LIMITATIONS OF GNP

Deliberate Omissions

·        Transfer Payments/Financial Transactions-Excluded from GDP/GNP calculation

·        Exchange of Gifts-Excluded from GDP/GNP calculation

·        Do it Yourself economic Activities-(Unpaid and domestic services, labor services of housewives, day care/nursing services)-Excluded from GDP/GNP calculation

·        Barter Transactions-Excluded from GDP/GNP calculation

·        Second-hand transactions-Excluded from GDP/GNP calculation

·        Intermediate transactions-Excluded from GDP/GNP calculation

·        Leisure-Excluded from GDP/GNP calculation

·        Depletion of resources-Excluded from GDP/GNP calculation

·        Environmental costs-Excluded from GDP/GNP calculation

·        Allowance for Non-profit making/inefficient activities-Excluded from GDP/GNP calculation

GDP/GNP do not reflect changes in the quality of output

·        Allowance for improved quality in goods/services-Excluded from GDP/GNP calculation

·        Income distribution-GDP/GNP as a measure of economic welfare are mute about the allocation of income in society-Give an example

·        Illicit economic activities(egs drug trafficking, counterfeit, prostitution etc)-Excluded from GDP/GNP calculation

·        Underground economic activities( tips, cash payments to professionals for services, accounting tricks for tax avoidance ends etc)-Excluded from GDP/GNP calculation

GDP/GNP deal in dollar values not in physical units

·        Inflation distorts the comparative value of nominal GDP/GNP and complicates the usefulness of these indicators to measure the economic performance of different economies -Why?-See Price changes vs changes in real GDP/GNP

GDP/GNP do not reflect the purpose of production

·        Military/security expenditure-Added to GDP/GNP calculation

·        Divorce/illness/accident expenditures-Added to GDP/GNP calculation