How far can GDP be taken as an index of welfare?
It can be argued that gross domestic product does not actually do a good job of what we most often use it to display: growth. There are some key aspects that are ignored through the use of GDP as a marker for the growth and welfare of an economy. It is important to clarify that growth is not necessarily good if there is the exploitation of land, labour, and capital. This is because the main aim of the economy is the provision of our welfare, so people are employed, stable prices, and sustainable growth.
Gross Domestic Product can be defined as:
The market value of all the goods and products produced or provided within a country at a given moment in time.
There are various ways to determine the GDP of a country, there is the expenditure approach or the production approach. The expenditure approach is:
GDP = private consumption + gross investment + government spending + (exports-imports)
This identifies the first issue in which GDP fails to accurately measure the welfare of an economy. The calculation of GDP at no point involves whether or not the welfare of the people has improved, GDP is used as an indicator of a standard of living because the central variables tend to attribute towards factors that improves people’s welfare within an economy. GDP should be considered as an indicator of economic activity.
The use of gross domestic product can be useful to give a holistic view of a countries economy, however when looking at the welfare of an economy it fails to be an effective indicator because it does not involve factors such as happiness, and non-monetary activity within that country which directly attribute to peoples standard of living. This is why there are other approaches to the welfare of an economy such as the Human Development Index (HDI) or Gross National Happiness (GNH). The main issue with attempting to indicate a level of welfare within a country is that factors such as environmental sustainability can be difficult at times to quantify, and equally so with happiness. However, the dependence of GDP to indicate welfare of an economy and growth is becoming an outdated concept.