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Gross domestic product (GDP) is generally considered as a best and single measure of the value of output produced in an economy or welfare or growth or development.

Importance or Role of GDP:

The importance or role of GDP as a measure of good standard of living or welfare is as under:

(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 in term analysis and the other for short term study. If GDP increases over the 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. The national income figures throws light as to how much general price level has increased or decreased, how much income people spend on consumption goods and how much they save? Government can devise measures of controlling inflation or deflation on the basis of these figures of consumption, saving and investment 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 to 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.

(viii) Economy’s structure: The GDP indicates the share of various sectors to the economy. If in a particular sector, the share is less and it is desired to be raised, then steps can be taken to increase it. GDP thus gives us a clear idea about the structure of the economy.

(ix) Public Sector: GDP studies help us to know the relative roles of public and private sector in the economy.

Is GDP a Good Indication of a Country’s Standard of Living?

GDP no doubt is a good measure of the value of output produced by an economy but it is not regarded as a good indicator of the welfare or happiness of the citizens of its country. There are certain serious problems in relying solely on national income statistics.

The main problems or flaws involved in the construction of GDP are as under:

Problems of Measuring National Output:

(i) Non marketed items: GDP ignores transactions that do not take place in organized markets. For example, the services performed in the home such as cleaning, cooking, child care, painting of houses by the residents themselves etc., go unrecorded. GDP statistics, thus, understate the true level of production in the country.

(ii) Ignores the underground economy: There are certain economic activities that should have been included in the GDP account but they are not shown up because the activity is either illegal or unreported. For example, a teacher doing tuition work at home but does not declare income to evade taxes. The waiters and waitresses do not report all their tips to avoid paying tax. The profits of illegal trade such as drugs sale etc., also go unrecorded.

(iii) Human cost of productions: If GDP increases as a result of people having to work for longer hours and in unhygienic conditions, its net benefit will be less to the citizens of a country.

(iv) GDP ignores externalises: When there is industrial growth in the country, its side effects such as pollution of air, water etc., are not taken into account.

Conclusion:

GDP statistics are a measure of output of a country and should be primarily seen in this context. However, if a country’s industrialists give a high priority on a clean environmental, quality production and relaxed way of life and still increase production, the GDP would be a good measure of economic welfare of its citizens.