Using National Income Figures To Measure A Country’s Standard Of Living Or Social Welfare: Some Qualifications. The standard of living (SOL) otherwise referred to as the level of economic or social welfare Measures the level of material well-being of an individual or household. It refers to the real national income per capita (person) and is measured using the formula;
Although the formula for calculating social welfare tends to suggest that social welfare is only affected by tangible factors, it should be made crystal clear that intangible factors like leisure time, externalities etc have a considerable influence on the level of social welfare or on the standard of living.
Everything being equal, an increase in national income would mean an improvement in the standard of living and vice versa. If the national income of Cameroon increases everything is equal, every Cameroonian is expected to have an improvement in his/her material well-being by having more food, clothing, health care, education, etc. The reverse is equally true if income falls everything being, equal. An increase in national income only leads to improvements in living standards when all other things like income distribution, negative externalities, population changes etc are held constant. In many instances, however, changes in national income may not reflect changes in the standard of living because things hardly remain equal. An increase in national income may not necessarily mean an improvement in the standard of living in the following circumstances:
- The increase in national income has been brought about by an increase in the general price level (inflation) which means that real output may not have increased.
- There are inequalities in the distribution of the newly acquired income meaning that the rich could have been getting richer at the expense of the poor.
- Additional output results in externalities (social costs) such as pollution, congestion, noise, etc. Extemcosts and benefits do not enter national income statistics. External costs do negatively affect the social welfare of people although output could have been increasing.
- Additional output is on non-consumer goods such as armaments, capital goods, etc. In this case, th standard of living would not be instantly improving as it would have been if the additional output hi been comprised of consumer goods like cars, food, clothing, etc.
- Anincrease in national income comes as a result of longer working hours, inferior working condition longer journeys to work and the sacrifice of leisure. This is because it does not make sense to me Pcoplec to have increased wealth that cannot be enjoyed.
- The increase in national income comes as a result ofa surplus of exports over imports. This represents investment abroad and a reduction of available consumer goods at home thus leading to lower living standards in the domestic economy.
- The increase in national income includes payments for services necessitated by the stress of modem living e.g. anti-depressant drugs, clinics for drug addicts and alcoholics.
- The increase in national income is accompanied by a more than proportionate increase in population meaning that there are many more mouths to feed whereas output may not have increased as much.
It is to be observed that there are activities which are not included in national income records but which add to the well being of the society. These include self-provided services, women who cook, clean and care for the home: leisure, etc.
It is equally tq be noted that foreign aid is not formally included in national income statistics but it has considerably helped in improving the living standards of many a developing country. Estimates of the true value of GNP may be imprecise due to the many problems involved with compiling these statistics. It follows that it is risky to use an imprecise data base to measure the standard of living.
Considering the aforementioned weaknesses of national income statistics as a measure of a country’s standard of living, Nordhaus and Tobin have devised Measurable Economic Welfare which adjusts national income figures for leisure, working conditions, unpaid homework, externalities, etc.
The measure of Economic welfare by James Tobin and William Nordhaus is: GDP minus economic “bads” (pollution, congestionetc) regrettable necessities (defence spending, police protection, private security measures) plus household, unreported and illegal production. The additions would be greater than the subtractions for most economics. Other indicators of the standard of living which are equally being used include life expectancy, number of doctors per fraction of’a population, amount of consumer durables like cars, TVs per household. mortality rates, length of working weck, computers, dish-washers, proportion of 16-18 year olds in higher education ete.
By way of conclusion, what is being said ts that national income figures can be used to measure a country’s standard of living but such a measure is subject to too many qualifications to the extent that economists and others are increasingly preferring other parameters for a measure of a country’s standard of living.