Macroeconomics There Are Three Main

Macroeconomics

There are three main limits to calculating the national GDP: errors in measurement, subcategories, and the lack of accounting for welfare (EconPort, 2006). Errors in measurement are probably the biggest challenge. Consider the different inputs to GDP and how easy that information would be to acquire. The only way to produce GDP figures quickly is through estimates of economic activity that can be extrapolated to the economy as a whole. Now consider that some economic activity is never recorded. Black market activity is not recorded through any channels, so our ability to estimate black market activity is severely compromised. The estimates for black market activity are harder to make than the estimates for legal activity (Ibid).

Now consider how difficult it would be to measure the size of an economy where a significant portion of the economy is believed to be black market activity. The participants in black markets make a point of keeping their activities hidden, and that makes it very difficult to get any sort of accurate gauge on the scope of black market activity. While in the developed world the black market is relatively small (aside from drugs, anyway), in some countries most economic activity is on the black market.

In addition, inflation skews the GDP figures. This is why there is both nominal GDP and real GDP. Inflation makes is more difficult to gauge whether changes in GDP are reflective of changes in the level of economic activity, or just changes in price due to inflation (Ibid).

There are also questions as to what, precisely, should be included in the GDP calculation. Some movements of money are difficult to consider as "economic activity" or especially as "national income." Some types of government expenditures, for example, stretch the definition of economic activity. We know that an order for new office chairs at city hall is economic activity, but what about transfers to government agencies to run prisons? Or loans made by government to bail out banks or automakers. Those were expenditures. Something like the AIG bailout was an investment. But even investments are not necessary part of the GDP. Commissions paid on investments are, but are the investments themselves? Sorting out what is and what is not included in the GDP is another challenge for calculating national income.

Also, EconPort (2006) note that welfare is not measured. Again, this is a disbursement that is not taken into consideration in the accounting, until it is spent at a later point in time. It is worth noting that this particular disbursement is a transfer of wealth not unlike spending, and is money that is funneled into the economy by government.