Question -
Answer -
Per Capita Real GDP can be taken as indicator for economy. But by itself is not an adequate indicator. There are many reasons behind this. These are:
1. Many goods and services contributing economic welfare are not included in GDP Or Non-Monetary exchanges.
(a)There are many goods and services which are left out of estimation of national income on account of practical estimation difficulties e.g., services of housewives and other members, own account production, etc.
(b)These are left on account of non availability of data and problem in valuation.
(c)It is generally agreed that these items contribute to economic welfare.
(d)So, if we depend only on GDP, we would be underestimating economic welfare.
2. Though externalities are not taken into account in GDP, they affect welfare.
(a)When the activities of somebody result in benefits or harms to others with no payment received for the benefit and no payment made for the harm done, such benefits and harms are called externalities.
(b)Activities resulting in benefits to others are positive externalities and increase welfare; and those resulting in harm to others are called negative externalities, and thus decrease welfare.
(c)GDP does not take into account these externalities.
(d)For example, construction of a flyover or a highway reduces transport cost and journey time of its users who have not contributed anything towards its cost. Expenditure on construction is included in GDP but not the positive externalities flowing from it. GDP and positive externalities both increase welfare. Therefore, taking only GDP as an index of welfare understates welfare. It means that welfare is much more than it is indicated by GDP.
(e)Similarly, GDP also does not take into account negative externalities. For examples, factories produce goods but at the same time create pollution of water and air. River Yamuna, now a drain, is a living example. The pollution harms people. The factories are not required to pay anything for harming people. Producing goods increases welfare but creating pollution reduces welfare. Therefore, taking only GDP as an index of welfare overstates welfare In this case, welfare is much less than indicated by GDP.
3. Change in the distribution of income (GDP) may affect welfare.
(a)All people do not earn the same amount of income. Some earn more and some earn less. In other words, there is unequal distribution of income.
(b)At the same time, it is also true that in the event of rise in ‘per capita real income’ all are not better off equally. ‘Per capita’ is only an average. Income of some may rise by less and of some by more than the national average. In case of some it may even fall.
(c)It means that the inequality in the distribution of income may increase or decrease.
(d)If it increase it implies that rich become more rich and the poor become more poor.
(e)Utility of a rupee of income to the poor is more than to the rich. Suppose, the income of the poor declines by one rupee and that of the rich increases by one rupee. In such a case, the decline in welfare of the poor will be more than the increase in welfare of the rich.
(f) Therefore, if the rise in per capita real income inequality increases, it may lead to a decline in welfare (in the macro sense).
4. All products may not contribute equally to economic welfare.
(a)GDP includes different types of products, like food articles, houses, clothes, police services, military services, etc.
(b)Some of these products contribute more to the welfare of the people, like food, clothes, houses, etc. Other products like police services, military services etc. may comparatively contribute less and may not directly affect the standard of living of the people.
(c)Therefore, how much is the economic welfare would depend more on. the types of goods and services produced, and not simply how much is produced.
(d) It means that if GDP rises, the increase in welfare may not be in the same proportion.
5. Contribution of some products may be negative
(a)GDP includes all final products whether it is milk or liquor.
(b)Milk may provide both immediate and ultimate satisfaction to consumers On the other hand, liquor may provide some immediate satisfaction, but because of its harmful effects on health it may lead to decline in welfare.
(c)GDP include only the monetary values of the products and not their contribution to welfare.
(d)Therefore, economic welfare depends not only on the volume of consumption but also on the type or goods and services consumed.