Get the answer of: Does an Increase in National Income Lead to an Increase in Social Welfare?
National income, or more accurately per capita income, is often used as an index of economic welfare. However, in recent years, recognition of the shortcomings in national income accounts of various countries has prompted considerable interest in developing improved measures of output and economic welfare.
In this context, James Tobin and William Nordhaus of Yale University developed the concept of MEW in 1972. Arguing that the ultimate purpose of economic activity is consumption, not production, they modify the currently used national income accounts data to provide a new index called the measure of economic welfare (MEW).
Even J.R. Hicks has commented in 1939 in his famous Value and Capital, “A man’s income is the maximum amount which he can consume during a week, and still expect to be as well off at the end of the week as he was at the beginning.”
In broad terms, to obtain MEW, GNP totals are adjusted by:
(1) Reclassification of GNP expenditure into C, I and intermediate production, where only C contributes to current economic welfare,
(2) Imputations of the value of services of consumer capital, the value of leisure and the value of household work, and
(3) A negative correction for some of the dis-amenities of urbanisation. Paul Samuelson called it net economic welfare.
It is generally believed that, economic welfare of the people is proportional to the total amount of goods and services available to a country per year. The latter aggregate is called GNP. It is nowadays thought that the GNP does not show economic welfare exactly. The GNP has to be adjusted with several factors.
The GNP has to be added to certain factors, e.g., the psychic satisfaction from leisure and also from the available goods and services. The GNP also does not account for the work done by women in the home, nor their formal pay. From the GNP there are certain minuses also, e.g., hidden pollution and ecological costs. Along with adding in “good” (e.g., pleasurable air-conditioning), GNP should be adjusted so that it subtracts out “bad” (e.g., the pollution of air and water that is involved in generating the power of the air-conditioning).
In 1994, the US Commerce Department unveiled its augmented national accounts with the introduction of environmental accounts (also called “green accounts”) that enable us to estimate the contribution of subsoil assets like oil, gas, coal, etc.
Having reviewed the measurement of national GDP, what should now be out of national what should now be our conclusion about the adequacy of our national accounts as measures of economic welfare? The answer was aptly stated in a review by Arthur Okun.
“It should be no surprise that national prosperity does not grantee a happy society, any more than personal prosperity ensures a happy family. No growth of GDP can counter the tensions arising from an unpopular and unsuccessful war, a long overdue self-confrontation with conscience on racial injustice, a volcanic eruption of sexual mores, and an unprecedented assertion of independence by the young. Still, prosperity … is a precondition for success in achieving many of our aspirations.”
The idea of adjusted GNP was explained by Professors William Nordhaus and James Tobin at Columbia in USA in 1972.
Their views are quoted below:
“Our adjustments to GNP fall into three general categories: reclassification of GNP expenditure as consumption, investment and intermediate; imputation for the services of consumer capital, for leisure and for the product of household work; correction for some of the dis-amenities of urbanisation”.
Nordhaus and Tobin have called it the Measure of Economic Welfare (MEW). Samuelson explained the concept and he called it Net Economic Welfare (NEW).