Question

Explain how the gross domestic product has its limitations as a measure of economic welfare.

Answer 1

It is not only the quantum of GDP which affects economic welfare. The pattern of distribution of GDP is extremely important to understand the welfare of the citizens in an economy. If GDP is distributed in a manner with large income inequalities, it will adversely affect economic welfare. This is so because the utility income is more for the poor than for the rich, implying that the poor spend a large part of their income on general consumption and utility, not luxury consumption or savings.