Question

Per capita income is not considered a good indicator of economic welfare. Explain this statement by giving two reasons.

Answer 1

Per capita income is not a reliable indication of economic well-being. This assertion is correct.

Two factors can be given to explain this:

1. Distribution of Income: Economic welfare is determined by the volume of income as well as the distribution of money that results from an increase in national revenue; hence, per capita income is only a partial predictor of economic welfare. Even if per capita income has increased, we cannot be assured that economic welfare has improved unless the distribution of income that has followed this increase is also perceived favourably.
2. Composition of Output: Because GDP assesses the value of all finished commodities and services in an economy, it includes products that can have a negative impact on social welfare. Consider a country whose primary source of income is a thriving weaponry industry. If the weapons are marketed and utilised in the United States, the overall state of society is likely to deteriorate. Naturally, the same is true for other goods and services that may have bad societal implications.