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

Limitations of using GDP as an indicator are as follows:
1. Distribution of GDP: It is possible that with rise in GDP, inequalities in the distribution of income may also increase, i.e. the gap between rich and poor increases. GDP does not take into account changes in inequalities in the distribution of income. So, welfare of the people may not rise as much as the rise in GDP. 

2. Change in prices: If increase in GDP is due to rise in prices and not due to increase in physical output, then it will not be reliable index of economic welfare. 

3. Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example- non-market transactions like services of housewife, kitchen gardening, leisure time activities etc. are not included in GDP, due to non-availability of data. However, such activities influence the economic welfare. 

4. Externalities: Externalities refers to benefits or harms of an activity caused by a firm or an individual, for which they are not paid or penalised. Activities which results in benefits to others are termed as positive externalities and activities which result in harm to others are termed as negative externalities. 

5. Rate of population growth: GDP does not consider the changes in the population of a country. If rate of population growth is higher than the rate of growth of GDP, then it will decrease the per capita availability of goods and services, which will adversely affect the economic welfare. 

Finally, it can be conducted that GDP may not be taken as a satisfactory measure of economic welfare due to above mentioned limitations, yet it does reflect some index of economic welfare.

Gross domestic product (GDP) is the sum total of value of goods and services created within the geographical boundary of a country in a particular year, dt gets distributed among’the people as incomes except retained earnings. So we consider that higher level of GDP of a country is an index of greater well being of the people of that country.

Welfare of a country means the well being of entire population of the country. But there are certain limitations of using GDP as an index of welfare of a country. 

They are as follows:

a. Distribution of gross domestic product (GDP): Generally, the rise in GDP will not represent increase in the welfare of the country. If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in gross domestic product may be concentrated in the hands of only a few individuals or firms. For the remaining, the income may in fact might have decreased. In such a situation, the welfare of the entire country cannot be said to have improved.

b. Non-monetary exchanges: Some of the activities in a country are not evaluated in terms of. money. For instance, the domestic services of housewife are pot paid for. The-exchanges which take place in the informal sector without the help of money are called barter exchanges. In barter exchanges, goods are directly exchanged against each other

As money is not used here, these exchanges are not registered as part of economic activity. In India, because of many remote areas, these kinds of exchanges still take place and they are generally not counted in the GDP. Therefore, gross domestic product calculated in the standard manner may not give us a clear indication of welfare of a country.

c. Externalities: An externality is a cost or benefit conferred upon second or third parties as a result of acts of individual production and consumption. In other words, externalities refer to the benefits or harms, a firm or an individual causes to another for which they are not paid or penalized.

These do not have any market in which they can be bought and sold. But the cost or benefit of an externality cannot be measured in money terms because it is not included in market activities. For example, the pleasure one gets from his neighbour’s garden is an external benefit and external cost is environmental pollution caused by industries. Both are excluded from national income estimates.

d. Leisure and work: One of the important things that affect the welfare of a society is leisure. But this is not included in GDP. For example, longer working hours may make people unhappy because their leisure is reduced. On the contrary, shorter working hours per week may increase leisure and make people happy.

e. Manner of production: The economic welfare also depends on the manner of production of goods and services. If goods are produced by child labour or by exploitation of workers, then the economic welfare cannot increase.

Gross domestic product (GDP) is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. It gets distributed among the people as incomes except retained earnings.

So, we consider that higher level of GDP of a country is an index of greater well being of the people of that country. Welfare of a country means well being of entire population of the country. But there are certain limitations of using GDP as an index of welfare of a country. 

They are as follows:

1. Distribution of gross domestic product (GDP): Generally, the rise in GDP will not represent increase in the welfare of the country. If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in gross domestic product may be concentrated in the hands of very few individuals or firms. For the remaining, the income may, in fact, might have decreased. In such a situation, the welfare of the entire country cannot be said to have improved.

2. Non-monetary exchanges: Some of the activities in a country are not evaluated in terms of money. For instance, the domestic services of housewife are not paid for. The exchanges which take place in the informal sector without the help of money are called barter exchanges. In barter exchanges, goods are directly exchanged against each other.

