The following points will highlight the five qualifications required for national income as a measure of welfare.
1. The rise in national income may be due to inflation.
2. Population changes should also be taken into account. For example, if over a certain period the national income of a country rises by 25%, but over the same period there is a 40% increase in the population, can we say that living standards have increased? If we wish to use national income statistics to find out something about the standard of living, the important figure in this respect is national income per head of the population.
3. Rises in national income may be accompanied by effects which adversely influence the standard of living of the people. Much has been heard in recent about pollution and its dangers. It may be that a rise in national income has been accompanied by an increase in the amount of pollution and this environmental damage may more than offset any advantageous effects of the rise in national income.
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Again, it may be that the national income of a country has risen because people are being forced to work more hours. Can we then say that the standard of living has risen, i.e., the people are better-off?
4. It is important to bear in mind the distribution of the national income. If there is an increase in national income, but all of this increase goes to only a few people, can we say that the standard of living in the country, in general, has risen?
In fact, a comparison based on Gross National Product per head is subject to the general limitations of arithmetical averages. For example, it reveals nothing about the distribution of goods and services. A rise in the average figure per head does not show whether the increase has gone to a small number of very wealthy people, leaving the rest of the community exactly in the same position as before—or whether the increase has been shared equally by everyone.
5. Fifthly, the Gross National Product per head figure reveals nothing about the composition of the goods and services available to the community. For example, an increase in the Gross National Product may be due to a rise in spending on military equipment for defence purposes. Hence, while the statistics will suggest a rise in the standard of living, in fact, the extra production does not comprise goods and services which improve economic welfare.
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Similarly, if the Gross National Product figure is increased because of a rise in the output of producer goods (machinery, factory buildings, etc.) the figure per head will give an over- optimistic impression of the standard of living. It is the output of consumer goods and services that determines the current standard of living, although investment in product goods allows a higher standard to be enjoyed in the future.
We see, therefore, that care must be taken in the interpretation of national income statistics. However, having said all these, it must be stated that national income per head figures still provide the best single indication available of changes in a country’s standard of living.
GDP does not present a complete picture of production in the Indian economy; it understates actual output because many goods and services that are produced are never included in the calculation. For example, some goods and services are not included in GDP because they are not bought and sold in a market. Such nonmarket and unmeasured production includes people repairing their own automobiles, painting their own homes, or volunteering in hospitals and nursing homes.
Actions such as these involve the actual production of goods and services and improve the economy’s material well- being, but they are not included in GDP because no pay is involved. If someone were paid to perform these same tasks, the dollar value of those tasks would be included in the accounts.