investments, monetary quantity of consumption and net Exports (Rittenburg, 2009). Unlike the Gross National Product (GNP) which measures output of resources and labor from nationals regardless of their location, the Gross Domestic Product (GDP) comprises of production from within the country’s borders regardless the nationality of the labor or resources’ owner.
As the economy keeps on changing, certain measurements definitely have short comings especially regarding the welfare and well being of a country.The wealth, inequality, consumption or security of citizens is not factored into the GDP. For instance the Gross Domestic Product model does not safeguard the safety of the citizen’s property. Second hand goods sold in a country are not included when calculating the GDP as there is no production involved. However, it comprises the replacement of depreciated capital. If your house is robbed, the new television that you purchase is factored into the GDP (Rittenberg & Tregarthen, 2009). A higher GDP may be achieved but greatly caused by a high crime rate.
Moreover, GDP is not designed to distinguish how money is spent. Money spent on activities that people like or are beneficial to their well being is not included. For instance, the value of time spent with friends or family is ignored. Similarly, the value of clean water or air is not regarded in Gross Domestic Product (Rittenburg & Tregarthen, 2009). Instead, GDP factors in many items that do not improve the welfare of the people such as reconstruction costs after certain disastrous events.
To effectively measure economic welfare a model proposed by Nobel laureate James Tobin and William Nordhaus can be used. The Measure of Economic Welfare (MEW) adds the value of leisure and services to the Gross National Product (GNP) and subtracts certain misfortunes such as pollution and the cost of capital consumptions while excluding police services against crime. It considers factors that influence the economic well-being of a country, and successfully shows the improvement or decline of the living standards of citizens.
Rittenberg, L., & Tregarthen, T. (2009). Principles of Macroeconomics. Irvington: Flat World Knowledge, Inc.