Question

Identify three reasons why gross domestic product (GDP) is not a perfect measure of a nation’s well-being.

Answer 1

Gross domestic product (GDP) is the value of all the goods and services which are produced in a country. Usually, it is used to measure the well being of a nation but there are some reasons why it is not a perfect method to measure the well-being of a nation. Three of them are given below:

1). GDP Distribution: If the GDP of a country is increasing, then it doesn't mean that well being of the nation is also improving because we don't know how the increased GDP is getting distributed among the people. It may be possible that the income of only a few people is actually increasing whereas the rest of the people's income or well being is actually decreasing. For example, we assume that in 2015 there are 10 people in a country and all are earning $10, so GDP by income method is $100. Next year, 7 people earn $8 and remaining 3 earn $16 so this year GDP is $104. Here, we can see that though GDP has increased by 4%, 7 people are still earning less which shows declining well being despite an increase in GDP. Hence, GDP doesn't correctly measure the well being of the nation.

2). Non-Paid Activities: There are many activities which are not included in the GDP because it is very difficult to evaluate the monetary value of these jobs or activities. For example, domestic services which are being provided at home by so many women and so many services are being given as favours where no exchange of money takes place. Hence, GDP is not able to correctly measure and include the value of all these activities which underrate the GDP.

3). Externalities: Externality can be defined as the harm or benefit caused by the activity of one person to others for which they are not being compensated. Many big industries cause different types of pollution like air, water, land etc. Though these activities affect the lives of so many people, yet they never get compensated for all these harms. Hence, we can say that GDP never takes into account all these externalities which impact the well being of a nation.

From the above discussion, we can conclude that GDP is not a perfect measure of the well being of a nation as many factors which directly or indirectly influences the well being of the nation are not taken into account.