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### Course: Macroeconomics>Unit 2

Lesson 2: Limitations of GDP

# Limitations of GDP

GDP is the most commonly used measure of output, but it leaves some things out. Learn about the limitations of GDP in this video.

## Want to join the conversation?

• Purchasing power parity measures what, exactly? To be clear, how is it different from nominal GDP?
• Purchasing power parity (PPP) is an economic theory that compares different countries' currencies through a "basket of goods" approach. According to this concept, two currencies are in equilibrium or at par when a basket of goods (taking into account the exchange rate) is priced the same in both countries.
--Investopedia
PPP takes into account cost of living, inflation rates, etc., to accurately describe GDP per capita.
*Example:*
Country X has a GDP per capita of \$200,000.
Country Y has a GDP per capita of \$100,000.
On the rankings, Country X will be higher than Country Y, right? But if you take into account the fact that Country X has a high cost of living and a high inflation rate, while Country Y has a low cost of living and a low inflation rate, it seems that Country Y should be higher on the rankings relative to Country X.
This is what PPP does. Under PPP rankings, Country Y will be higher than Country X.
Purchasing power parity is calculated by `S=P1/P2`,
where `S` is the exchange rate,
where `P1` is the cost of good X in currency 1
where `P2` is the cost of good X in currency 2.
As for how nominal GDP and PPP are different:
Nominal GDP is calculated by `GDP = Consumer Spending + Investment by industry + Excess of exports over imports + Government Spending`
Real GDP adjusts the nominal GDP for inflation, using a selected 'base year'.
Purchasing Power Parity adjusts the nominal GDP for inflation and cost of living by comparing two countries' currencies.
Hope that helps!
• At , if I were to pay the babysitter in cash and the transaction is not registered with the IRS, wouldn't that still count as a household expense and add to the total consumption and therefore add to the GDP? It wouldn't be under the particular heading of payments to babysitter perhaps, but it would still affect my bottom line.
• Because the transaction was not registered, the government would have no way of adding it to the GDP, I think
• What would happen without GDP?
• Demand would outstrip supply of food, gas, and other necessities. If the collapse affected local governments and utilities, then water and electricity might no longer be available. A U.S. economic collapse would create global panic.
• this question: How does per capita GDP in the following countries "stack up" against America's (in percentage terms)?
Instructions: Enter your responses as a percentage rounded to one decimal place.

us: 55,980
china: 7,930
cuba: 6,000

China:_

Cuba:__

Do I have to divide the U.S and Canada and multiply by 1% to find the percentage for Canada?
(1 vote)
• What are the drawbacks and limitations associated with using GDP as a measure of economic output?
(1 vote)
• Hi I want to tell you that Macau is not a country!It's a part of China. Please correct it.Thanks.