Is Gdp an Adequate Measure of Economic Welfare?

Gross Domestic Product (GDP) is defined as the total value of all final goods and services produced in an economy within a given period (Economics Course Notes, 2006). As is common in most economies worldwide, it is used to gauge the performance of the economy.

GDP is calculated with an assumption that all goods and services produced in the period specified have been sold, and all the income derived from the sale is spent within the same period. The expenditure method calculates GDP as follows:

GDP = consumption + investment + government spending + (exports − imports).

There are several methods of calculating GDP but they all arrive at the same end result which is deemed to be a reflection of the country's total production in a specified period, and thereby a measure of economic activity.

National welfare refers to the wellbeing of a country's people. Economic growth is one of the key macroeconomic objectives that influence national welfare. The economic growth rate must outstrip the population growth rate for living standards to increase and adequate job creation to sustain the population (Mohr et al, 2004). Favourable economic growth implies that a nation is better off, things are going well. GDP is used to measure economic growth. Hence, if GDP is used as a measure of national welfare, a rise in GDP would imply that the national welfare has improved and people are better off than they were before.

There are some serious flaws with using the GDP calculation alone to measure economic activity. GDP is merely a measure of "all money that changes hands in a country" during a specified period (Montague, 1996). Transactions in the informal sector are not taken into account, yet in South Africa this sector is a significant player in the economy. For this reason, our national GDP figures have been adjusted since 1994 to estimate and recognise informal sector contribution, but these figures are not reliable (Mohr et al, 2004). It also ignores the value of non-monetary transactions which promote national wellbeing such as volunteer work and care of the elderly (Montague, 1996).

Yet another shortfall in using GDP as a measure of national welfare is the fact that it does not recognise inequalities in the distribution of income. For example, South Africa may have a satisfactory GDP, but the income may be