GDP and Welfare – Positive correlates
Increase in level of Income: A larger GDP increases the size of the pie which can be distributed for welfare in an economy. The fruits of higher income at top trickle down to the lowest level and create demand at that level also.
Increase in Assets and resources: It helps in creating tangible as well as financial assets. The surpluses, in the form of savings, are channelised to create long term assets. These investments promote welfare as well as are incorporated as capital formation under GDP.
Development of human resource capabilities: It creates a skilled workforce which works for wages in enterprises. A highly skilled labour is paid better. This creates competition among people for upskilling and leads to improvement in human resource capabilities of a nation.
Creation of affordability with globalisation: A country, which is at a comparative advantage for a particular goods or service, is able to export to other countries at competitive prices. This creates affordability since the cost of goods and services go down and become affordable for even lower income people.
Limitation of GDP as an indicator of welfare
Concentration of wealth: GDP promotes concentration of wealth as every commodity is traded.
Promotion of relative poverty: Even if measures are taken to eliminate absolute poverty, GDP as an indicator of economic growth promotes relative poverty since prices of goods and services inflate up in case of supply shocks which render even essential items unaffordable.
Exploitation of Environment: To maximise profits, many firms violate pollution and environmental guidelines. This hampers the environment in the long run for short term gain.
Unpaid work not counted: GDP ignores non-monetary care-based work like child and elderly care, household work, which are important for the wellbeing of a society.
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