Question

Write down some of the limitations of using GDP as an index of welfare of a country.

Answer 1

1. National income figures do not reflect the size of the country’s population, etc. If the national income of the country is increasing, even then, the level of welfare can be lowered, if the population is growing at a much faster rate.
2. There may be a higher national income due to the concentration of some resources in the country. For example, due to abundant sources of oil, many Arab countries have high national income, but most of their population is lagging behind.
3. National income is not an account for the price level. People can earn, but due to high prices, they are not able to maintain high level of life. The national income is obviously an insufficient index to this extent.
4. Higher national income of the country can be due to some very rich businessmen like Ambani, Tata, etc. In such a situation, some people say that 20% of will have a great life, while 80% of people will continue to struggle because they only have to give 20% of GNP.
5. National income in the country also does not indicate the level of employment. People will not be in a position to enjoy a high level of life if the unemployment level is very high in the economy.
6. National income also does not consider the structure of manufactured goods. If the goods produced in a country include protective goods such as radars, war planes, etc., then higher national income will not increase welfare.
7. Increase in national income will lead to industrialization and urbanization which will increase the problem of air, water and noise pollution. This, in turn, causes environmental degradation, which greatly harms the welfare of the society. Thus, GDP is not directly related to economic welfare, and an increase in GDP does not necessarily reflect this growth in the economic prosperity of the people.