Revision: National Income >> National Income and Economic Welfare Economics ISC (Commerce) Class 12 CISCE

Definition: Welfare Economics

According to A.C. Pigou’s, "The range of our enquiry becomes restricted to that part of social (general) welfare that can be brought or indirectly into relation with the measuring rod of money."
William J. Baumol in his book, Economic Theory and Operations Analysis, has defined welfare economics in the following manner:
“Welfare economics is the branch of economic theory which has investigated the nature of the policy recommendations that the economist is entitled to make.”
Oscar Lange has defined Welfare Economics as given below: “Concerned with the conditions which determine the total economic welfare of a community.” He also states that: “Welfare economics establishes norms of behaviour which satisfy the requirements of social rationality of economic activity.”

Key Points: Factors Determining the Size of National Income

Natural Resources: Availability of land, minerals, forests, rivers, etc.
Human Resources: Size, skill, efficiency and education of labour force.
Capital Resources: Availability of machines, tools; depends on past savings and investment.
Entrepreneurship & Organisation: Ability to organise resources, take risks and innovate.
Social & Political Structure: Social attitudes, government policies and support for growth.
Technical Know-how: Level of technology and scientific knowledge.
Political Stability: Stable government encourages production and investment.

Key Points: National Income and National Welfare

National income is often used as an indicator of national welfare, but it is not fully reliable.
Higher national income may not reduce inequality or poverty due to unequal income distribution.
It does not show unemployment, quality of life, or type of goods produced.
Growth may occur at the cost of environment and health due to pollution and over-industrialisation.
Per capita income is only an average, not a true picture of living standards.
Hence, modern economists suggest sustainable measures like Green GNP for real welfare.

Key Points: Relation between Economic Welfare and National Income

According to Pigou, economic welfare is closely related to national income as both are measured in money.
Increase in national income raises welfare only if per capita income increases and more consumption goods are available.
Welfare does not increase if income rises due to exploitation, war production, population growth, or pollution.
Distribution of income matters: transfer from rich to poor generally increases welfare; the reverse reduces it.
Excessive taxation on the rich or misuse of income by the poor can reduce welfare.
Economic welfare increases when income growth is fair, productive, and used for improving living standards.

Key Points: National Income as a Measure of Economic Welfare

GNP is not a perfect measure of welfare because it ignores many important factors.
It excludes leisure, quality of life, non-market activities, and external effects like pollution.
GNP does not consider what type of goods are produced (necessities vs luxuries).
Higher GNP may reduce welfare due to pollution, congestion, or longer working hours.
Hence, national income is a poor indicator of social welfare.
To improve this, Nordhaus and Tobin proposed MEW (Measure of Economic Welfare), which adjusts GNP by adding leisure and non-market activities and deducting harmful expenditures.

Key Points: Causes of Slow Growth of National Income

Key Points: Suggestions for Increasing National Income