Q:

What are the advantages and disadvantages of the GDP in macroeconomics?

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Quick Answer

Using GDP in macroeconomics gives the advantage of easy calculation, because most GDP calculations use the same methodology and it correlates with development measures such as literacy levels. Disadvantages of using GDP include that it excludes the underground economy and ignores the value of household labor.

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Full Answer

Using GDP hides the income inequalities found within a country because it paints the picture of uniform income. A country such as Namibia has a large income gap between the richest 10 percent and the poorest 10 percent as compared to Belarus, although the two countries have the same GDP per capita. GDP excludes non-market production, which are goods and services that are not exchanged for money, yet such production has value. It excludes the value of leisure time activities and higher quality goods and services that replace older goods. GDP ignores the harmful side effects of economic activities, such as pollution, yet it includes the money spent on efforts to correct these effects.

GDP does not consider the sustainability of income-generating activities, such as income from sustainable forestry activities, which it treats similarly to income from destructive logging activities. The national income is a viable alternative to the GDP for economists. National income represents the income earned by citizens of a country.

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