Question

Gross Domestic Product (GDP) is the broadest measure of output for an economy. However, GDP does not perfectly measure well-being of a nation and its citizens' welfare. Discuss what GDP is and what it measures? Discuss what the shortcomings (limitations) of GDP as a measure of well-being and welfare of a nation are?

Answer 1

1.Gross Domestic Product (GDP) is the broadest measure of output for an economy.

Ans.....

1. Gross domestic product (GDP) refers to the monetary value of all the final goods and services produced within a nation's borders in a specific time period. GDP is an indicator of a society’s standard of living, however gives a rough indicator as it does not directly account for leisure, environmental quality, levels of education and health, activities conducted outside the market, increases in variety, increases in technology, changes in inequality of income, or the negative or positive value that society may place on some types of output. The main problems of the GDP as the indicator of society’s economy and society’s well-being focusing on economy as well as environment are as follows:

• GDP does not account for leisure time.
• GDP includes what is spent on environmental protection however it does not include actual levels of environmental cleanliness. GDP is inclusive of the cost of buying pollution-control equipment, however it does not address whether the water and air are actually dirtier or cleaner.
• GDP consists of what is spent on healthcare, and education, however does not include health, and learning. GDP counts spending on medical care, however does not address whether infant mortality or life expectancy have fallen or risen. Similarly, GDP includes the spending on education, however fails to address directly how much of the population can write, read, or do basic mathematics
• GDP counts production that is exchanged in the market, however does not includes production that is not exchanged in the market. For instance, hiring someone to mow the lawn or clean the house is part of GDP, however doing these tasks yourself is not included in the GDP.
• GDP remains quiet about the level of inequality in society.
• GDP has nothing in specific to say about the amount of available variety.
• GDP has nothing much to say about which products and technology are available in the economy.
• GDP does not count non-market production activities and all of the production in terms of legal and illegal which falls in the underground economy .

2. GDP does not perfectly measure well-being of a nation and its citizens' welfare.

Ans.....

• Although GDP is a good indicator of economic situation of a country, it is rather incomplete in measuring the overall performance of the economy. It ignores the environmental aspect of the economy and what all progress or degradation on its environment the country has made.
• For eg while Bhutan stands much below US in GDP values, but looking at its ecology and the happiness index of its people, the situation is just the opposite with Bhutan ranking the highest in it.
• So, just comparing countries based on GDP values is an incomplete approach and it would infact be wrong to go by this ranking. Only when all the variables are taken into account, can a full and complete comparison can be made.

3. Discuss what GDP is and what it measures?

Ans.....

• Gross Domestic Product (GDP) is a star, as far as economic measurements go. The Consumer Price Index (CPI) (and other members of the acronym club) have their moment in the sun, but the talk inevitably returns to GDP. When it increases, we cheer. When it decreases, we point fingers. It is seen as the weathervane for our economy. This begs the question of how accurate a measure it is, and what it is actually measuring. Upon closer inspection, it appears that there is something truly gross about GDP.
  
  Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP per capita is often considered an indicator of a country's standard of living;[2][3] GDP per capita is not a measure of personal income (See Standard of living and GDP). Under economic theory, GDP per capita exactly equals the gross domestic income (GDI) per capita (See Gross domestic income).
  GDP is related to national accounts, a subject in macroeconomics. GDP is not to be confused with gross national product (GNP) which allocates production based on ownership

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4.Limitations of GDP accounting as a measure of well being ..

Ans...........

1. GDP ignores externalities, especially environment related.
2. After some point, people do not become happier if their income increases. The reason for this is that after some point we might not have the time to enjoy as the income continues to increase. Therefore GDP does not capture the true picure of well being.
3. Defensive expenditure add positively to the GDP, but they do not add to well being
4. GDP does not include everyday work like cleaning, washing, etc. that a does himself/herself. Therefore underestimating the per capita income.
5. GDP don't measure natural capital. Preserving the country’s natural resources is essential to our current and future wealth is not counted in GDP estimates.
6. GDP does not measure the distribution of incomes or output in the economy.