We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Are the Different Problems with GDP?

By Theresa Miles
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

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.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Related Articles

Discussion Comments

By anon962465 — On Jul 23, 2014

Take a country that is completely devastated by an earthquake. All buildings have to be re-built. Economic growth from rebuilding is reflected in an increased GDP! Has the GDP really been increased?

Another example: Let's all become lawyers and sue each other. Yup, the GDP per capita will rise. Also take an economy with surplus capital that does not spend all its income. Savings? What happens to this factor? Nothing unless it is spent internally.

By fBoyle — On Mar 10, 2014

A high GDP sometimes translates into social welfare and sometimes it doesn't. I think we can say that most developed countries such as Germany, US and Japan have high social welfare and they also have high GDP rates. But there are newly growing economies in the world, where GDP rates are impressive, but social welfare is not.

We can't simply look at GDP and say that the citizens of that country have high standards of living or that they have opportunities and freedom. Capital does not equal to social development and using GDP as an indicator is problematic for this reason.

By fify — On Mar 09, 2014

@Melonlity-- That's a good point but I don't think anyone is trying to replace GDP as an economic indicator. Perhaps more metrics can be developed so that the measurement of GDP is more realistic.

By ZipLine — On Mar 09, 2014

There are undoubtedly problems with measuring GDP. It's not always a realistic measurement and depends on various factors as the article said. But I still think that the advantages of this indicator are greater than the disadvantages. Although the measurement may not be 100% accurate, it still gives an overall idea about how the economy is doing.

This is one of the measurements that economists rely on to decide on economic policies. Without this measurement, it would be very difficult to make predictions about the future of the economy and it would not be possible to take precautions.

For example, right now, if economists see that GDP is being negatively affected by inflation, then they will suggest actions to reduce inflation so that the GDP can keep growing without negative side effects.

By Melonlity — On Mar 01, 2014

Using gross domestic product (GDP) to measure a nation's economic growth may be problematic, but what alternatives to it exist. And, here's a problem -- let's say a new metric is developed. Is there enough data appropriate to that measurement to track economic growth over a long period of time? Such comparisons are necessary to determine if an economy is, in the long run, expanding or contracting.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.