Relationship of GDP with Economic Well-Being

Let us make an in-depth study of the relationship of GDP with Economic Well-Being.

Clearly, in evaluating the welfare effects of a proposed economic policy, it is necessary to apply the cost-benefit principle.

It is not sufficient to consider only the likely effects of policy on GDP.

It is also necessary to know whether the policy will affect other aspects of economic well-being that are not captured in GDP.

Environmental regulations may reduce production of steel, for example, which reduces the GDP. As a result, air quality improves. But the regulations should be adopted if the benefits of cleaner air are worth more to people than the costs of the regulations in terms of lost output and lost jobs.

Real GDP per person tends to be positively associated with various things which are of much value to people such as a high material standard of living, better health and life expectations, and better education. We may now discuss some of the ways in which higher real GDP implies greater economic well-being.

1. Availability of goods and services:

Obviously, the people of a country with a high GDP are likely to possess more and better goods and services. On average, people in high GDP countries enjoy larger, better-constructed and more comfortable homes, high quality food and clothing; a greater variety of entertain­ment and cultural opportunities; better access to transportation and travel, better communi­cation and sanitation and other advantages.

Although affluence does not necessarily bring happiness or peace of mind the majority of people in the world place greater importance on achieving material prosperity. After all, that is what GDP measures.

2. Health and education:

Apart from an abundance of consumer goods, a high GDP brings other more basic advantages. There are differences between rich and poor countries with regard to some important socio-economic indicators of well-being, such as life expectancy (at birth), infant and child mortality rates, number of doctors, better nutrition and educational opportunity.

On some of the most basic measures of human welfare, the developing countries like India and Pakistan fare much worse than the industrial countries.

On average, in some important dimension of human well-being, such as literacy and education rates, high GDP countries also have the advantage. Due to their surplus financial capital, they can make more investment in human capital for enhancing total factor productivity. So, along with a rising GDP, they are able to improve the quality of life of the people.

Furthermore, enrolment rates do not capture important differences in the quality of education available in rich and poor countries, as measured by indicators such as the educational backgrounds of teachers and student-teacher ratios. Once again, the average person in an industrialised country like the USA is likely to be much better off than his (her) counterpart in a low-income developing country like Bangladesh or Nepal.