GDP and Welfare

GDP or Gross Domestic Product is the total value of all the final goods and services produced within the domestic boundaries of a country during a year. It can be calculated at Market Price or Factor Cost. Gross in Gross Domestic Product means that the total value of final goods and services includes depreciation, i.e., no provision has been made for it. Domestic in Gross Domestic Product means that the final goods and services produced are located within the domestic boundaries of the country. Product in Gross Domestic Product indicates that only final goods and services are included. Market Price in GDP at MP means that the amount of indirect taxes paid is included in GDP; however, the subsidies are excluded from it. However, Factor Cost in GDP at FC means that the gross total value of all the final goods and services is included. 

GDP and Welfare

GDP is often used as an index to measure the welfare of people. Welfare here refers to the sense of material well-being amongst people. The welfare of people depends upon the per head availability of goods and services. It means that higher GDP is good for a country, as it indicates greater welfare for the people. 

However, higher GDP does not always mean greater welfare for people because of the following reasons:

1. Distribution of GDP

Sometimes a higher GDP results in the rise in inequalities in the income distribution amongst people. Inequality in income distribution refers to a rise in the gap between the rich and the poor. Gross Domestic Product does not consider the change in the income distribution of a country. Therefore, in some cases, a rise in GDP does not mean an increase in the welfare of people. 

2. Non-Monetary Exchanges

There are many activities such as kitchen gardening, housewife services, etc., in an economy that are not measured in monetary terms, but influence the economic welfare of people. These activities are not included in the determination of GDP because of the lack of data available. Therefore, it might be possible that there is no rise in GDP, but actually, it has increased from the non-monetary exchanges. 

3. Change in Prices

Sometimes the GDP of an economy increases because of the increase in the price of the goods and services, but not because of the rise in physical output of goods and services. In these cases, taking GDP as an index to measure welfare is not reliable. 

4. Externalities

Externalities mean any benefit or harm of an activity that is caused by an individual or an organization for which they are not paid or penalised. There are two types of externalities: Positive Externalities and Negative Externalities. Positive Externalities are those activities that benefit other people. For example, public parks are used by people for pleasure for which they have not made any payment. Positive Externalities result in an increase in welfare. However, Negative Externalities are those activities that harm other people. For example, pollution caused by people and industries for which they are not always penalised. Negative Externalities result in a decrease in welfare.

5. Rate of Population Growth

Change in the population of a country is considered while calculating the GDP of an economy. If a country’s rate of population growth is higher than the rate of GDP growth, then it will have an adverse impact on the economic welfare of the economy. It happens because the per capita availability of goods and services will decrease due to the rise in population. 

With the help of the above explanation, it can be concluded that GDP is not always a satisfactory or perfect index to measure the economic welfare of a country.  Because of these reasons, some policy planners and economists have suggested Green GNP. It measures the national income or output adjusted of an economy for the depletion of natural resources and degradation of the environment. A larger number of Green GNP indicates greater sustainability.