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Practice each question, then open the answer or worked solution.
The value of the nominal GNP of an economy was Rs 2,500 crores in a particular year. The value of GNP of that country during the same year, evaluated at the prices of same base year, was Rs 3,000 crores. Calculate the value of the GNP deflator of the year in percentage terms. Has the price level risen between the base year and the year under consideration?
Solution coming soon.
Write down some of the limitations of using GDP as an index of welfare of a country.
There are various limitations to using GDP as a measure of the welfare of a country. GDP (Gross Domestic Product) is the total aggregate value of all goods and services produced within the boundaries of a country or an economy. GDP can be a good indicator of a country’s economic size, growth and value. It is essentially a total measure of all the economic activities taking place in the economy. The relationship between welfare and GDP is contested and not conclusive. Here are some reasons why GDP cannot be a measure of welfare in a country.
i) GDP gives us only a measure of the total income of an economy. It does not provide us with any details about how the earned income is distributed between the people. In countries with a high rate of inequality, growth in GDP disproportionately benefits the wealthy, leaving the average person with fewer benefits.
ii) GDP does not take into account the environmental costs of production and development. A factory causing environmental degradation and pollution might be contributing to the GDP, but the long-term costs and consequences of these are not taken into account in the GDP calculation. Therefore, the GDP value of an economy is not a reflection of environmental welfare.
iii) Consumption and spending do not necessarily mean ‘well-being’ for the people. The citizens of a country could be spending more and raising their income, but other factors like access to healthcare and education are essential for their well-being. GDP does not speak for the average citizen’s Standard of living and Quality of Life.
iv) There are several socioeconomic factors like gender development, literacy, freedom and equality which play a part in the overall welfare of society. GDP ignores these factors of social progress and human development.
Chief concepts of this chapter –