6 Main Factors Affecting GDP

The following points highlight the six main factors affecting GDP. The factors affecting GDP are: 1. Leisure Preference 2. Non-Marketed Activities 3. Underground Economy 4. Environmental Quality and Resource Depletion 5. Quality of Life 6. Poverty and Economic Inequality.

Factor Affecting GDP # 1. Leisure Preference:

Due to technological progress, average productivity of resources (including manpower) has gone up in most industrialised countries.

This has enabled workers to enjoy more leisure.

The increased leisure available to the workers allows them to enjoy more recreation in the form of weekend terms and pursuing cultural activities.

Their activities are, no doubt, welfare- enhancing in nature. But their extra hours of leisure are not priced in markets and, therefore, do not get reflected in GDP.

Factor Affecting GDP # 2. Non-Marketed Activities:

All economically important activities are not bought and sold in market. With a few exceptions, such as government services, non-marketed economic activities are omitted from GDP. An example is unpaid housekeeping services. Another example is voluntary services of NGOs such as volunteer free service and education services offered free of cost to poor children in slums. Such unpaid and un-priced services, no doubt, increase social welfare. But they are omitted from GDP, because it is difficult to estimate their market values.

Factor Affecting GDP # 3. Underground Economy:

Many activities are performed unofficially. The underground economy includes both legal and illegal activities from informal (private) nursing, house cleaning or child care to organised crime. House cleaners or plumbers are paid in cash. Such transactions go unnoticed by the tax authorities. However, such activities have a welfare implication. No doubt, they may enhance or reduce social welfare.

Factor Affecting GDP # 4. Environmental Quality and Resource Depletion:

China and India have recently achieved tremendous growth in real GDP and are cited as two models of globalisation. But in expanding their manufacturing base, both countries have also suffered from a severe decline in air and water quality. Increased pollution certainly reduces the quality of life. But because air and water quality are not bought and sold in markets, the Indian GDP does not reflect this downside of its economic growth.

The explanation of finite (non-renewable) natural resources also tends to be overlooked in GDP. If more oil is extracted today, less oil will be available in future. But this fact is not reflected in GDP.

Incorporating factors like air quality and resource depletion into a comprehensive measure of GDP is difficult, since it often involves placing a rupee on intangibles, like having a clean river to take water instead of a dirty one. But the fact that the benefits of environmental quality and resource conservation are not measured in terms of money, does not mean that they are unimportant.

Factor Affecting GDP # 5. Quality of Life:

Various factors make a particular town or city an attractive place to live. Some of these desirable features get reflected in GDP: spacious, well-constructed homes, good star hotels and restaurants, a variety of entertaining and high-quality medical services. However, other indicators of good life are not sold in markets and so may be omitted from GDP.

Examples include a low crime rate, minimum traffic congestion, active civic oganisations (like municipal corporations) and open space.

Factor Affecting GDP # 6. Poverty and Economic Inequality:

With increase in per capita income, the incidence of poverty often goes up. So, social welfare diminishes. This is what has happened in India over the plan period. Although India has achieved a satisfactory growth rate in recent years, the planners have failed to alleviate poverty in 56 years.

Even though a dent has been made on poverty in recent years due to financial assistance from the World Bank and the IMF, the degree of income inequality has increased rather than diminished even though the growth rate has picked up.

Moreover, GDP measures the total quality of goods and services produced and sold in an economy, but it conveys no information about who enjoys those goods and services. Two countries may have identical GDPs but differ markedly in the distribution of economic welfare across the population.

Furthermore people’s economic satisfaction depends not only on their absolute economic position — as measured by the quantity and quality of food, clothing and shelter they have but on what they have compared to what others have.

To the extent that such comparisons affect people’s well-being, inequality (relative poverty) matters as well as absolute poverty. Again, since GDP focuses on total production rather than actual distribution of output, it does not capture the effects of inequality.