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compared to 2000, the GDP of the country in 2001 was higher by Rs10. But thishashappenedwhen90percentofpeopleofthecountryhaveseenadropin theirrealincomeby10per cent(fromRs10toRs9),whereasonly10percent havebenefitedbyariseintheirincomeby100percent(fromRs10toRs20).90 percentofthepeopleareworseoffthoughtheGDPofthecountryhasgoneup. Ifwerelatewelfareimprovementinthecountrytothepercentageofpeoplewho arebetteroff,thensurelyGDPisnotagoodindex. 2. Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. The exchangeswhichtakeplaceinthe informal sector without the help of money are called barter exchanges. In barter exchanges, goods (or services) are directly exchanged against each other. Butsincemoneyisnotbeingused here, these exchanges are not registered as part of economic activity. In developing countries, where many remote regions are underdeveloped, these kinds of exchanges do take place, but they are generally not counted in the GDPs of these countries. This is a case of underestimation of GDP. Hence, GDP calculated in the standard manner may not give us How uniform is the distribution of GDP? It still seemsthatamajorityofthepeoplearepoorand a clear indication of the a few benefited. productive activity and well-being 31 of a country. N 3. Externalities: Externalities refer to the benefits (or harms) a firm or an a individual causes to another for which they are not paid (or penalised). n Externalities do not have any market in which they can be bought and l c sold. For example, let us suppose there is an oil refinery which refines m crude petroleum and sells it in the market. The output of the refinery is A the amount of oil it refines. We can estimate the value added of the refinery c by deducting the value of intermediate goods used by the refinery (crude u oil in this case) from the value of its output. The value added of the refinery i will be counted as part of the GDP of the economy. But in carrying out g the production the refinery may also be polluting the nearby river. This may cause harm to the people who use the water of the river. Hence their well being will fall. Pollution may also kill fish or other organisms of the river on which fish survive. As a result, the fishermen of the river may be losing their livelihood. Such harmful effects that the refinery is inflicting on others, for which it will not bear any cost, are called externalities. In this case, the GDP is not taking into account such negative externalities. Therefore, if we take GDP as a measure of welfare of the economy we shall be overestimating the actual welfare. This was an example of negative externality. There can be cases of positive externalities as well. In such cases, GDP will underestimate the actual welfare of the economy. Reprint 2026-27