4. NATIONAL INCOME ACCOUNTING
NOTES- GDP AND WELFARE
1. Differentiate between real and Nominal GDP.
Nominal GDP or GDP at current prices
It is the money value of final goods and services produced by normal residents of a country in a year
measured at prices of the current year.

For example measurement of India’s National Income of 2013-14 at the prices of 2013-14.

It does not show the true picture of economic growth of a country as any increase in national income may
be due to rise in price level without any change in physical output.

It is not a good tool for measuring the economic growth of country.

In order to calculate GDP at constant prices, Gdp at current prices is calculated first.
Real GDP or GDP at constant prices
It is the money value of final goods and services produced by normal residents of a country in a year,
measured at the base year price.

Base year is a normal year which is free from price fluctuations.

It shows the true picture of economic growth of a country as any increase in the real national income is
due to increase in output only.

It is a better tool for measuring the economic growth of a country.

We measure GDP at price of base year because national income at current prices may give a misleading
picture of economic performance if prices are constantly rising or falling.
HOW TO CONVERT national income/GDP OF CURRENT YEAR INTO NATIONAL INCOME/GDP AT CONSTANT
PRICES
This can be done by using Price index . ( we know how to find price index as we did in class XI)
It is done with the help of the following formula:
REAL GDP= NOMINAL GDP X100
PRICE INDEX
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

If price level in base year is more than price level in current year then real GDP will be more than
Nominal gDP.
If price level in base year is equal to price level in current year then real GDP will be equal to n
Nominal gDP.
If price level in base year is less than price level in current year then real GDP will be less than
Nominal gDP.
2. GDP Deflator:
GDP deflator measures the average level of prices of all the goods and services that constitute GDP.
It helps to determine the real change in physical output.
GDP deflator=nominal GDP)/real GDP x 100
3. PER CAPITA REAL GDP

THIS helps better in judging the prosperity of country. it indicates increase in per capita availability of
goods and services.

Per capita real GDP =total real GDP/population

This is also indicator of economic welfare.

But it is not an indicator of total or social welfare, but just a part, called economic welfare.
4. GDP and Welfare:
The term welfare means well being of people. Welfare affected by economic factors is called economic
welfare and welfare affected by non economic factors is called non economic welfare. The sum total of
economic welfare and non economic welfare is called total or social welfare.
GDP or per capita GDP can be taken as indicator of economic welfare, which is not adequate because of
the following reasons:
a. many goods and services contributing economic welfare not included in GDP
There are many things which are left out from the estimates of NI like services of housewives, own
account production due to non availability of data and problem of valuation. NI also does not include
goods and services produced for self satisfaction like hobbies sports, but these activities do contribute to
social welfare. This is underestimation of welfare.
b. externalities not taken into account:
when activities of one result in benefit or harms to others with no payement received for the benefit and
no payment made for harm done, such benefits are called externalities.
Activities resulting in benefits are called positive externalities and increase welfare.
Activities resulting in harm to others are called negative externalities and decrease welfare.
GDP does not take into account these externalities.
For eg. Construction of flyover reduces transport costs and journey time of its users who have not
contributed anything towards cost of construction. These benefits are positive externalities but are not
included in GDP , only the expenditure of construction of flyover is in included in GDP. In this case welfare
is much more than indicated by GDP.
Similarly, negative externalities are also not included in GDP. For eg. Factories produce goods but at the
same time produce pollution of water and air. pollutions reduces welfare. But only the value of goods
produced by industries is in included in GDP but harm caused by industries in not accounted for. In this
cases loss may be more than benefit. This is the eg of negative externalities. In this case welfare is much
less than indicated by GDP.
c. change in distribution of income (GDP) may affect welfare:
there is unequal disgtribution of income in economy, coz not all get same incomes. Per capita income also
does not mean that all enjoy equal standard of living.if these inequalities increase rich will become richer
and poor will become poorer. Welfare of poor will decline and welfare of rich will rise. It means high GDP
or High per capita does not always mean welfare for all.
d. all products may not contribute equally to economic welfare:
GDP includes different types of products like food, house police services, defence services etc. All goods
and services do not give equal welfare. So rise in NI may not mean that welfare also rises in same
proportion.
e. Some products may reduce welfare:
GDP includes all final goods like milk, liquor, cigarettes etc. Milk provides satisfaction which is good for
health. But liquor is harmful for health and reduce welfare. But monetary value of both are included in NI
and are given equal importance.where one product increases welfare and other reduces welfare.
5. Green GNPmeasures NI adjusted for the depletion of natural resources and degradation of
environment. it will help to attain a sustainable use of natural environment and equitable distribution of
benefits of development.