Some Limitations/Omissions of GDP/GNP

Deliberate Omissions

· Transfer Payments/Financial Transactions-Excluded from GDP/GNP calculation

· Exchange of Gifts-Excluded from GDP/GNP calculation

· Do it Yourself economic Activities-(Unpaid and domestic services, labor services of housewives, day care/nursing services)-Excluded from GDP/GNP calculation

· Barter Transactions-Excluded from GDP/GNP calculation

· Second-hand transactions-Excluded from GDP/GNP calculation

· Intermediate transactions-Excluded from GDP/GNP calculation

· Leisure-Excluded from GDP/GNP calculation

· Depletion of resources-Excluded from GDP/GNP calculation

· Environmental costs-Excluded from GDP/GNP calculation

· Allowance for Non-profit making/inefficient activities-Excluded from GDP/GNP calculation

GDP/GNP do not reflect changes in the quality of output

· Allowance for improved quality in goods/services-Excluded from GDP/GNP calculation

· Income distribution-GDP/GNP as a measure of economic welfare are mute about the allocation of income in society-Give an example

· Illicit economic activities(egs drug trafficking, counterfeit, prostitution etc)-Excluded from GDP/GNP calculation

· Underground economic activities( tips, cash payments to professionals for services, accounting tricks for tax avoidance ends etc)-Excluded from GDP/GNP calculation

GDP/GNP deal in dollar values not in physical units

· Inflation distorts the comparative value of nominal GDP/GNP and complicates the usefulness of these indicators to measure the economic performance of different economies -Why?-See Price changes vs changes in real GDP/GNP

GDP/GNP do not reflect the purpose of production

· Military/security expenditure-Added to GDP/GNP calculation

· Divorce/illness/accident expenditures-Added to GDP/GNP calculation

Given these limitations\Omissions of the GDP/GNP-What alternatives exist to the GDP/GNP as a measures of economic welfare of the populations of societies?

Three (3) of the more outstanding alternative measures of economic welfare to the GDP/GNP are:

(1) MEW-Measure of Economic Welfare (Developed by James Tobin and Robert Nordhaus)

MEW subtracts any index that reduces the overall welfare of a population (such as pollution, military spending etc) and adds any index that improves the well-being of a population (such as Do it yourself activities, labor services of housewives, caring for families etc). The calculation of the GDP/GNP do the opposite.

(2) HDI-Human Development Index: (Developed by United Nations economists in 1980s)

The HDI ranks member countries of the UN based on their investments or expenditures on and delivery of a clearly defined set of development indices. These include foods, shelter, health care services, education, clean water among others. The focus of the HDI is on the accessibility of these basic services to the most indigent members of society. The equitable distribution of the basic necessities is the hallmark of this index.

(3) GPI-Genuine Progress Indicator (Developed by Cobb/Halstead)

It is similar to MEW in some ways in terms of its methodology but pursues a more critical stance on the GDP/GNP. Cobb/Halstead refer to the GDP as the “Gross Deficiency Product”. The latter term unmistakably summarizes the lack of confidence of Cobb/Halstead in the GDP/GNP to measure the well-being of a population.