What Are the Advantages & Disadvantages of the GDP in Macroeconomics?

by Sam Grover; Updated September 26, 2017
...

Gross domestic product is a rough measure of economic power. Calculated basically as the sum of the value of an economy's goods and services, GDP is useful for its simplicity. However, it has some key disadvantages in its use as an economic growth indicator.

Simplicity

Despite GDP's flaws, it is useful because of the way it breaks an economy down into a single number. It's a raw figure that shows how much value an economy is producing. It doesn't show as much detail as other metrics do, but it is also easier to understand than other metrics.

Indicator of Well-being

GDP, according to OECD economist Fran├žois Lequiller, is an indicator of an economy's well-being because of its connection to that economy's goods and services. If GDP is high, then production is high, which means that people have the money to purchase goods. This in turn means that firms have the money to employ people. So, a major advantage of GDP is that it gives a clear indicator as to how well (or badly) an economy is doing.

Inaccurate Data

GDP only takes reported consumption into account. Black market goods like pirated movies, drugs and labor paid for in cash do not get reported. This means that there is potential for inaccuracy. An economy can be thriving in unreported goods but have a low GDP, which means that it will not reflect the actual well-being but rather only the reported well-being.

Unclear Indicator

While GDP does indicate consumption, it doesn't differentiate between high-quality consumption and low-quality consumption. For example, if a town has a major toxic waste spill that costs $100 million to clean up, then that town will get a $100 million injection to its GDP despite the fact that a toxic waste spill is clearly not a beneficial event. GDP also ignores beneficial components of society, such as health care and education, that are extremely important but don't always turn a profit.

About the Author

Sam Grover began writing in 2005, also having worked as a behavior therapist and teacher. His work has appeared in New Zealand publications "Critic" and "Logic," where he covered political and educational issues. Grover graduated from the University of Otago with a Bachelor of Arts in history.

Photo Credits

  • Jupiterimages/Photos.com/Getty Images