Full Answer Section

• Correlation with well-being: Economic growth, as reflected by GDP, generally leads to higher incomes, improved living standards, and greater access to resources, contributing to increased well-being.

Shortfalls of GDP:

• Limited scope: GDP only measures market goods and services, neglecting non-market activities like household work, volunteerism, and leisure, which contribute significantly to well-being.
• Income inequality: GDP growth may not translate equally to all individuals, potentially leading to increased income inequality and exacerbating social problems.
• Environmental impact: Economic activities contributing to GDP growth may have detrimental environmental consequences, impacting sustainability and long-term well-being.
• Distortion by externalities: Positive and negative externalities, such as pollution or environmental degradation, are not factored into GDP, creating an incomplete picture of the economy’s true impact.

Limitations of GDP as a Measure of Standard of Living:

• Distribution of income: GDP per capita provides an average, but it doesn’t reveal the distribution of income within a society. A high average GDP can mask significant inequalities, where a small portion of the population enjoys immense wealth while others struggle to meet basic needs.
• Social factors: While economic growth can contribute to well-being, other factors like social cohesion, political stability, and access to quality education and healthcare also play crucial roles in determining living standards. GDP cannot capture these non-economic aspects of well-being.
• Subjective well-being: GDP does not measure individual happiness, satisfaction, or perceived quality of life. These subjective dimensions are integral to well-being but are not reflected in economic data.

Conclusion:

GDP is a valuable tool for analyzing economic activity, but it should not be interpreted as the sole measure of societal well-being. Evaluating economic performance requires considering its limitations and supplementing GDP data with other indicators like income distribution, social welfare measures, and subjective well-being surveys for a more complete picture of the economy’s impact on people’s lives.