Question

Answer the following question.
The growth of the Gross Domestic Product is not a real indicator of economic welfare. Discuss two reasons to justify the given statement.

Answer 1

1. Externalities:

1. Externalities refer to benefits or harms of an activity caused by a firm or an individual, for which they are not paid or penalized.
2. Externalities occur outside the market i.e., they affect people not directly involved in the production and or consumption of a good or service. They are also known as spill-over effects. Externalities are not taken into account while calculating GDP.
3. For example, setting up industry in a town may add up to domestic product but while calculating GDP the pollution and its impact on society are not taken into account.
4. The industrial growth and urbanization create problems like industrial slumps diseases and crime. The damage to the physical and social environment has an adverse impact on the health and welfare of the community. Thus despite an increase in GDP, no accurate conclusion can be drawn on the welfare level.

2. Distribution of GDP:

1. GDP shows the total value of goods and services produced in a country. However, it does not exhibit how the GDP is distributed among the people. For example GDP of India is rising but it is not being equally distributed among all the strata of people. The major share of the increase is being grabbed only by the upper-middle class and the share of the poor of the poorer is decreasing.
2. If with every increase in the level of GDP, Distribution is getting more unequal, the welfare level of society may not rise.
3. No doubt, GDP is a useful measure of the overall productive activities in a country, yet no welfare implication, on its basis, can be derived, unless it is fairly divided among all the section of the society.