Gross Domestic product (GDP) is generally considered a best single measure of
the value of output produced in the economy. The importance of GDP as a measure
of good standard of living or welfare is as under:
Importance of GDP:
(i) Study of economic growth: The GDP has not only a theoretic
importance but also practical importance. Harris is of the opinion that
of national income can be split up into two parts, one for the Ion term analysis
and the other for short term study. If GDP increases ova years, it shows that we
are heading towards prosperity and if it is stagnant or is falling, it indicates
that the economy is declining.
(ii) Unequal distribution of wealth: The GDP throws light on the earnings
of the various factors of production and the total output of the country. If the
output is less and there is unequal distribution of wealth, the economist can
suggest measures to increase output and to bridge the income gap between the
rich and the poor.
(iii) Problems of inflation and deflation: The GDP statistics can help
the economists a lot in solving the problems of inflation in the country. The national income figures throws light as to how much general price
level has increased or decreased, how much income people spend on consumption
goods and how much they save? Government can devise measures of controlling
inflation or deflation on the basis of these figures of consumption, saving and
investment in the country.
(iv) The share of government in economic progress:
In a centrally
controlled economy, all the factors of production are awarded and are fully
controlled by the state. In a mixed economy, the state as well as the people in
cooperation with each other can take part in the economic advancement of the
country, GDP shows the role which state is playing for the economic progress of
(v) Comparison with developed countries of the world:
The GDP figures
help us to know the economic position of the people of the various countries. If
the standard of living of the people in one country is low, they can take
measures to increase the standard of living of the people.
(vi) Estimate of the purchasing power: The importance of the GDP
can also be judged from the fact that it throws light in the purchasing power of
the people, their power to save and the ability lo pay taxes to the government.
(vii) Guide to economic planning:
The GDP figure is very helpful for the government to frame short and long
term economic policies according to the prevailing conditions in the country.
(viii) Economy's structure: The GDP indicates the share of various
sectors to the economy. If in a particular sector, the share is less and it is
desired to be raised, then steps can be taken to increase it. GDP thus gives us
a clear idea about the structure of the economy.
(ix) Public Sector: GDP studies
help us to know the relative roles of public and private sector in the economy.
Is GDP a Good Indication of a
Country's Standard of Living?
GDP no doubt is a good measure of the value of output produced by an economy
but it is not regarded as a good indicator of the welfare or happiness of the
citizens of its country. There are certain serious problems in relying solely on
national income statistics. The main problems or flaws involved in the
construction of GDP are as under:
Problems of Measuring National Output:
(i) Non marketed items: GDP ignores transactions that do not take place in organized markets. For
example, the services performed in the home such as cleaning, cooking, child
care, painting of houses by the residents themselves etc., go unrecorded. GDP
statistics, thus, understate the true level of production in the country.
(2) Ignores the underground economy:
There are certain economic activities that should have been included in
the GDP account but they are not shown up because the activity is either illegal
or unreported. For instance, a teacher doing tuition work at home but does not
declare income to evade taxes. The waiters and waitresses do not
report all their tips to avoid paying tax. The profits of illegal
trade such as drugs sale etc. also go unrecorded.
(3) Human cost of productions: If GDP
increases as a result of people having to work for longer hours
and in unhygienic conditions, its net benefit will be less to the citizens of a
(4) GDP ignores externalities: When there is industrial growth in the country, its side effects such as
pollution of air, water etc., are not taken into account.
GDP statistics are a measure of output of a country and should be
primarily seen in this context. However, if a country's industrialists give a
high priority on a clean environmental, quality production and relaxed way of
life and still increase production, the GDP would be a good measure of economic
welfare of its citizens.