Gross domestic product (GDP) is considered a method to measure the level of output produced by the economy in an accounting period. But the control of people over goods is different than GDP.
For example, we have property outside the country and our nationals are working in other countries. As a result, we earn wage income or property income outside the country. In the same way, foreigners have the same process here. Adjusting for these incomes, we get Gross Domestic Product (GDP).
Here we must remember, there is no difference between GDP and GNP. In India, being a big country, GNP is lesser than GDP. Thus, GDP is the better representative index. Moreover, – we should consider the consumption of fixed capital in the process of production.
We should ensure that the level of capital is kept intact during the year; otherwise fixed capital will be eaten away. Therefore, amount of capital should be subtracted in the process of production. This is known as Net National Product (NNP) which is popularly known as National Income.
In order to compare the welfare of the people at two points of time, or two economies, size of the population must be counted. Therefore, it is suggested that NNPfc should be valued at constant prices and should be divided by the size of population.
This is known as Per Capita Income. In case of international comparisons, national income should be divided by sizes of their respective populations. This will focus on the progress over time.
National income can be measured both at current prices and at constant prices. The national income at current prices includes both changes in physical production and price while national income at constant prices includes changes in the physical production and not prices.
National income at current price may change with the change of prices even though there may be no change in the output. As such national income at constant price should be used to study the relationship between national income and welfare. National income at constant prices is also known as real national income.
Real national income shows changes in physical production. Increased production is shared by the increased population. It is just possible that the increased production may be eaten up and washed away by the excessive increase in population. Thus per capita availability of goods and services can be measured by real per capita income which is real national income divided by population.
There is a hot discussion among economists to use utility of the national income as an index or indicator of welfare of the people. Index, we consider only a mirror, reflecting the well-being of the people. Quality of the life stands for standard of living and development index means the growth of the economy.
Many economists feel that national income is not a good measure of welfare, standard of living and the real growth of the economy. They feel that economic welfare, though imperfect, is not the total welfare which people look for.
The suggestions to correct the weaknesses of the measurement of per capita income are stated below:
(i) Distribution of national income of individuals should not be ignored. It has been pointed out that the welfare of a society depends on what is the size of cake and how it is distributed over common masses in a country.
(ii) People have come to enjoy more leisure over time. However, according to many, this index may be the ultimate aim. But its value needs to be added to the national income to get better results of welfare.
(iii) Social cost of harmful effects in terms of variety of pollution may also be deducted.