GDP is a measure of the economic prosperity of a country compiled as output or income. There is a strong correlation between the development in GDP and changes in several important social factors, including tax payments and unemployment and, to a lesser extent, health and education.
However, GDP is regularly criticized for not presenting a fair view of welfare. If GDP is a poor measure of welfare, focusing one–sidedly on increasing GDP may lead to misguided political decisions.
CRITICISMS OF GDP
The first criticism is that GDP is hopelessly flawed as a measure of human welfare. For example, the argument goes, it takes no account of pollution.
• GDP has always been a measure of output, not of welfare. Using current prices, it
measures the value of goods and services produced for final consumption, private and
public, present and future.
• But GDP can be considered a component of welfare.
• The second criticism is that GDP ignores distribution. In a rich country like the US, some say, the typical person or family has seen little or no benefit from growth since the 1970s. At the same time, inequality has risen sharply.
• The third criticism is that above a certain level, a higher material standard of living does not make people happier. This view concludes that we should
IMPORTANCE OF GDP
(i) Study of economic growth: The GDP has not only a theoretic importance but also practical importance. Harris is of the opinion that the study of national income can be split up into two parts, one for the Ion term analysis and the other for short term study. If GDP increases ova years, it shows that we are heading towards prosperity and if it is stagnant or is falling, it indicates that the economy is declining.
(ii) Unequal distribution of wealth: The GDP throws light on the earnings of the various factors of production and the total output of the country. If the output is less and there is unequal distribution of wealth, the economist can suggest measures to increase output and to bridge the income gap between the rich and the poor.
(iii) Problems of inflation and deflation: The GDP statistics can help the economists a lot in solving the problems of inflation in the country.
(iv) The share of government in economic progress: In a centrally controlled economy, all the factors of production are awarded and are fully controlled by the state. In a mixed economy, the state as well as the people in cooperation with each other can take part in the economic advancement of the country, GDP shows the role which state is playing for the economic progress of the people.
(v) Comparison with developed countries of the world: The GDP figures help us to know the economic position of the people of the various countries. If the standard of living of the people in one country is low, they can take measures to increase the standard of living of the people.
(vi) Estimate of the purchasing power: The importance of the GDP can also be judged from the fact that it throws light in the purchasing power of the people, their power to save and the ability lo pay taxes to the government.
(vii) Guide to economic planning: The GDP figure is very helpful for the government to frame short and long term economic policies according to the prevailing conditions in the country
