National Income and Social Wefare

8/4/2019 National Income and Social Wefare

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GNP as a measure of Economic

Welfare Since goods and services satisfy wants, GNP has been

often used as a measure of economic welfare of thepeople

Recent economists believe that NY or GNP (as it isusually defined) cannot be used as a satisfactory

measure

Adjustments, both in form of additions andsubtractions have to be made to the aggregate NY


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Things that should be added LEISURE : People enjoy leisure as much as goods and

services. If the average working hours are reduced, itmay reduce NY or National Output but the welfare ofthe people will increase

NON-MARKETED PERSONAL SERVICES : Like

services of a housewife. Services rendered to oneselflike gardening, painting your own house, etc.


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Net Economic Welfare

NEW = Real GNP Depreciation +Value of leisure + Value ofNon-marketed personal services

Environmental pollution

Regrettable costs


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NEW - Not a true indicator of

economic welfare

4) Improvement in Quality of product NY does

not reflect this

5) Method of Production If NY is increased bymaking the workers work for longer hours or by

introducing labour-saving machinery (causingunemployment)


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Human Development Index (HDI) Human development is the process ofenlarging

peoples choices as well as raising the levels of wellbeing achieved

The United Nations Development Programme(UNDP) prepared the HDI in 1990

HDI focuses on How the people of the country arefaring rather than How much a nation is producing


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Construction of HDI HDI has three dimensions:

A) Life expectancy at birth

B) Educational Attainment

i) Adult Literacy Rate

ii) Combined Gross Enrolment Ratio

C) Real GDP per capita (PPP$)


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Construction of HDI Step 1: Fixing the minimum and maximum values for

each indicator

Source: UNDP Human Development Report, 2005

Sr. No. Indicator MinimumValue

Maximum Value

1 Life expectancy atbirth 25 years 85 years

2 Educationalattainment

a) Adult Literacy Rate 0% 100%

b) Combined GrossEnrolment Ratio 0% 100%

3 Real GDP per capita(PPP US $)

$100 $4000


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Construction of HDI Step 2: Computing Individual Indices

Performance in each field is expressed as a value

between 0 and 1 0 for worst performance

1 for best performance

Index= Actual Value Minimum Value

Maximum Value - Minimum Value


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Construction of HDIA) Life Expectancy Index

For example according to Human DevelopmentReport, 2005 the Life Expectancy at birth in India in2003 was 63.3 years

Thus:

LEI = 63.3 25 = 38.3 = 0.638 85 - 25 60.0


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Construction of HDI B) Educational Attainment Index : It has 2 variables

i) Adult Literacy Rate : The %age of people (agegroup 15 years and above) who can read and write. Thisis given 2/3rd weightage

ii) Gross Enrolment Ratio : No. of students enrolledat different levels of education ( primary, secondaryand tertiary). This is given 1/3rdweightage


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Construction of HDI For example, according to the Human Development

Report, 2005, in India in 2003, the adult literacy ratefor age 15 and above was 61 and the gross enrolmentratio was 55

Adult Literacy Rate = 61 0 = 0.61

100 0

Gross Enrolment Ratio = 55 0 = 0.55

100 - 0


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Construction of HDI EAI = 2/3 (0.61) + 1/3 (0.55)

= 0.4026 + 0.1815

= 0.5841


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Construction of HDI C) Standard of Living Index or Real GDP Per Capita

Index This reflects the quality of life of people they need

resources PCI is the simplest measure of resources at the command

of the people GDP per capita is calculated at constant prices show

changes in physical production in real terms

Real PCI = GDP at constant pricesPopulation To facilitate comparison, PCI of different nations are

converted into PPP US $


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Construction of HDI For example, according to Human Development

Report, 2005, per capita GDP of India was $2892 in2003

SLI = 2892 100 = 2792 = 0.71

4000 100 3900


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Construction of HDI Step 3 : Calculating the HDI

A simple average of the 3 indices is to be taken

HDI = LEI + EAI + SLI

3

HDI = 0.638 + 0.5841 + 0.71

3

= 0.644


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Interpreting HDI values Countries are ranked on Human Development on the

following basis:

HDI value > 0.8 High Human Development

HDI value between 0.5 and 0.8 Medium HumanDevelopment (India falls in this category)

HDI value < 0.5 Low Human Development

Out of 177 countries, India ranks 127th ( HumanDevelopment Report, 2005)

In India, Kerala ranks 1st and Bihar at the bottom

National Income and Social Wefare

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