Page 5 - Lesson Note 1

(iii) It means that the inequality in the distribution of income may increase or decrease.
(iv) If it increase it implies that rich become more rich and the poor become more poor.
(v) Utility of a rupee of income to the poor is more than to the rich. Suppose, the income
of the poor declines by one rupee and that of the rich increases by one rupee. In such a
case, the decline in welfare of the poor will be more than the increase in welfare of the
rich.
(vi) Therefore, if the rise in per capita real income inequality increases, it may lead to a
decline in welfare (in the macro sense).
(d) All products may not contribute equally to economic welfare:
(i) GDP includes different types of products, like food articles, houses, clothes, police
services, military services, etc.
(ii) Some of these products contribute more to the welfare of the people, like food,
clothes, houses, etc. Other products like police services, military services etc. may
comparatively contribute less and may not directly affect the standard of living of the
people.
(iii) Therefore, how much is the economic welfare would depend more on the types of
goods and services produced, and not simply how much is produced.
(iv) It means that if GDP rises, the increase in welfare may not be in the same
proportion.
(e) Contribution of some products may be negative:
(i) GDP includes all final products whether it is milk or liquor.
(ii) Milk may provide both immediate and ultimate satisfaction to consumers. On the
other hand, liquor may provide some immediate satisfaction, but because of its harmful
effects on health it may lead to decline in welfare.
(iii) GDP include only the monetary values of the products and not their contribution to
welfare.
(iv) Therefore, economic welfare depends not only on the volume of consumption but
also on the type or goods and services consumed.

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