Question

GDP or GDP per capita is the conventional measurement of a given national economy. Define them and the list the problems associated with this conventional measurement. Do you consider HDI as a reasonable alternative to GDP per capita in ranking nations based on their overall development? Why or why not?

Answer 1

GDP is not the perfect measure of country's economic progress. Below listed are some of its limitations:

• It does not take into account all the transactions. Some goods people produce for personal use and not for sale. Example You grow some organic vegetables in your lawn . You are using it for your own welfare and not for sale. GDP will not count this.
• It does not take into account happiness. People in India have low standard of living as compared to people in USA But they may be more happy and satisfied due to spiritualism . GDP does not measure this.
• It does not take into environmental benefits received. The amount spent on cleaning water or purifying air are taken into account while calculating GDP but how much actually air and water are cleaned is ignored by GDP.
• GDP takes into account the amount spent on education but cannot tell what percentage of the population is actually literate.
• It does not take into account inequality in income. If we say GDP has risen by 10% . It does not mean that everyone's per capita income has risen by 10%. Some may be higher than this figure and others may be much below than this figure.
• It fails to indicate whether the growth rate of the economy will remain stable for longer period of time or not.
• It also ignores the technological developments that have taken place while making comparison between two years with long difference .

HDI or Human Development Index can be considered a reasonable alternative to some extent. It takes into account knowledge of people , standard of living and long and healthy life. But it is also prone to limitations. It ignores poverty, inequality.