GDP is a measure of the value of production in terms of market prices and an indicator of economic activity. It is not a measure of a nation's overall welfare.

Economists find it especially valuable as an overall indicator of a nation's economic performance. But it is important to realize that GDP has significant weaknesses.

The following points make GDP figures unreliable to get a true picture of an economy's health:

It includes only the value of goods and services traded in markets, it excludes nonmarket production, such as the household services of homemakers discussed earlier. This can cause some problems in comparing the GDP of an industrialized country with the GDP of a highly agrarian nation in which nonmarket production is relatively more important.

It also causes problems if nations have different definitions of legal versus illegal activities. For instance, a nation with legalized gambling will count the value of gambling services, which has a reported market value as a legal activity. But in a country where gambling is illegal, individuals who provide such services will not report the market value of gambling activities, and so they will not be counted in that country's GDP. This can complicate comparing GDP in the nation where gambling is legal with GDP in the country that prohibits gambling.

Furthermore, although GDP is often used as a benchmark measure for standard of living calculations, it is not necessarily a good measure of the well-being of a nation. No measured figure of total national annual income can take account of changes in the degree of labor market discrimination, declines or improvements in personal safety, or the quantity or quality of leisure time.

Measured GDP also says little about our environmental quality of life. Other nations, such as China and India, have also experienced greater pollution problems as their levels of GDP have increased.

Nonetheless, GDP is a relatively accurate and useful measure of the economy's domestic economic activity, measured in current dollars. Understanding GDP is thus an important first step for analyzing changes in economic activity over time.


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