Formalization at Google

Why might GDP not be a good measure of the level of welfare or economic activity within an economy?

Gross domestic product is a measure of the value of goods and services produced by the factors of production (land, labour, capital, enterprise) within a country over a period of one year hence National income. One purpose for which National income is that it is used for international comparisons of living standards or real income. GDP in a country is measured in local currency so to make comparisons we have to covert different countries numerical GDP into the same currency. The following factors are taken into consideration about GDP not being a good measure of economic activity.

1.1 Black Economy

It does not take into account the informal sector that compromises of underground activities. The transactions that occur are perfectly legal but the only illegality is that they are not reported for tax purposes and therefore omitted from the calculation of GDP.

1.2 Illegal activities

Many forms of illegalities such as gambling, prostitution and drug trade fall into this category. Therefore to gain an accurate measure of the total demand for factors of production in the economy of total marketable output, we need to include these activities whether or not we approve them.

1.3 Non marketed activities

Services such as household work at home and voluntary work are excluded, as time is not marketed and therefore its value does not show up in measures.

For an overall measure of economic welfare we may need to supplement or modify conventional measures of NI, none of which measures the quality of life.

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