India's GDP is expected to expand 7.5% in 2019-20: World Bank”- The Economic Times. Does the given statement mean that welfare of people of India increase at the same rate? Comment with reason. 3

No, the statement does not hold true. GDP is usually considered as index to welfare of the people. Welfare means sense of material well-being among the people. Higher GDP is usually taken as greater welfare of people.

However, this generalisation may not be correct due to following limitations or reasons:

1. Externalities:

Externalities refer to the benefits or the harm of an activity caused by a firm or an individual, for which they are not paid or penalized. An activity which results in harm is known as negative externalities and activities which results in benefits are known as positive externalities.

• Example and impact of negative externalities: environmental pollution, overfishing. Such pollution reduces the welfare as it impacts the health of the people and social welfare will decrease as a result. This effect is not included in GDP at all.

• Example and impact of positive externalities: For the use of public parks by the people, no payments are made here. Such activities increases the welfare as it creates a positive impact on the health of the people and social welfare will increase as a result.

2. Non-monetary exchanges: there many activities in an economy which are not expressed in monetary terms. For example services of house wife, gardening, and leisure time activities are not included in GDP due to non availability of data. However such activities impact the economic welfare.

3. Change in prices: If increase in GDP is due to raise in prices and not due to increase in output them it will not be a reliable index of economic welfare.