Question

Discuss two reasons why the per capita real income is considered to be a better index of economic welfare than gross domestic product.

Answer 1

Per capita real income is a better index of economic welfare than gross domestic product (GDP) because:

1. It reflects average living standards – Unlike GDP, it accounts for population size, showing the average income per person and better indicating individual well-being.
2. It adjusts for inflation – Per capita real income is measured at constant prices, meaning it removes the effect of inflation. This makes it a more accurate measure of purchasing power and actual living standards over time, unlike nominal GDP, which can rise simply due to price increases.