Answer to Question #292541 in Microeconomics for Nibret

Question

Per capita real GDP is an indicator to measure welfare. However, it has important limitations to measure welfare. Briefly discuss some of these limitations while using Per capita real GDP as a measure of welfare

Answer 1

GDP has a number of drawbacks as a measure of well-being. The majority of these may be traced back to the fact that GDP isn't designed to measure happiness. Therefore, several key aspects that influence social wellbeing are ignored by the notion. The most important limits are given here to make things simple:

1. GDP does not include any wellbeing indicators; it simply describes the total worth of all completed commodities produced in a given economy over a certain period of time. There are several methods for calculating and measuring GDP, but none of them includes a measure of welfare or well-being.
2. GDP does not account for domestic or voluntary work, despite the fact that these activities have a significant beneficial impact on social welfare by complementing the market economy and thereby improving the standard of living.
3. GDP does not reflect income distribution: When income distribution is very unequal, the majority of people do not profit from increasing economic output because they cannot afford to purchase the majority of products and services. As a result, income distribution must be included in order to effectively define social welfare.
4. GDP is not a good indicator of what's being produced: GDP includes products that may have negative effects on societal welfare because it estimates the worth of all finished commodities and services inside an economy.
5. Externalities are ignored by GDP: Increased utilization of both renewable and non-renewable resources usually goes hand in hand with economic expansion. As a result of this abuse, a growing number of negative externalities emerge which are not included in GDP