What is real GDP? State three limitations of GDP as an index of economic welfare.
What is real GDP? State three limitations of GDP as an index of economic welfare.
National Income when computed at constant prices is called real GDP. Following are some of the reasons why a higher GDP may not necessarily mean higher welfare of the people:
(i) It does not reflect distribution of income among people because increased GDP may be concentrated in a few hands.
(ii) It does not take into account non-monetary exchanges e.g., domestic services provided by housewives are not counted while estimating national income.
(iii) It does not take into account the benefits (or harms) caused due to economic activities for which people are not paid (or penalised) called as positive or negative externalities such as environmental pollution.
National Income when computed at constant prices is called real GDP. Following are some of the reasons why a higher GDP may not necessarily mean higher welfare of the people:
(i) It does not reflect distribution of income among people because increased GDP may be concentrated in a few hands.
(ii) It does not take into account non-monetary exchanges e.g., domestic services provided by housewives are not counted while estimating national income.
(iii) It does not take into account the benefits (or harms) caused due to economic activities for which people are not paid (or penalised) called as positive or negative externalities such as environmental pollution.
