Economic Growth

Limitations of Real GDP as a measure of growth

Although the calculation of Real GDP is the best indicator of economic growth that we have, it still has its faults. No economic measure can ever be perfect, and as such it is vital that in analyzing this statistic we are able to recognize these faults and, where necessary, adjust our analysis as a result.

Limitations of Real GDP as a measure of economic growth include:

There is no indication of the quality of the goods and services being produced. It is possible that the quality of a smaller number of items has improved to such an extent that our standard of living has actually increased. However, this would not be reflected in the measure of Real GDP.
Non-market activity is excluded from the calculation. Non-market activity includes any production of goods and services that does not involve a flow of money. For example, many duties completed around the home do have economic value. However, because they are not paid for with an exchange of funds, they do not appear in the calculation of Real GDP. This can actually be more complicated than it sounds at first. If you pay a gardener to mow your lawn, that will be counted. On the other hand, if you mow the lawn yourself it will not be counted. The same activity has been completed each time, and yet one appears in the measure of Real GDP and the other does not.
Some figures are estimates. For example, the value of farm produce that is consumed on the farm is estimated, and yet it is still included in the calculation of GDP. Estimates like this make the final figure slightly more unreliable.
There has been a great deal of discussion over the way in which the figures are deflated. The ABS changed to the chain volume measure in 1998 after a recommendation in a paper called the “System of National Accounts” which was published in 1993. It is a complex mathematical procedure, and in completing this procedure some variances are bound to creep in to the final figure.
In the calculation of growth there is no indication of the way in which the extra production is being distributed. Another important goal of the Australian economy is to achieve an equitable distribution of income. We do not want to achieve “growth at all costs”, and yet our growth statistic can not reflect this.
There is also no way of seeing the costs associated with the growth that we have achieved. It is conceivable that Australia could grow at a much higher rate in the short term, however to do so would mean ravaging our natural resources. Statistics associated with growth do not reflect the damage which is done to the environment in the form of resource use or pollution.

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