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“GDP is not a barometer of economic welfare but only a rough indicator”. Analyse this statement.

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The GDP is not a satisfactory measure of economic welfare because the estimates of national income do not include certain services and production activities which affect welfare. 

Following are the factors which affect human welfare but not included in GDP estimates:

(i) Non-market transactions: Some of the non-market transactions increase welfare but they are not included in national income estimates. The services of housewives within the home and community activities like welfare activities of NGOs influence the welfare of the people but they are not included in GDP.

(ii) Consumption of harmful goods: The consumption of harmful goods like cigarettes, liquor, narcotic drugs etc may not bring welfare to the community but they are included in the GDP estimates.

(iii) Unequal distribution of National Income: The increase in National Income may not always coincide with the increase in economic welfare of a country. This is mainly because of unequal distribution of income. The rich people may be having more share than the poor.

(iv) Environmental concerns: The rapid industrialization and urbanization are causing a severe threat to environment. Many hazardous pollutants are being added to the atmosphere in the name of development which is not in favour of economic welfare. But these are included in GDP estimates.

(v) Externalities: An externality is a cost or benefit conferred upon second or third parties as a result of acts of individual production and consumption. 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.

(vi) 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.

(vii) 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.

Keeping the above limitations in view, GDP cannot be used as a barometer of economic welfare.

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