Gross Domestic Product (GDP) is the most commonly used indicator of a country's economic growth, but there are a number of problems involved with the way GDP is calculated that must be kept in mind. One of the primary problems with GDP is that it measures goods and services sold through markets but does not take into account anything that is produced but not sold. Also, this value does not factor in a country's underground economy of tax evaders and criminal enterprises. Most importantly, GDP purports to determine a country's growth and standard of living, but it only does this from a material perspective and does not factor in actual social welfare.
A country is concerned with its rate of economic growth because it predicts the ability its people to produce and consume goods and services in the future. Consumption, or the demand for goods and services, in turn drives job creation, which in turn drives the country's standard of living. The rate of economic growth is measured by tracking GDP, or the total value of the goods and services produced. This number is calculated by the government based on the sale of goods and services in the marketplace, which can be determined by looking at government transactions such as sales and income taxes.
One of the problems with GDP is that it only takes into account the goods and services an economy produces and sells in a legitimate marketplace. This is only a portion of the total economic activity that takes place in a country. In areas where bartering is still in use, GDP is particularly unsuitable as an economic indicator. The value of economic production that is not exchanged in a traditional sense also goes uncounted, such as the work done by a stay-at-home mom.
Problems with GDP also arise when you consider that there is a portion of a country's economy that does not flow through legitimate government channels. This “underground” economy can be significant. If this was a true unbiased indicator, all production would be valued, regardless of the legality of the transaction. GDP ignores the person who works off the books, the illegal immigrants who work without paying taxes, the corporate tax scofflaws and the criminal masterminds equally.
Perhaps, one of the most significant problems with GDP is its framing paradigm. This value is used to indicate a country's standard of living, or how well off its citizens are compared to other citizens in other countries. The indicator uses market sales exclusively to reach its conclusion, however, which are mostly driven by a profit motive. As an indicator, GDP only really measures how well off a country is materialistically and how capable the populace is of making purchases. It does not truly measure the increase in social welfare, which is a multifaceted approach to an analysis of the standard of living.
