GDP and Welfare

GDP Welfare

Welfare: It the state of doing well especially in respect to good fortune, happiness, well-being, or prosperity must look out for your own welfare. In macro sense, it means sense of well.

Difference between Economic welfare and Non-Economic welfare: 

S.No.	Economic welfare	Non-Economic welfare
1	National income, consumption, etc. are all economic factors and can be expressed in terms of money.	Environmental pollution, law and order situation, etc. are all non-economic factors and cannot be expressed in money.
2	The sense of well being affected only by economic factors is called economic welfare.	The sense of well being affected only by non-economic factors is called non-economic welfare.

 

Social Welfare:

It is the sum of economic and non-economic welfare is called social welfare or total welfare.

GDP (Gross domestic product):

The final products within the boundaries of India within that specific period of time are in the GDP of India. Further, the effect of inflation on these products is also calculated.

GDP includes government expenditures, consumption, exports, imports, and investment of India.

For example, if Honda decides to manufacture it’s parted in India than that will go into the GDP of India. But the revenues got through the sales are included in the GDP of Japan.

What are the limitations of per capita real GDP or real GDP or Real national income as an indicator of economic welfare?

Or

Is per capita real GDP an adequate indicator of economic welfare?

No, because of the following reasons:

·         Contribution of some products included in GDP may reduce welfare or have a negative impact in the society. For e.g.: The final values of milk and liquor are included in the GDP. Milk may provide both immediate and ultimate satisfaction to the consumers and increases the welfare.

On the other hand, liquor may provide some immediate satisfaction but ultimately it has a harmful effect on health and thus, it reduces the welfare.

Therefore, this point must not be kept in mind in drawing conclusion about economic welfare from national income.

·         All products included in the GDP may not contribute equally to the economic welfare. GDP includes different types of products like food, homes, clothes, police services, military services, etc. Some of these products contribute more to the welfare of the people like food, shelter, cloth, etc.

Other products like police and military services may cooperatively contribute less and may not directly affect the standard living of the people. Therefore, the economic welfare depends on the types of goods and services produced and not just on how much it is produced.

·         Change  in equality in the distribution of income on account of change in GDP influences the welfare. All people don’t earn the same amount of income and thus, it leads to unequal distribution of income in the society.

If per capita GDP increases, then all are not better off equally because income of some may rise by less and some of by more than the national average and if inequality increases it implies that the rich becomes more rich and poor become more poor.

Therefore, if with the rise in per capita real income inequality increases, it may lead to a decline in welfare.

·         GDP doesn’t include many goods and services which contribute to the welfare. There are many goods and services which are left out from the estimation of national income on account of practical estimation difficulties.

For e.g.: Services of housewife and other family members, own account production, etc.

These non-exchange and non-monetary production activities are left out on account of non-availability of data and problem valuation.

·         GDP doesn’t take into account externalities.

Externality: When the activities one result in benefits or harm to the others with no payment received for the benefit and no payment made for the harm done such benefits and harms are called externalities.

Difference between Positive and Negative externalities:

S.No.	Positive externality	Negative externality
1	Activities resulting in benefits to others with no payment received for the benefit.	Activities resulting in harms to others with no payment made for the harm.
2	It includes the welfare.	It decreases the welfare.
3	For e.g.: Construction of flyover reduces transportation cost and time of the users who have not contributed anything towards its cost. Expenditure on its construction is included in the GDP but the positive externalities of it are not.	For e.g.: Factories produces goods but also create water and air pollution. The pollution harms people and factories aren’t required to pay anything to harm people. Production of goods increases the welfare but pollution decrease the welfare. Yamuna is being a live example.

Difference between Nominal and Real GDP:

S.No.	National income at current price Or Nominal GDP	National income at constant price Or Real GDP
1	It refers to money value of final goods and services produced by the normal residents of a country in a year, measured at current year prices.	It refers to money value of final goods and services produced by nominal residents of a country in a year, measured at price of base year.
2	It is not a good tool for measuring the economic growth of a country.	It is a better tool for measuring the economic growth of a country.
3	It is affected by change in both price and quantity.	It is affected by change in quantity only.
4	It is not a suitable tool for comparing the national incomes of different years.	It is generally used for comparing the national incomes of different years.
5	Nominal GDP = Current price (P1) * Current quantity (Q1).	Real GDP = Base year price (P0) * Current quantity (Q1).

Main steps of conversion of Nominal GDP into Real GDP:

·         Take some year as the base, for e.g.: Base year in India is 2019-20.

·         Calculate nominal GDP of the base year which must be at the price of the base year. For the base year, nominal and real GDP are the same because both are calculated at the same price.

·         Given nominal GDP’s of years other than the base year, we can find real GDP’s by eliminating changes in prices.

Let the base year be called year 1 and the next as second year. The effect of change in prices on the nominal GDP of the second year can be eliminated in the following way:

            Real GDP of 2^nd year = Nominal GDP of 2^nd year/Price index of 2^nd year * 100.

Therefore, this will give the GDP of second year.

Precautions for Domestic and National Income:

•        All types of transfer payments are not included because correspondingly there is no production of goods and services in the economy. For e.g.: Gifts, donations, charity unemployment allowance, old age pension, pocket money, compensation given to accident or flood victims, prize money, remittances, etc.
•          Money received from sale and purchase of second-hand goods is not included because they are already included in the previous and hence, can lead to the problem of double-counting but commission or brokerage received or paid to the middleman on sale and purchase of second-hand goods is included because it is treated as factor income.
•          Money received from sale and purchase of land is not included because land is considered as free gift of the nature and cannot be produced by human.
•          Construction of a new floor on an old building is included because correspondingly, goods are produced in the economy.
•          All types of intermediate goods are not included in the economy as it will lead to double-counting because of final goods include the intermediate goods. 
•          All sale and purchase of shares, bonds, equity and dentures is not included because they are purely financial transactions and just a change of ownership takes place.
•          All the savings of household into the banks and some interest given by the bank to the households which is not included because it is treated as factor income of households.
•          When the loan is given from a bank to the households and the interest received by the bank from the loan is not included because any interest paid for consumption purchase of household are not included and same as it is follows between a bank and a production firm.
•           Services rendered by the family members to each other and services of housewives are not included due to the lack of data on its monetary value.
•           Capital gain or windfall gain (rise in price of property, shares, jewelry, etc.) is not included because correspondingly there is no production of goods and services in the economy.
•          All expenditure incurred by government on construction of dams, roads, bridges, street lights etc are included under government expenditure because there is production of goods and services.
•          All the expenditure incurred by households on durable goods, semi-durable goods, perishable goods, services etc are included because correspondingly goods and services are being produced.
•          Income from smuggling is not included because of non-availability of data.
•      All types of tax payments are not included because they are treated as transfer payment because correspondingly no goods or services are promised to be given to the payers.

For e.g.: sale tax, income tax, wealth tax, etc, except corporation tax.