Why might rises in national income be deceptive as indications of increases in material prosperity?

National income is an indicator of a nation’s production, usually calculated as Gross domestic product (GDP). Although the rate of change in GDP can be used to measure economic growth, it is not necessarily a good indicator of a society’s well being. This is for a number of reasons.

One of the main reasons a rise in national income can be deceptive as an indication of material prosperity is inflation. If inflation rates are high in the UK, the chances are that the GDP figures will rise as the UK is an economically healthy country. The rise in national income due to inflation does not mean significant improvements in the population’s well being because although they are spending more money, they are receiving the same product or service. A good example of this is public transport in London. A single adult bus fare in 2003 was 70p. Now in 2006, it has more than doubled to £1.50. The proportion of rise in price is far lower than the improvement in the quality of service, and it can be argued that the service is even worse now! However, some inflation is due to genuine developments in the quality of the produced goods and this could lead to an exaggeration of inflation.

Production does not fundamentally mean consumption. For example, if millions of pounds are invested into the building of a new school, the GDP figure will rise. However, the investment will not lead to the society benefiting from the school straight away as it will take a few years to build. So it would be wrong if we thought that the rise in GDP here increased the current living standards. Nevertheless it will raise future standards. Another example of this problem is when GDP rises due to an increase in exports. This is because when there are exports, it is the consumers abroad that gain rather than the national consumers. A good example of this is the German exports of cars such as BMW and Volkswagen. Many consumers around the world benefited from these exports rather than the Germans, but it is their GDP statistics that will rise from these exports.

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Where consumption has increased due to investment in a particular area such as education health, the insufficiency of certain factors within the sector can mean that the society’s net benefit will not have increased. We have seen this before in education, where corrupt members of staff have simply stole  money from schools. In the health sector, the government in the UK had recently spent millions on a campaign trying to cut down on obesity within school children. We have seen significant changes in school dinners and the amount of sugary foods available to children during school hours, but this is ...

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