Difficulties In Measuring Gdp

Q3 What are the difficulties in measuring GDP?

A region's Gross Domestic Product (GDP) is one of several measures of the size of its economy. The GDP of a country is defined as the market value of all final goods and services produced within a country in a given period of time. It's also considered the sum of value added at every stage of production of all final goods and services produced within a country in a given period of time. The two terms GDP and GNP are almost identical. If consumer spending growsÐ'--if people buy more clothing and cars and homesÐ'--then the economy grows. If business investment growsÐ'--if companies invest in new buildings and equipment and buy more raw materialsÐ'--then the economy grows. If government spending growsÐ'--if money is poured into the space program, defense, roads, and police forcesÐ'--then the economy grows.

* Difficulties in measuring Gross Domestic Product

GDP is widely used by economists to follow how the economy is moving, as its variations are relative quickly identified. However, its very difficult to measure GDP. The problems include:

Ð'* Determination of intermediate & final goods is difficult. A final good or service is the end product of a process, the product or service that consumers actually use. On the other hand, goods produced on the way to making the final product are called intermediate goods. In the example of making bread, if the grain, the flour and the bread were all counted, the grain would end up being counted three times, which would lead to an overstatement of GDP. The determination of final good or intermediate good is also complicated when production extends over several periods.

Ð'* Transfer payments-

Ð'* Income of foreign companies- If they send the remaining profits back to their country or re-invest that money, how can that income be computed that has been generating from foreign companies.

Ð'* Goods for self-consumption- no money transaction takes place, hence there's no record of it. So, how to compute it when measuring GDP?

Ð'* Services without remuneration- services which are produced without any payment, cannot be accounted in the GDP. For example, street lighting.

Ð'* Double counting-