Question

Why GDP is an imperfect index of social welfare?.

Answer 1

GDP is not the real indicator of economic wellbeing. GDP takes into account only the quantitative aspect of economic wellbeing ignoring the qualitative aspect. For example in a country the GDP may high but the total GDP may unevenly distributed among the citizens. When a larger share of GDP is received by a small fraction of it, we cannot say that the wellbeing of the citizens is higher. Thus a higher GDP is not a true index of national welfare.

The growth of GDP creates negative externalities which deplete the natural resources of the economy. The high level of GDP creates high level of hazards to the environment. But the calculation of GDP does not include the environment degradation and the reduction of wellbeing connected with improvement in GDP. On one side the increased GDP increase the material wellbeing but on the other side it decreases the wellbeing. The calculation of GDP by ignoring the cost on the society is not a true index of economic wellbeing of the citizens.

GDP is very often an underestimation of production and wellbeing. In agriculture a large part of the product is exchanged on barter system. The GDP does not account for the wellbeing resulting from such transactions. A part of manufactured product is used by the manufactures themselves and a part of agricultural product is consumed by the farmers themselves. The GDP does not account for it and as such the calculation of GDP underestimates the wellbeing of the citizens.

The GDP estimates the market factors but excludes the non market factors such as leisure, health, sanitation and childcare which improve the quality of life. Thus GDP is a rough measure of economic wellbeing of citizens in a country.