As money is not used here, these exchanges are not registered as part of economic activity. In India, because of many remote areas, these kinds of exchanges still take place and they are generally not counted in the GDP. Therefore, gross domestic product calculated in the standard manner may not give us a clear indication of welfare of a country.

3. Externalities: An externality is a cost or benefit conferred upon second or third parties as a result of acts of individual production and consumption. In other words, externalities refer to the benefits or harms, a firm or an individual causes to another for which they are not paid or penalized. These do not have any market in which they can be bought and sold.

But the cost or benefit of an externality cannot be measured in money terms because it is not included in market activities. For example, the pleasure one gets from his neighbour’s garden is an external benefit and external cost is environmental pollution caused by industries. Both are excluded from national income estimates.

4. Leisure and work: One of the important things that affect the welfare of a society is leisure. But is not included in GDP. For example, longer working hours may make people unhappy because their leisure is reduced. On the contrary, shorter working hours per week may increase leisure and make people happy.

5. Manner of production: The economic welfare also depends on the manner of production of goods and services. If goods are produced by child labour or by exploitation of workers, then the economic welfare cannot increase.

Gross domestic product (GDP) is the sum total of value of goods and services created within the geographical boundary of a country in a particular year, dt gets distributed among’the people as incomes except retained earnings. So we consider that higher level of GDP of a country is an index of greater well being of the people of that country.

Welfare of a country means the well being of entire population of the country. But there are certain limitations of using GDP as an index of welfare of a country. 

They are as follows:

a. Distribution of gross domestic product (GDP): Generally, the rise in GDP will not represent increase in the welfare of the country. If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in gross domestic product may be concentrated in the hands of only a few individuals or firms. For the remaining, the income may in fact might have decreased. In such a situation, the welfare of the entire country cannot be said to have improved.

b. Non-monetary exchanges: Some of the activities in a country are not evaluated in terms of. money. For instance, the domestic services of housewife are pot paid for. The-exchanges which take place in the informal sector without the help of money are called barter exchanges. In barter exchanges, goods are directly exchanged against each other.

As money is not used here, these exchanges are not registered as part of economic activity. In India, because of many remote areas, these kinds of exchanges still take place and they are generally not counted in the GDP. Therefore, gross domestic product calculated in the standard manner may not give us a clear indication of welfare of a country.

c. Externalities: An externality is a cost or benefit conferred upon second or third parties as a result of acts of individual production and consumption. In other words, externalities refer to the benefits or harms, a firm or an individual causes to another for which they are not paid or penalized.

These do not have any market in which they can be bought and sold. But the cost or benefit of an externality cannot be measured in money terms because it is not included in market activities. For example, the pleasure one gets from his neighbour’s garden is an external benefit and external cost is environmental pollution caused by industries. Both are excluded from national income estimates.

d. Leisure and work: One of the important things that affect the welfare of a society is leisure. But this is not included in GDP. For example, longer working hours may make people unhappy because their leisure is reduced. On the contrary, shorter working hours per week may increase leisure and make people happy.

e. Manner of production: The economic welfare also depends on the manner of production of goods and services. If goods are produced by child labour or by exploitation of workers, then the economic welfare cannot increase.

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.

GDP is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. It gets distributed among the people as incomes. So we may be tempted to treat higher level of GDP of a country as an index of greater well-being of the people of that country. But there are at least three reasons why this may not be correct. 

They are discussed below.

1. Distribution of GDP – how uniform is it: 

If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. For the rest, the income may, in fact, have fallen. 

In such a case the welfare of the entire country cannot be said to have increased. If we relate welfare improvement in the country to the percentage of people who are better o, then surely GDP is not a good index. 

2. Non-monetary exchanges: 

Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. The exchanges which take place in the informal sector without the help of money are called barter exchanges.

This is a case of underestimation of GDP. Hence GDP calculated in the standard manner may not give us a clear indication of the productive activity and well-being of a country. 

3. Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized). Externalities do not have any market in which they can be bought and sold. Therefore, if we take GDP as a measure of welfare of the economy we shall be overestimating the actual welfare. 

This was an example of negative externality. There can be cases of positive externalities as well. In such cases, GDP will underestimate the actual welfare of the economy.