GDP and Economic Well-Being

Review section 3 of the Macroeconomics chapter assigned in 2.1. Learn about the shortcomings of GDP as a measure of well-being. As we will see, GDP is an imperfect measure of happiness as it focuses exclusively on the material well-being of a country's citizens. Factors such as the quality of healthcare, education, and the environment, are not explicitly covered by GDP.

Conceptual Problems with Real GDP

A second set of limitations of real GDP stems from problems inherent in the indicator itself. Real GDP measures market activity. Goods and services that are produced and exchanged in a market are counted; goods and services that are produced but that are not exchanged in markets are not. There are two exceptions to this rule. The value of food produced and consumed by farm households is counted in GDP. More important, an estimate of the rental values of owner-occupied homes is included. If a family rents a house, the rental payments are included in GDP. If a family lives in a house it owns, the Department of Commerce estimates what the house would rent for and then includes that rent in the GDP estimate, even though the house's services were not exchanged in the marketplace.