NATIONAL INCOME AND WELFARE
The relationship between National Income and Welfare is best explained in terms of economic growth (By economic growth is meant capacity expansion). The effect of economic growth is an increase in the National Income. This increase in National Income has several effects on a country's citizens.
1) Assuming a fair distribution of income, the average citizen would be in a position to enjoy a higher living standard.
2) The ordinary households or persons could be able to afford luxury commodities. NB: luxury differs in its definition from one country to another and the determining factor being the level of income. e.g. clothing can be a luxury for some people.
3) It enables the ordinary household to afford leisure which may be regarded as luxury i.e. reducing working hours.
Points 1, 2 and 3 are based on assumption that there exists a fair distribution of the National cake. This may not be the case in fact it is disastrous to rely on GNP, its growth rate and GNP per capita as indicators of economic well being. GNP per capita e.g. gives no indication of how National Income is actually distributed and who is benefiting most from the growth of production. A rising level of absolute and per capita GNP may camouflage the fact that the poor are not better than before. In fact the calculation of GNP, and especially its rate of growth is in reality largely a calculation of the rate of growth, of the incomes of upper 20% who receive a disproportionately large share of the National Product. It is, therefore, unrealistic to use GNP growth rates as an index of improved economic welfare for the general public.
Example: Assuming a 10 people economy and assuming 9 of them had no income and the 10th person receives 100 units of income the GNP for this economy would be 100 units of income and per capita income would be 10 units. Suppose everyone's income increases by 20% so that GNP rises to 120 units per capita income would rise to 12 units. However for the 9 people without income before and currently such a rise in per capita income provides no cause for rejoicing since the one rich individual still has the income. In this case we observe that GNP instead of being a welfare index of a society as a whole is merely increasing the welfare of a single individual.
This exchange though an extreme case is indicative of what happens in the real life situation where incomes are very unequally distributed.