The limitations of GDP
- GDP does not include non-market activity.
- GDP does not include transactions taking place in an underground economy.
- GDP does not include sale of 'second hand' goods.
- GDP does not include the transactions taking place in the 'stock market'.
- GDP does not include 'leisure time'.
- Exchange Rate
- Cannot tell if Economy is Growing
- GNP Inflated due to Expats
- GNP Deflated due to Foreign Direct Investment
The limitations of CPI
While the CPI is a convenient way to compute the cost of living and the relative price level across time, because it is based on a fixed basket of goods, it does not provide a completely accurate estimate of the cost of living. Three problems with the CPI deserve mention: the substitution bias, the introduction of new items, and quality changes. Let's examine each of these in detail.