Gross Domestic Product (GDP) is described as the market value of current, final, and domestic production within a specific interval of time. All production is summed with regards to their market prices. The value of the final goods is the only figure included as opposed to including the value of all intermediate sales. Also, the output of productive factors located in a particular nation is counted. However, the GDP has its shortcomings as a measure of social welfare.
The first shortcoming of the usage of GDP is its inclusion of government’s spending together with other voluntary market transactions. This reduces the usefulness of the GDP because the government expenditures are not beneficial to the social welfare, or rather not important as indicated by their costs. Van den Bergh (2009) said that the GDP fails to highlight the economic activities that do not directly have a positive influence on the individual welfare. A good example of such activity is the military spending. Also, GDP fails to account for productive non-market activities. GDP also fails to account for any unpaid work whatsoever, despite how productive it may be. The GDP does not consider leisure time or how people work hard to produce output. Because they don't take into account such factors, there is a possibility that changes in real income could be understated. The GDP does not include the aspects of the underground economy. Such economy could include the barter and cash transactions that occur outside the recorded market place.
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However, the GDP remains the single best measure of economic progress. It can also be used to compare the economic performances of two or more countries. Other than GDP, there are alternative ways to measure the domestic income such as national income, personal income, and the disposable personal income.
Reference
Van den Bergh, J. C. (2009). The GDP paradox. Journal of Economic Psychology , 30 (2), 117-135.
