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Understanding Gross Domestic Product

Limitations of the Gross Domestic Product:
Economic Activity That Isn't Counted

As we have discussed, economists use the gross domestic product to measure economic activity. However, in spite of the best efforts of the statisticians, there are important parts of the economy that never find their way into GDP estimates because they just aren't counted even though they produce significant amounts of goods and services. The three most important parts of the economy that are left out of such analyses are: black-market activities, barter, and unpaid work.

The BLACK MARKET — sometimes referred to as the UNDERGROUND ECONOMY — describes economic activity based on illegal transactions. Some examples of black market activity are the illegal buying and selling of stolen goods, drugs, and copyrighted material. Other examples are prostitution, bribes, smuggling, and (in some countries) illegal currency exchange. Because such activities are against the law, the transactions are difficult for government statisticians to track and to value accurately.

BARTER refers to transactions, often informal, in which goods or services are used for payment instead of money. Economists refer to such goods or services as IN-KIND PAYMENTS. For example, let's say I fix my neighbor's computer and, in return, he gives me a lamp for my living room. We have provided goods and services with real value. However, because they are informal, in-kind payments, they are not counted as part of the GDP.

In most countries, the black market, as well as barter transactions are ignored by government statisticians and, as such, are not part of GDP estimates. In some countries, however, this value of this type of economic activity is tracked, or at least, estimated.

For example, the European Union mandated that, starting September 2014, all member countries must count, as part of the GDP for that country, all transactions for which the actions take place "by mutual agreement". Thus, within the EU, GDP values must now contain estimates for the value of prostitution, illegal drug sales, and the sale of stolen property. (Theft is not included, however, because, presumably, it does not take place by mutual consent.)

The third source of economic activity that is not part of GDP estimates is UNPAID LABOR, services that people provide for free. The three most important sources of unpaid labor are professionals, volunteers, and homemakers.

Professionals: When a mechanic fixes your car, he charges you money, and that transaction is considered to be part of your country's gross domestic product. However, when he fixes cars for his family and friends, it is not considered part of the GDP, even though it is the same mechanic doing the exact same type of work.

Volunteers: The same principle works for volunteers. I know a computer expert who has his own thriving business. However, in his time off, he works hard maintaining all the computers for a non-profit organization. Such labor has obvious economic value but, since no money changes hands, it is not counted as part of the GDP. Many non-profit organizations depend on volunteer work for their very existence and, although such work has considerable value, it is not counted as part of the GDP.

Homemakers: Think about the massive amount of work done by homemakers for their families. When a family pays a cleaning person, a nanny, or a cook, it is considered part of the GDP. However, when people devote time and effort to cleaning their own homes, taking care of their own children, and cooking for their own families, it is not counted, even though such labor has significant value (as you know if you have ever paid a cleaner, a nanny, or a cook).

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