Posted by Anjali Kaur on Aug 25, 2020

GDP and Welfare

GDP is considered as an index of the welfare of the people. Welfare means the sense of material well being among the people. So, higher GDP indicates the greater welfare of the people. However, this generalization may not be correct due to some limitations. Today, we will understand these limitations. Let’s start.

Limitations of GDP as a welfare measure

1. Distribution of GDP

It is possible that with the rise in GDP, inequalities in the distribution of income may also increase, that is, the gap between rich and poor will increase.

GDP does not take in account, change in inequalities in the distribution of income.

So, welfare of the people may not increase with the rise in GDP.

2. Change in Price

If increase in the GDP is due to rise in the prices and not due to increase in physical output then, it will not be a reliable index of the economic welfare.

3. Non-Monetary Changes

Many activities in an economy are evaluated in monetary terms.

For example, non-monetary transactions like services of the housewife are not included in the GDP. However, they influence the economic welfare.

4. Rate of Population Growth

GDP does not consider the changes in population of the country.

If the rate of population growth is higher then the rate of growth of GDP, then it decreases the per capita availability of goods and services, which negatively affects the economic welfare.

Therefore, GDP may not be taken as a satisfactory measure of the economic welfare. But still, it reflects some index of economic welfare.

5. Externalities

Externalities refer to the benefits and harms of an activity caused by a firm or individual for which they are not paid or penalized. Externalities are of two types:

a. Positive Externailties

Activities which result in benefits to others are called positive externalities.

For example, Use of public parks by the people for pleasure.

b. Negative Externalities

Activities for which no payments are made by the people activities which result in harm to others are called negative externalities.

For example, Environmental population caused by the industry.

That’s it.

You can check more related post to this topics:

  1. Real and Nominal GDP
  2. Gross and net investment
  3. National Income
  4. Stock and Flow Concept
  5. National Income Formulas
  6. Value-added Method
  7. Income Method
  8. Expenditure Method

I hope it was helpful. You can read more about the concept of production function and the terms related to production.

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