Relation Between Economic Welfare and National Income

The effect of national income can be studied in two ways.

Change in the size of National Income

Changes in Distribution of National Income

Changes in the Size of National Income

The change in the size of national income may be given positive or negative. The positive change in the national income increases its volume. Consequently, people consume more of goods and services. Which lead to increase in the economic welfare, whilst the negative change in national income results in reduction of its volume.

Changes in Prices

If the change in national income is due to change in prices, it will be difficult to measure the real changes in economic welfare. For instance, when the national income increases as a result of increase in prices, the increase in economic welfare is not possible for the reason that it is possible that the productivity of goods and services may not have increased. It is more likely that the economic welfare would decline as a result of increase in prices. It is only the real income in national income that increases economic welfare.

Working Conditions

It depends on the manner in which the increase in national income comes about. The economic welfare cannot be said to have increased, if the increase in national income is due to explanation of labour, for instance, hike in production by labourers for longer hours by paying them lesser wages than the minimum. Influencing to put their women and kids to work by not providing them with facilities of transport to and from the factories and residence, and that their residence in slums. 

Per Capita Income

National income cannot be a reliable index of economic welfare, if per capita income is not kept in mind. It is possible that with the hike in national income, the population may increase at the same pace and thus the per capita income may not increase at all. In such a condition, the hike in national income will not result in hike in fiscal welfare and vice versa. 

Method of Spending

The influence of hike in national income on fiscal welfare depends also on the method of spending adopted by the people. If with the increase in income people spend on such necessities and facilities as milk, butter, eggs etc. which hikes efficacy, the economic welfare will increase. But otherwise, the outlay in consuming alcohol, speculating etc. will decrease the economic welfare. Hence the increase and decrease of fiscal welfare depends on changes in the tastes of people.