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Question

Is gross domestic product a true index of economic welfare of the people? Give two reasons in support of your answer.


Solution

The term welfare refers to a sense of well-being. Welfare is affected by a wide range of factors - both economic and non-economic.

GDP at its best, indicates economic welfare. However, it is not a satisfactory measure of economic welfare due to the following limitations:

(i) Externalities: These are the benefits or harms of an activity caused by a firm or an individual for which they are not paid or penalized. As such since these external/effects do not form part of market transactions, GDP does not consider such negative externalities. For example, pollution caused by smoke emitted from a factory.

(ii) Non-monetary exchanges: These activities though influence economic welfare are not considered while measuring GDP, for example, services of housewives, own account production, etc. They are not included in the GDP due to non-availability of data and problem of valuation.


Economics

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