Write Down Some of the Limitations of Using Gdp as an Index of Welfare of a Country Economics

There are multiple ways to calculate and measure GDP (e.g., income, expenditure), but neither of them includes any indicator of welfare or well-being. Gross Domestic Product (GDP) is essentially an indicator of aggregate economic activity. In addition to that, it is also frequently used to describe social welfare in an economy. The idea behind this is that GDP tends to correlate with consumption, which in turn is commonly used as a proxy for welfare. In other words, the more people consume, the happier they are supposed to be.

Gross National Happiness Index

Assuming causality based on a simple correlation between GDP and welfare may lead to false conclusions, which can be highly problematic, especially for policymakers. Hence it is important to look at the limitations of GDP as a welfare indicator and to consider possible alternative approaches. If the increase in the GDP is due to a rise in prices and not due to an increase in physical output then, it will not be a reliable index of economic welfare. Activities for which no payments are made by the people activities which result in harm to others are called negative externalities. Therefore, GDP may not be taken as a satisfactory measure of economic welfare.

GDP does not incorporate any measures of welfare

• GDP ignores the welfare component as the goods and services produced may or may not add to the welfare to a society.
• Due to this overuse, more and more negative externalities arise (e.g., pollution, overfishing), and the ecosystem will decrease as a result.
• Because of inflation, the cost of living increases leading to a decrease in the standard of living.
• For example, non-monetary transactions like the services of the housewife are not included in the GDP.

Economic growth usually goes hand in hand with increased exploitation of both renewable and non-renewable resources. Due to this overuse, more and more negative externalities arise (e.g., pollution, overfishing), and the ecosystem will decrease as a result. GDP measures the goods and services produced in an economy during a particular period of time.

Alternative Measures and Approaches

For example, the production of goods, like guns, narcotic drugs, high-end luxurious goods increase the monetary value of production, but they do not add to the welfare of the majority of population. GDP does not take into account the level of prices in a country. Because of inflation, the cost of living increases leading to a decrease in the standard of living.

• Economic growth usually goes hand in hand with increased exploitation of both renewable and non-renewable resources.
• GDP does not consider the changes in the population of the country.
• So, higher GDP indicates the greater welfare of the people.
• Activities that result in benefits to others are called positive externalities.
• Assuming causality based on a simple correlation between GDP and welfare may lead to false conclusions, which can be highly problematic, especially for policymakers.

GDP does not describe what is being produced

But still, it reflects some index of economic welfare. Explain how ‘Non-Monetary Exchanges’ impact the use of Gross Domestic Product as an index of economic welfare. Activities that result in benefits to others are called positive externalities. Many activities in an economy are evaluated in monetary terms. So, the welfare of the people may not increase with the rise in GDP.

You can read more about the concept of production function and the terms related to production. GDP does not consider the changes in the population of the country. “Many goods and services which may contribute to welfare, but are not included in estimating Gross Domestic Product (GDP).” Government spends on child immunization programme. Analyse its impact on Gross Domestic Product and welfare of the people.

So, higher GDP indicates the greater welfare of the people. However, this generalization may not be correct due to some limitations. Sale of petrol and diesel cars is rising particularly in big cities. Analyse its impact on gross domestic product and welfare. Write down some of the limitations of using GDP as an index of welfare of a country. This short video looks at some of the limitations of GDP when measuring changes in economic well-being.

The increase in aggregate national income may be a result of the increase in income of a few individuals. Thus, this may lead to false interpretation of social welfare. Thus explain the limitation of gdp as welfare. to accurately describe social welfare, it is essential to consider income distribution and inequality (for more information, see also the Gini index). As mentioned before, GDP only describes the value of all finished goods produced within an economy over a set period of time.

However, it does not take into account those transactions that do not come under monetary terms. In less developed countries there are non-monetary exchanges, particularly in rural areas. Hence, these transactions remain outside the domain of GDP. The household sector and volunteer sectors get ignored in GDP. For example, non-monetary transactions like the services of the housewife are not included in the GDP. GDP ignores the welfare component as the goods and services produced may or may not add to the welfare to a society.

GDP does not take into account, change in inequalities in the distribution of income. GDP is considered as an index of the welfare of the people. Welfare means the sense of material well being among the people.

The End of the Chinese Economic Miracle

The loss of welfare due to this decrease is not taken into consideration by GDP as an index of welfare. Quickonomics provides free access to education on economic topics to everyone around the world. Our mission is to empower people to make better decisions for their personal success and the benefit of society. Now, this line of argument seems a little too simplistic.

b. Negative Externalities

Since Gross Domestic Product measures the value of all finished goods and services within an economy, it also includes products that may negatively affect social welfare. Think of a country with an extremely strong armaments industry that represents most of its economic output. If the arms are sold and used within the country itself, overall social welfare will most likely decrease. Of course, this also holds true for other goods and services that may have adverse effects on subjective well-being or society as a whole. On the other hand, GDP does not include black market transactions or other illegal activities that may have a substantial negative impact on overall social well-being. All these approaches take into account multiple dimensions to provide a more comprehensive description of social welfare.

If the rate of population growth is higher than the rate of growth of GDP, then it decreases the per capita availability of goods and services, which negatively affects economic welfare. While GDP can provide a snapshot of economic activity, it doesn’t fully capture the quality of life of a population or the sustainability of economic growth. In view of the shortcomings mentioned above, there have been various attempts to develop more accurate and reliable indicators in order to measure social well-being. Among others, these alternative approaches include the Human Development Index (HDI), the Gross National Happiness Index (GNH), and the Social Progress Index (SPI).