Introduction:
National income or GDP has often been used as a measure of economic
welfare or wellbeing of the people. However, it has been asserted by several
modern economists that national income as it is usually defined is not a
satisfactory measure of true economic welfare. According to them, in order to
obtain an accurate gauge of economic welfare, significant adjustments both in
the form of additions and subtractions have to be made to the aggregate of
national income.
GDP AS MEASURE OF WELFARE
The usual concept of GDP fails to account for certain factors that increase
people's satisfaction and welfare. Firstly, it does not attach any significance to
the value of leisure which individuals derive great satisfaction from. The usual
concept views leisure as unproductive, but people get utility not just from
consumption but also from having leisure time. Hence, for constructing a
welfare measure, the value of leisure people enjoy must be included.
Secondly, GDP excludes non-marketed personal services like household
work performed by housewives and self-provision activities like gardening,
painting one's own house etc. These unpaid services significantly raise
welfare but do not get recorded in national income accounting. In order to get
a true economic welfare index, the value of such non-market activities must
be incorporated.
On the other hand, GDP includes certain negative elements that reduce
economic welfare and should be subtracted out. The production of goods and
services by modern industries pollutes the environment through air emissions,
water discharges and noise - all of which decrease welfare. These
environmental costs or "costs of economic growth" ought to be deducted from
GDP.
Apart from pollution costs, certain other "regrettable costs" like government
expenditure on police, law courts and defence to maintain law and order are
counted as part of GDP. However, these regrettable necessities do not
enhance welfare and their costs should be excluded from a welfare
calculation.
Furthermore, GDP numbers alone do not reflect how the national income is
being produced and distributed across society. An increase obtained by
overworking labour which impairs health and efficiency, or through labour-
displacing machinery raising unemployment, cannot be considered welfare-
enhancing despite higher GDP.
Similarly, a nation's GDP may be high with greater output of war materials, but
the actual wellbeing of its people may still be low. This is because the
composition of GDP between necessities (wage goods) and luxuries is crucial
in determining welfare gains, not just the total output level.
Moreover, the distribution of national income between the rich and poor
matters greatly. If GDP growth is concentrated among the rich with the poor
getting poorer, it cannot be considered as improving overall societal welfare
despite rising national income.
Another critical limitation is that GDP calculations do not account for the
depletion of natural resources like oil, forests, minerals etc. Extracting these
resources leads to a reduction in a country's natural capital wealth. This
depletion of natural resources should be treated as negative investments and
deducted while estimating economic welfare.
Also, economic costs imposed by environmental disasters like floods, forest
fires etc. that degrade natural ecosystems and capital stocks are not captured
in GDP estimates. But these effectively undermine the sustainable productive
capacity of an economy.
In light of these serious shortcomings of GDP as a measure of welfare,
economists have proposed remedies like 'Green GDP' which involves:
1) Subtracting costs of pollution and environmental degradation
2) Adjusting for depletion of natural resources by accounting for this loss of
natural capital
The 'Net Economic Welfare' (NEW) concept further modifies national income
by:
1) Adding value of non-market activities and leisure time
2) Deducting costs of environmental damages
3) Excluding regrettable defensive expenditures
4) Factoring in distribution of income between rich and poor
Conclusion:
To summarize, while GDP is an important metric, it has several critical
limitations in representing true economic welfare and societal wellbeing. From
including environmentally damaging production to excluding beneficial non-
market activities, from disregarding natural resource constraints to ignoring
inequalities in income distribution - GDP provides an incomplete and
misleading picture of sustainable prosperity and quality of life.
For GDP to serve as a genuine welfare measure, it must incorporate
adjustments for pollution costs, depletion of natural capital, additions for non-
market benefits like household services and leisure, the composition of output
between necessities and luxuries, and the distribution of income gains
between the rich and poor. Only such a comprehensive 'Green GDP' or 'Net
Economic Welfare' metric can truly reflect the economic welfare and overall
wellbeing of a nation and its people.
