Question

6. Explain why GDP is often discarded as a measure of the actual well-being of developing countries. What are the strengths and shortcomings of alternative measures such as the HDI? Is the HDI really “a new paradigm or reinvention of the wheel”?

Answer 1

Ans- GDP is often discarded as a measure of the actual well-being of developing countries because of the below mentioned reasons:-

1) Distribution of GDP: It is possible that with rise in GDP, inequalities in the distribution of income may also increase, i.e. the gap between rich and poor increases. GDP does not take into account changes in inequalities in the distribution of income. So, welfare of the people may not rise as much as the rise in GDP.

2. Change in prices: If increase in GDP is due to rise in prices and not due to increase in physical output, then it will not be reliable index of economic welfare.

3. Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example- non-market transactions like services of housewife, kitchen gardening, leisure time activities etc. are not included in GDP, due to non-availability of data. However, such activities influence the economic welfare.

4. Externalities: Externalities refers to benefits or harms of an activity caused by a firm or an individual, for which they are not paid or penalised. Activities which results in benefits to others are termed as positive externalities and activities which result in harm to others are termed as negative externalities.

5. Rate of population growth: GDP does not consider the changes in the population of a country. If rate of population growth is higher than the rate of growth of GDP, then it will decrease the per capita availability of goods and services, which will adversely affect the economic welfare.

The human development index is an index that measures key aspects of human development i.e, a good lifestyle or a long or healthy life which is measure through life expectancy and many other tools.

Strength of HDI is it does not rank the countries based on their income alone. It takes into account the measures like education, health status, poverty, life expectancy etc.as a combine measure to present the status of economy over a period of time.

The main shortcomings of HDI is that it reflects long-term changes (e.g. life expectancy) and may not respond to recent short-term changes. So, the current status of the economy cannot be reflected by human development index.

I am not sure to say that HDI is a new paradigm because from my point of view new paradigm is made due to growth in e-commerce. The limitations of HDI make it difficult to say.