GDP is commonly used to measure economic activity, but it has important limitations. GDP does not account for which of the following?

• A. The total amount of government spending included in the expenditure approach to GDP
• B. The total market value of final goods and services produced within a country during a given period
• C. The value of unpaid household labor (such as cooking and childcare provided within the home)
• D. The level of the overall price index used to convert nominal GDP into real GDP

Answer: (C)

Verified step by step guidance

1. Step 1: Understand what GDP measures. GDP (Gross Domestic Product) calculates the total market value of all final goods and services produced within a country during a specific period, typically a year or a quarter.
2. Step 2: Recognize the components included in GDP. The expenditure approach to GDP sums consumption, investment, government spending, and net exports (exports minus imports). Government spending is explicitly included in this calculation.
3. Step 3: Identify what GDP excludes. GDP does not account for non-market activities, such as unpaid household labor (e.g., cooking, childcare done within the home), because these activities do not have a market transaction and thus no market price.
4. Step 4: Understand the difference between nominal and real GDP. Nominal GDP is measured using current prices, while real GDP adjusts for changes in the price level using a price index to reflect the true volume of production.
5. Step 5: Conclude that among the options, the value of unpaid household labor is not captured by GDP, highlighting one of its important limitations as a measure of economic activity.