Question

Explain the limitations of real per capita income as a measure of economic welfare.

Answer 1

Limitations of real per capita income as a measure of economic welfare are as follows:

1. Distribution of Income: Real per capita income ignores how income is distributed. Even if average income rises, if the additional income is concentrated in the hands of a few, overall economic welfare may not improve. Inequality can reduce welfare despite higher national income.
2. Composition of Output: The type of goods and services produced matters. If GDP rises due to more capital goods instead of consumer goods, current welfare may not improve. Furthermore, an increase in non-civilian goods (e.g., weapons) doesn't contribute to direct consumption or welfare.
3. Manner of Increase in GDP: If GDP rises due to exploitation of labor, child labor, pollution, or overuse of natural resources, it may harm overall welfare. Environmental degradation and harsh working conditions can lower the quality of life.
4. Expenditure on Regrettable Necessities: Some expenses included in GDP (e.g., pollution-related healthcare or transport costs due to congestion) are forced and not welfare-enhancing. These expenditures do not improve living standards.
5. Monetisation of Goods and Services: GDP only includes goods exchanged in the market. Non-Monetisated services, like household work (e.g., cooking, childcare by homemakers), are excluded even though they contribute significantly to welfare.
6. Exclusion of Some Items from GDP: Items like leisure, free time, and non-market activities (e.g., gardening, voluntary work) increase well-being but are excluded from GDP. Furthermore, quality of life indicators such as health, education, and life expectancy are not captured by per capita income.