Question

Answer the following question.
Gross Domestic Product (GDP) Does Not Give Us a Clear Indication of Economic Welfare of a Country. "Defend Or Refute the Given Statement with Valid Reason.

Answer 1

GDP does not give us a clear indication of the economic welfare of the country.

The following observations can be made in this regard.

1. Income Patterns: It is possible that even with the rise in the Real GDP, the welfare of the people might not increase. The increase in the GDP may be a result of the increase in the income of a few individuals. On the other hand, the majority of people remain deprived of the benefits of the rise in the GDP. Hence, a rise in national income may lead to a false interpretation of social welfare.
2. Composition of Output: To know whether the rise in Real GDP reflects a rise in the welfare of the economy, one need to consider the composition of the output produced that has led to the rise in the level of GDP. For example, the production of goods such as guns, narcotic drugs, and high-end luxurious goods increases the monetary value of the production, but they do not add to the welfare of the majority of the population.
3. Non-Monetary Exchanges: GDP does not take into account those transactions that are not expressed in monetary terms. In less developed countries, there are various non-monetary exchanges, particularly in the rural areas and household sectors. Consequently, such transactions remain outside the domain of GDP leading to underestimation of the value of GDP. Thus, GDP cannot be regarded as an index of economic welfare, as it ignores the household and the volunteer sectors.