First, GDP figures omit production of goods and services that are not sold on markets. This component includes housework, meals cooked at home, and child care provided by parents, as well as services volunteered for charities and other groups. For example, when parents care for their own children, the value of their care does not appear in GDP. However, when parents pay for child care, those services appear in GDP (for more examples see the book).
Second, GDP includes only a very imperfect estimate of production of goods and services sold on the underground economy (or black market).
This activity includes production of illegal goods and services (such as drugs and prostitution). It also includes production of legal goods that goes unreported to avoid taxes. Many estimates suggest that the underground economy in the United States amounts to between
5 and 10 percent of GDP; this figure is even larger in many other countries.
Third, special measurement problems result when GDP includes certain goods that are not sold on markets.
When you rent a house or apartment, your expenses appear in GDP as payments for housing services. However, if you own the house or apartment where you live, GDP includes the
government’s estimate of the rent that you would pay if you were renting.
Fourth: Substitution bias: As consumers' tastes change and as new technological improvements are introduced,
the relative prices of goods change.
Such changes are independent of inflation so optimally we would like the real GDP measure to take them into consideration. For example, as more people started
using cellular phones, the cost of supplying this service went down and so has price. In the real GDP the value of these services is measured using old, higher prices,
overstating the increase in the value of production.
New-good bias: it is very difficult
to include new goods into the real GDP: In the base year they did not exist and hence their price was infinite.