Gross Domestic Product (GDP) is the measure of the overall economic productivity of a country. This implies that the GDP is the fiscal value of all the manufactured goods and services created within the borders of a country within a particular duration, although GDP is normally computed on yearly terms. Gross Domestic Product comprises all of the private and public expenditure, investments and exports less imports that occur within a defined territory and government outlays. The quantification of the overall economic output in a country requires evaluation of all sources of income and transactions. GDP estimation encompass the summation of private consumption (C), government spending (G), sum of all the country's businesses spending on capital (I) and nation's total net exports (NX). The mathematical representation of the GDP would be:
GDP = C + G + I + NX
GDP accompany a number of shortcomings as a measure of economy’s performance. GDP does not account for transactions that are executed in places other than the market (Barro, 2008). For instance a mechanic repairing his own car is an activity that is not considered as an output. This is an activity that is considered in the GDP model as a voluntary activity and it is not considered as a transaction. Nonetheless, this is an activity that involves all technicalities as it would have been in the garage by a different mechanic. The GDP is not precise in this case because of this bias and the total output is not incorporated.
GDP as a measure does not consider the improved quality of products. The current involvement of computers in daily operations such as documentation and communication has led to a significant improvement. However, GDP does not account for the improvement in its provisions (Barro, 2008).
The black market exchanges and the underground economy are not included in GDP. Activities such as gambling and smuggling of drugs yield significant amounts of money to the economies of the subject countries. It should be understood that these activities and their output are not incorporated in GDP computations.
Therefore, GDP is not a good tool for measuring the well being and welfare of a nation because the economic output should cater for all sources of income and the transactions to be precise (Barro, 2008).