National Income At Constant Prices

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National Income At Constant Prices

National income at constant prices is a true measure of the purchasing power of the people. Therefore, it is also known as the real national income. In case national income at constant prices increases, it means that purchasing power of the people has gone up. They can buy more goods and services, their standard of living rises, as a result, economic welfare also rises. National income at constant prices, therefore, is a better index of economic welfare as compared with national income at current prices.

Limitations of National Income at Constant Prices as an Index f Economic Welfare

The following difficulties arise in taking national income at constant prices as an index fo economic welfare:

(1)    GDP does not include many Things. Exclusion of some of these results in underestimation of GDP, to the extent these positively affect living standards, GDP does not work as a true index of economic welfare. At least two such groups of goods and services can be easily identified. These are as follows:

(a)    Unreported activities. These include underground or black economy. The transactions that occur in the underground economy are perfectly legal in themselves. The only illegality is that such transactions are not reported for tax purposes. Because such transactions go unreported, they are omitted from GDP.

(b)    Non-marketed activates. Different types of services are performed that generate high utility but are not paid for Examples are activities performed by a housewife voluntary work, etc. To the extent these are not included, GDP gets underestimated.

Contrary to this, inclusion of some activities overestimates GDP. These are:

(i)    Economic Beds. Rise in real national income will not bring corresponding increase  in economic welfare, if it has adverse effect on the environment. For example, industrialization and urbanization may increase the level of output and national income, but the resulting pollution of water, air and noise i.e., production of economic ‘beds’, instead of increasing economics welfare will decrease it. The money value of economic beds should be subtracted from GNI.

(ii)    Longer working hours at the cost of Leisure. If the people have to work for long hours to raise the level of national income, it will not stimulate economic welfare. Fore example, instead of 8 hours people have to work for 12 hours to raise the level of national income, the size of output will definitely rise. but, exertion and fatigue will have adverse effect on the health of the workers, as a result, economic welfare declines.

(2)    Distribution of National Income. In case, the national income rises but it is unevenly distributed among the people, it will nto promote economic welfare. The law of diminishing marginal utility also applies to the accumulation of wealth. Those who have larger income and wealth get lesser utility from it as compared to those smaller income. Unequal distribution of income does not promote economic welfare.

(3)    Composition of National Income. In case national income comprises more so the consumer goods and services, it will promote economic welfare. Conversely, if the proportion of defense goods, capital goods and luxury goods is larger in the national income, it will reduce economic welfare.

(4)    Fast Exploitation of Natural Resources. Fast exploitation and utilization of natural resources increase the level of national income, but it does not promote economic welfare. Fore example, indiscriminate cutting of tress and deforestation causes problem of soil-erosion, scanty rainfall, environmental pollution, consequently, economics welfare declines.

(5)    Pattern of Investment. In case a large proportion of national income is spent on investment, it will raise the rate of economic growth but not economic welfare. For example. Rs. 3,000 crore are spent on a power project and it takes 5 years to complete it. The economy is not getting the supply of any services for 5 years, hence the level of economic welfare registers a fall.

(6)    Quality of Goods and Services. Increase national income implies larger output of goods and services, but does no tonsure their high quality. Generally, as the size of output increase, it becomes difficult to maintain good quality. Deterioration of quality of goods and services cases fall in economic welfare. In India, after independence, there has been enormous increase in the coverage of postal, communication, banking there has been enormous increase in the coverage of postal, communication, banking and railway services but due to poor quality of these services economic welfare has declined.

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