Question

The per capita income in Ghana and Nigeria for the year 2019 are 4605 and 5927 dollars respectively. Discuss the flaws of using these figures to suggests that the welfare of people living in Nigeria is better than those living in Ghana. [10 MARKS].

Answer 1

Ans- GDP is often considered as an index of welfare of the people. Welfare means sense of material well being among the people. It depends on greater per head availability of goods and services. So higher GDP is generally taken as greater welfare of the people.

However GDP only measures economic welfare of the people. It does not considers social aspects of people and economy.

Some of the limitations of GDP are mentioned below:-

1) Distribution of GDP- It is possible that with rise in GDP, inequalities in the distribution of income may also increase,i.e. the gap between rich and poor increases. GDP does not take into account changes in inequalities in the distribution of income. So welfare of people may not rise as much as the rise in GDP.

2) Change in prices- If increase in GDP is due to rise in prices and not due to increase in physical output, then it will not be reliable index of economic welfare.

3) Non-monetary exchanges- Many activities in an economy are not evaluated in monetary terms. For example non market transaction like service of housewife, kitchen gardening, leisure time activities etc. are not included in GDP due to non availability of data. However such activities influence the economic welfare.

4) Externalities- Externalities refers to benefit or harms of an activity caused by a firm or individual, for which they are not paid or penalized. Activities which result in benefits to other are termed as positive externalities and activities which result in harm to other are termed as negative externalities. Such external effect do not form part of market transaction. GDP does not take into account externalities, positive or negative.

5) Rate of population growth- GDP does not consider the changes in the population of a country. If rate of population growth is higher than the rate of growth of GDP then it will decrease the per capita availability of goods and services, which will adversely affect the economic welfare.