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Limitations of GDP

AP Macro - 2.2AP Micro - 2.2

GDP does not measure welfare, leisure, income distribution, nonmarket activity, or environmental quality. It is a useful output measure but not a well-being index.

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Limitations of GDP

Key Concepts to Understand

Question 1 of 3

Which of the following activities is excluded from GDP because it is a non-market transaction?

Hiring a professional plumber to fix a leaky pipe.

A homeowner renovating their own kitchen without paid assistance.

Purchasing materials from a hardware store for a home project.

Paying a monthly subscription fee for a streaming service.

Practice Questions: Test Your Understanding

Apply what you've learned with these practice questions. These questions test your understanding of the key concepts.

Question 1 of 3

Which of the following is a limitation of using GDP as a measure of a country's overall well-being?

It includes the value of intermediate goods.

It fails to account for the distribution of income.

It double counts transfer payments.

It only measures the production of goods, not services.

It adjusts for changes in the price level.

Key Takeaways

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GDP excludes household production, underground economy, leisure, environmental quality, and distribution of income.
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Use GDP for measuring output and growth; do not use it alone to judge welfare or happiness.