Q12 of 12 Page 30

Write down some of the limitations of using GDP as an index of welfare of a country.

The limitations of using GDP as an index of welfare of a country can be divided under following headings –

1) Distribution of GDP - Increase in the rate of GDP is not an indicator of good economic welfare because GDP is concentrated in hands of some individuals only.


2) Non monetary exchanges - GDP is under-estimated by the way of not calculating non monetary exchanges which are quite evident in rural areas in India so it is not a good indicator of economic welfare.


3) Externalities - It refers to good and bad impact of an activity without paying the price or penalty for that, in this case if GDP is taken as welfare measure of an economy it will affect the actual welfare of the economy.


4) Change in prices - If increase in GDP is due to rise in prices and not due to increase in production then it will not be a reliable index of economic welfare.


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


More from this chapter

All 12 →
8

Net National Product at Factor Cost of a particular country in a year is Rs 1,900 crores. There are no interest payments made by the households to the firms/government, or by the firms/government to the households. The Personal Disposable Income of the households is Rs 1,200 crores. The personal income taxes paid by them is Rs 600 crores and the value of retained earnings of the firms and government is valued at Rs 200 crores. What is the value of transfer payments made by the government and firms to the households?

 9

From the following data, calculate Personal Income and Personal Disposable Income.








































Rs (crore)



(a) Net Domestic Product at factor cost



8,000



(b) Net Factor Income from abroad



200



(c) Undisbursed Profit



1,000



(d) Corporate Tax



500



(e) Interest Received by Households



1,500



(f) Interest Paid by Households



1,200



(g) Transfer Income



300



(h) Personal Tax



500


 10

In a single day Raju, the barber, collects Rs 500 from haircuts; over this day, his equipment depreciates in value by Rs 50. Of the remaining Rs 450, Raju pays sales tax worth Rs 30, takes home Rs 200 and retains Rs 220 for improvement and buying of new equipment. He further pays Rs 20 as income tax from his income. Based on this information, complete Raju’s contribution to the following measures of income (a) Gross Domestic Product (b) NNP at market price (c) NNP at factor cost (d) Personal income (e) Personal disposable income.

 11

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?