At SmartCapitalMind, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
Gross domestic product (GDP) is a formula used to determine the size and scope of a country’s economy, created by adding together the total amount of money earned or spent on goods and services produced by citizens of the country. While this number can be a good indication of how well a country is doing financially, there are several limitations of GDP. One of the most important is that this number does not take into account the citizens’ quality of life, or how producing the products and services that make up the GDP impacts the environment, and, therefore, the resources, of the country. This number also does not factor in financial transactions that are not reported to the government, making the reported GDP often lower than what it is in reality.
Oftentimes, GDP is used to determine how wealthy a country is and, therefore, how well-off its citizens are. Using this as a blanket determination of how well a country is doing overall is one of the biggest limitations of GDP. A country that has a high GDP, which is often viewed as a good thing, may also be comprised of a work force that has limited time for pleasurable activities due to the large amount of work required by social or financial pressures. Essentially, gross domestic product only takes into account the finances of a country, and not what is needed to achieve the high numbers or how the amount of money generated is distributed among its citizens.
In the same vein, one of the most substantial limitations of GDP is the fact that the environmental impact of creating enough products or services to achieve a high number is not factored. For a country to achieve a high GDP, it generally has to utilize more resources and create more waste than countries with lower GDPs. This can eventually limit the amount of natural resources readily available to a country, and cause harm to the agricultural products that make up a portion of the GDP. These limitations of GDP, as with the lack of information regarding wealth disbursement and the impact producing high quantities of goods and services has on the overall well-being of the people, are why GDP alone typically fails in providing a well-rounded, truthful picture of a country and its economy.
Every country has what is known as an “underground economy,” which is defined as transactions between two parties that are not reported to the government. As the government has no real means of tracking these dealings, they are not included in the calculations, and this missing information is one of many limitations of GDP. In some areas of the world, the underground economy makes up a large part of the amount of gross domestic product that a country generates. Oftentimes, with the lack of information regarding a country’s underground economy, many places technically have a higher GDP than what is reported.