GDP and Welfare
Welfare is a subjective concept which cannot be measured objectively. However economic welfare is a major component of social welfare. Economic welfare increases by an expansion of goods and services designed to satisfy the needs of ultimate consumers today and in future (Shapiro). Viewed from this angle, let us examine whether gross domestic product is a true indicator of economic welfare? That means whether an increase of real GDP increase society’s welfare? If not why?
Non-Marketed Personal Services
In GDP, we do not include those services that do not involve market transactions. The foremost case of these is the value of housewives’ services. The meticulous services rendered by he housewife in rearing up her children definitely increases family welfare and ultimately social welfare. But the exclusion of those services in GDP make it a poor indicator of social welfare.
Composition of GDP
Production of bombs, guns, tanks, missiles etc. which are needed for national defence are included in the estimation GDP, But they do not increase national welfare. Similarly production of wine, cigarettes and opium etc. are harmful to human welfare. But their inclusion in GDP makes it a poor indicator of national welfare. Again if GDP consists of mainly luxury goods like air conditioners, colour TVs, luxury cars, refrigerators meant for the “few rich” rather than “many poor”, it cannot be the measuring rod of social welfare.
Distribution of GDP
It is not quantity of GDP but its equitable distribution among different sections of the society which should be taken into account for welfare considerations. A more equal distribution of the existing level of income and output might make a greater contribution to national welfare than a sizable increase in total with no change in its distribution. The approach to income expansion have received increasing attention in recent years in almost all welfare states.
Human Cost of Producing GDP
It is not GDP itself but ‘human cost’ of producing GDP is more important in increasing human welfare. Mechanisation of arduous and repetitive tasks, improvement in work safety and revised production techniques that restore “Pride of workmanship” are examples of things that reduce human cost. The most important single factor is the work-leisure ratio. If a given total output can be produced through a substantially smaller number of hours of labour, it clearly would be incorrect to say that constancy of output means a constancy of welfare. Since leisure adds to human welfare, its omission makes GDP a poor indicator of national welfare.
Exclusion of Transfer Payment
Transfer payment such as old age pension, unemployment allowance, scholarships, stipends and relief during natural calamities etc. are not included in estimation of GDP as they do not reflect real output of goods and services. But they certainly promote social welfare. Hence their exclusion in GDP make national income an inappropriate indicator of welfare
Environmental Damage
The GDP only takes only into account the positive aspects of goods and services produced but ignored the negative aspects of environmental damage that takes place due to the mindless exploitation of natural resources. Deterioration of environment quality due to air and water pollution, deforestation, soil degradation etc. are the costs that exceed the benefits of having greater output.
