What are some arguments against using real GDP?
Answer:
GDP is not a measure of satisfaction.
GDP just tells how much stuff the country makes.
With the assumption that the country with more stuff in it has a better opportunity to be happy.
One easy thing to measure is income distribution, which tells you if most of GDP is shared by a large middle class (single peak in histogram), or a few rich get it all while the masses are poor (two peaks).
YOu can also look at such indirect indicators of hapiness as life expectancy, birth and death rates, number of suicides.
Using it for what?
Remember that it's a guess -- what problem is so big that a big guess will help?
Thanks for the updated question, but you have to remember that there is really no such thing as "a nation's" feeling of well-being. It all comes down to individuals, and their values.
Two people, on the same day, can have very different values for the exact thing. (Otherwise, free exchanges wouldn't take place, and in fact they do, even with significant barriers that reduce the overall value of the transaction.) Since value is subjective, you can't use a single, guessed-at, artificially-derived number to predict how any individual feels, and so you can't assign a feeling to a group.
Hope that helps.
Prices and quantities are determined in general equalibrium. Nominal GDP is found by multiplying those prices and quantities. Real GDP is constructed by measuring the price levels using a basket of goods and multiplying that basket by prices. All criticisms revolve around how one constructs this basket of goods. Using the same basket is the equivalent of holding the ratio of qualtities constant across time, however this is incorrect since market choices depend on choices across goods so there will be some bias (since your assuming a suboptimal choice of quantity).
The theoretically correct way of doing this is looking at the cost of achieving some level of utility (an expenditure function) and using that to create a price index. Obviously this is impossible, but even if it were possible there is the question of the appropriate level of utility at which to create your index.
Other criticisms normally revolve around how we create a consistent index (basket of goods) over time since products change. The whole idea of real GDP is a disaster and gets worse when you attempt to compare across counties (PPP stuff), but the measures seem to work reasonably well so we use them.
doesnt account for american companies manufacturing outside the US but accounts for foreign businesses producing within the boarders of US.
GDP is a measure of market activity. Peoples satisfaction comes from their income, free time, economic and personal security, health and personal relationships. GDP and income distribution combined only gives a measure of income.
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