The ability economics to determine by measurement the value of social welfare in the human society has for a long time remained a contentious subject. From time to time, politicians, social scientist and economists have long to evaluate and find out whether individuals or society are doing well or worse off because of the prevailing social and economic interventions put in place. Being in a position to accurately find out the effect of social and economic intervention is a crucial and an indispensible tool sought by all of those concerned with the societal standards of living. Presently, there seem to be no measure that is wholly agreed upon. However, Gross Domestic Product is a widely used measure despite its weaknesses which has led to its improvement and introduction of real GDP (Sen., 1976).
Real per capita GDP as a measurement
Real GDP is a useful measure that can serve as a tool for evaluating the standards of living on one society from the other. The use of real GDP is beneficial because it accounts for the rise on population of a country, eliminates the increase of inflation rates and provides for the comparison of the standards of welfare between one country and another. The real GDP per capita which has a correction for inflation is widely utilized as the main index in judging the economic position of one country over a given time with respect to that of another.
The use of real GDP helps at address the difficulties faced through the use of GDP that could render the results of measurements inaccurate. Through the use of real GDP, the welfare standards of a country can be determined with little interferences occurring rise inflations values. This implies that living standards of countries can be compared with little fear of changes in inflation rates. Population increase has a significant effect on GDP and its inclusion in real GDP means that an accurate value can be realized and used as a sufficient measure of standard or welfare of a particular society (University of Pretoria 2004).
Inappropriateness of real GDP per capita
There are a number of reasons that make real GDP an inadequate tool for measuring the living of standards in the society. Though real per capita real GDP represent the average well-being of different societies or nations, real GDP is known to contain other expenditures like Gross Fixed Capital formation and net exports. These expenditures do not comprise of the final consumptions and has an indirect relevance to the well-being of the private households in the society under study. (OECD, 2008).real GDP may also contain services such as fire protection and police that are produced by the government in order to address the society needs.
For instance when there is an increase in population, there will be a rise of costs in order to maintain society’s level of services, housing and employment. These additional are meant to sustain an equal living standard. In an instance where a 1% rise in in population results in 100% rise in service costs, would make the real GDP per capita rise to 200/101 of the former value. This is a rise of 98% in real GDP due to contribution services that has little benefit to everyone in the society.
According to OECD publication, real GDP fails to provide an allowance form international payment transfer. These payments include profits that are obtained from overseas or sent abroad. Therefore in instances where individual receive funds or remit such funds overseas, the real GDP does not reflect these figures and thus causing inaccuracy.
GDP has a limitation in own construction as it does not factor production from households such as housekeeping small scale production of food and rising of children, though these activities are significant in developing countries. GDP also omit economic activities that are informal or illegal though these are significant too in developing countries. GDP calculation of all economic impact without discrimination is regarded as a failure to the measure as these activities are of negative of positive value (Clarke & Sardar, 2002).
The lack of measure that is widely accepted as a tool for measuring social welfare is due to the fact that a number of measures have been found to be insufficient and lacking accuracy. However, development of tools such as real GDP for measuring social welfare is seen as an improvement to previous GDP method. In return, the use of real GDP has helped to factor inflation rise, population increase and therefore providing a failsafe technique for comparing standards of one country from the other. Despite, its shortcoming, this method will still be useful as a measure for comparing the consequences of economic growth on social welfare at least while new tools are being developed.