Explain how our economic welfare depends upon our level of real GDP per person but there might not be a one-to-one relationship between economic welfare and real GDP per person. Give examples of things that can effect one but not the other

Question

What will be an ideal response?

Answer 1

Although GDP has a significant impact on our economic welfare, it is not a perfect measure of economic welfare. GDP omits some factors that affect our economic welfare. GDP does not include household production, all the tasks performed around the house. It omits underground production, the part of the economy hidden from the government. Real GDP does not include the value of people's leisure time. And, GDP does not make allowances for environmental quality. All of these factors influence the quality of our life and hence our economic welfare. Indeed, occasionally a change will affect GDP and economic welfare in different directions. For instance, if people decide they want more leisure and hence retire early, GDP will decrease because fewer people are working, but economic welfare will increase. Or, if there is an increase in production that creates massive amounts of pollution, GDP increases even though economic welfare likely decreases.