Difficulties in Measuring Gdp

Q3 What are the difficulties in measuring GDP?

A region's Gross Domestic Product (GDP) is one of several measures of the size of its economy. The GDP of a country is defined as the market value of all final goods and services produced within a country in a given period of time. It's also considered the sum of value added at every stage of production of all final goods and services produced within a country in a given period of time. The two terms GDP and GNP are almost identical. If consumer spending grows—if people buy more clothing and cars and homes—then the economy grows. If business investment grows—if companies invest in new buildings and equipment and buy more raw materials—then the economy grows. If government spending grows—if money is poured into the space program, defense, roads, and police forces—then the economy grows.
* Difficulties in measuring Gross Domestic Product GDP is widely used by economists to follow how the economy is moving, as its variations are relative quickly identified. However, its very difficult to measure GDP. The problems include:

· Determination of intermediate & final goods is difficult. A final good or service is the end product of a process, the product or service that consumers actually use. On the other hand, goods produced on the way to making the final product are called intermediate goods. In the example of making bread, if the grain, the flour and the bread were all counted, the grain would end up being counted three times, which would lead to an overstatement of GDP. The determination of final good or intermediate good is also complicated when production extends over several periods.
· Transfer payments-
· Income of foreign companies- If they send the remaining profits back to their country or re-invest that money, how can that income be computed that has been generating from foreign companies.
· Goods for self-consumption- no money transaction takes place, hence there's no record of it. So, how to compute it when measuring GDP?
· Services without remuneration- services which are produced without any payment, cannot be accounted in the GDP. For example, street lighting.
· Double counting- it's difficult to measure GDP because of double counting taking place.
· Difficult to measure illegal activities- GDP does not take into account the black market, where the money spent isn't registered, and the non-monetary economy, where no money comes into play at all, resulting in inaccurate or abnormally low GDP figures. For example, in countries with major business transactions occurring informally, portions of local economy are not easily registered. Bartering may be more prominent than the use of money, even extending to services (I helped you build your house ten years ago, so now you help me).
· Cross border trade within companies distorts the GDP and is done frequently to escape high taxation.
· Individuals do not keep correct account of their consumption.
· Illiteracy and ignorance.
· Lack of proper criteria for measuring the value of services.

However, despite of these difficulties GDP does help in providing data, which governments and external agencies can use in a variety of different ways. These include:
· to determine the extent of economic growth
· to measure changes in living standards over time
· to make comparisons of economic performance and living standards between countries
· to examine and judge the performance of different sectors of the economy