Additional Flaws In The Criterion Of Gdp To Measure Economic Development.

1.  The Role of Variety and the New Age of Mass Customization

Some economists are of this opinion that GDP may mis-state the actual growth in human welfare because it fails to measure changes in variety. Along with industrialization which is becoming standardized clothes are produced on assembly lines in factories (ignoring the personal choices) with ever decreasing costs. This will make the goods available even to those people who could not afford to purchase them earlier. Moreover, greater variety of goods and services are available to the customers in DCs. For example, in US there were 140 models of motor-vehicles on the market in 1970, but in 2000 there were 260 different models. In 1970, 267 new movies were released, while in 2000, there were 458 new movies. For athletes, there were 5 styles of running shoes on the market in 1970, in 1998 there were 285 different brands and styles. All such shows that the firms are eager to provide consumers with increased variety proves that people prefer variety over similar or homogeneous goods. Thus, the current age of mass customization may be increasing human welfare more rapidly than GDP numbers suggest because consumers have more choices and they can achieve a greater level of welfare for the same level of expenditures.

2.  Adjustment for Product, Quality and Changing Consumption Patterns.

Prof. Boskin Dulbeger and Jorgenson etc. are critical about the accuracy of the price index that is often used to adjust nominal figures and obtain real numbers. They think that US govt. CPI has been over-stating annual inflation by slightly more than 1% point. The CPI used often neglects improvement in quality of goods and services________ the case of improvement in the latest models of automobiles. Accordingly, if one properly measures the value of transportation and the driving enjoyment provided by this year’s automobile as compared with last year’s, the price of automobile this year may not have risen at all. Thus, Prof. Boskin says that the understatement of quality changes leads to a very serious overstatement of inflation, then there is the understatement of real output growth.

There is another problem that price indices are usually based on fixed samples of goods and services. Accordingly, this fact is ignored that the people alter their consumption decisions when the relative prices of goods and services change. Consumers often substitute cheaper goods for expensive goods by shopping round. But the price indices are likely to overstate inflation in many countries. Thus, in the presence of quality changes and adjustments in price responsive consumption patterns the growth of GDP may be under­estimated.

3.  Informal Activity and Measurement of GDP.

The standard GDP data are often inaccurate because they fail at account for household and informal economic activities. This short-coming is important for developing economies where much economic activity goes unrecorded. Accordingly, when year-to-year estimates of total output, including market activity, household activity and informal activity are not available satisfactorily, the GDP data will be unreliable to be used for the measurement of growth.


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