Answer :

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.

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