GDP is the total worth of products and services generated within a country's geographic limits during a given time frame, usually a year. The GDP growth rate is a key indication of a country's economic health. When the overall value of products and services sold by local producers to foreign nations surpasses the total value of foreign goods and services purchased by local consumers, a country's GDP rises.
If a country manufactures and sells one automobile for Rs. 10 lakhs, gives Rs. 10 lakhs in educational services, spends Rs. 10 lakhs on road connections, and generates Rs. 10 lakhs in net exports, the country's GDP will be Rs. 40 lakhs.
The GDP of the country will grow if the citizens buy more products and services made in the country. The more our government and the private firms invest in large domestic projects, the higher our GDP will rise. The more we export the more GDP we generate.
But there is no consideration for the good or bad consequences produced during the manufacturing and development process. For example, GDP counts the number of automobiles we make but ignores the pollutants they emit; it adds the value of sugar-sweetened drinks we sell but ignores the health issues they induce; and it includes the cost of creating new cities but ignores the worth of the crucial forests they destroy.
Let us discuss the limitations of GDP in detail.
GDP growth alone is insufficient to assess a country's progress or inhabitants' well-being. Leisure time is not included in GDP. Does the fact that the US GDP per capita is higher than Germany's GDP per capita mean that the US has a higher quality of living? Not necessarily, because the average American worker works hundreds of hours more per year than the average German worker. The extra weeks of vacation taken by German workers are not factored into the GDP calculation.
The state of the environment is another factor the GDP does not account for. Imagine suppose all environmental rules were repealed by the government. The GDP would increase as a result of businesses producing products and services without taking pollution into account. However, well being would probably decline. The benefits from increased productivity would be far less than the decline in air and water quality.
Quality of goods
GDP has little to do with the quality of goods and quantity of diversity offered. If a household buys 100 loaves of bread in a year, GDP doesn't care if they're all white or if they may select among wheat and a variety of other grains. GDP just cares if the overall expenditure incurred on bread is still the same.
Services of friends and family
GDP does not include the value of practically any activity that occurs outside of markets since it employs market pricing to evaluate commodities and services. The value of products and services generated domestically is specifically excluded from GDP. The value of a meal made by a chef and sold at her establishment is a component of GDP. The value the chef adds to the raw materials while cooking the same dish for her family, however, is not included in GDP.
Distribution of income
GDP also fails to account for the income disparity throughout society, which is becoming increasingly important in society as inequality levels rise in both the developed and developing worlds. When GDP per capita increases by 5%, it might look like that GDP has increased by 5% for everyone in the society. However, the case might be that the GDP of some groups has increased more while for others, it has stayed the same or even fallen.
It is unable to distinguish between an unequal and an equal society if their economic sizes are identical. Policymakers will need to account for these challenges when measuring progress since growing inequality is leading to increased social dissatisfaction and division.
GDP is a restricted instrument for gauging standard of life because many elements that contribute to people's happiness cannot be bought and sold. It is a rough indicator of a society's standard of living because it does not directly account for leisure, environmental quality, levels of health and education or the societal value placed on certain types of output, whether positive or negative.