Question

State any two limitations of per capita GDP as an index of economic welfare.

Answer 1

1. Distribution of Income: Per capita GDP is an average and does not reflect how income is distributed. If income inequality increases, overall economic welfare may decline even if per capita income rises.
2. Composition of Output: An increase in GDP may result from producing more capital or defense goods, which do not directly improve current consumer satisfaction. Thus, it may not lead to a real improvement in economic welfare.