Question

e) State any four (4) limitations of per capita RGDP as a measure of welfare.

Answer 1

Limitatuon of RGDP as a measure of welfare

1. RGDP does not describe what is being produced-

It includes the value of all goods and services of an economy and it also include the goods and services which may have negative impact on the welfare. If a country has strong armanents industry which have a big share in RGPD and the arms are used in country itself so it decreases the overall welfare.

2. RGPD does not describe income distribution-

If there is high degree of inequality in income distribution so it leads to not so much people get the benifits from an increased economic output because they are not able to afford to buy some goods and services. Thus to accurately describe social welfare we have to consider income distribution.

3. RGDP includes only market transaction-

It does not include voluntry work even it has a positive imapct on the welfare as they complement market economy and increases standard of living.

It also does not include black market and illegal transaction which have a negative impact on the welfare.

4. It ignores externalities-

Economic growth leads to the exploitation of resources both renewable and non renewable and due to overuse neagtive externalities arise eg. pollution. and welfare decreases. This effect is not included in it.

5. It does not incorporate any measure of welfare-

It only includes the value of goods and services produced in an economy over a period of time. It is calculated by various methods and measures but neither of them includes any indicator of welfare.