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Changes In Distribution Of National Income

 Changes in the Distribution of National Income

The changes in the distribution of national income take place in two ways.

  1. By Transfer of Wealth from the Poor to Rich

    When as a result of increases in national income, the transfer of wealth takes place in the former manner, the economic welfare decreases. This happens when the government gives more privileges to the richer sections and imposes regressive taxes on the poor.

  1. Transfer of Wealth from the Rich to the Poor

    The redistribution of wealth in favour of the poor is brought about by reducing the wealth of the rich and increasing the income of the poor. The income of the richer sections can be reduced by adopting a number of measures, e.g. By progressive taxation on income, property etc. by imposing checks on monopoly by nationalising social services, by levying duties on costly and foreign goods which are used by the rich and so on.

    Alternatively the income of the poor can be raised in a number of ways e.g. by fixing a minimum wage rate, by increasing the production of goods used by the poor by fixing the prices of such goods, by granting financial assistance to the producers of these goods, by the distribution of goods through co-operative stores and by providing free literacy, social security and low rent accommodation to the poor.

    When the distribution of income takes place in favour of the poor through these methods the economic welfare increases. But it is not essential that the equal distribution of national income would lead to increase in economic welfare. On the contrary there is greater feasibility of economic welfare decreasing the national income. Likewise, when through these efforts of the government the income, of the poor increases but if they expend that income on bad goods like alcohol and speculation or if their population hikes, the fiscal welfare will decrease.

    Both these situations are not real and only express the fears, for the reason that the government while imposing different kinds of progressive taxes on the rich, keeps explicitly in view that taxation should not affect the production and investment badly.


            We arrive at the conclusion that as a result of the increase in national income, the economic welfare will increase provided that the income of the poor increases instead of decreasing and they improve their standard of living and that the income of the rich decreases it such a way that their productive capacity, investment and capital accumulation do not decline.

National income as a member of Economic Welfare

In reality, GNP is not the complementary measure of economic welfare for the reason that the estimates of national income do not include certain services and production activities which affect welfare. We are going to discuss the aspects which affect human welfare but are not included in the GNP estimates.

  1. Leisure

    One of the most significant aspects that affect human welfare of a society is leisure. But it is not included in GNP. For instance, longer working hours may make people unhappy for the reason that leisure is reduced. Alternatively, shorter working hours per week hikes leisure and make people happy. More or less leisure enjoyed by the community as such may affect the total productivity of the economy. But the values of leisure are excluded from the national income estimates.

  1. Quality of Life

    GNP estimates do not include the quality of life, which reflects the community’s welfare. Life is over crowded cities is full of tensions. Roads are over crowded. There is loss in time. Accidents occur daily which kills people. Environment becomes polluted. There are the problems of water, power, housing, transportation etc. Crimes spread. Life becomes complex and the quality of life deteriorates. As a result, social welfare is reduced.

    But all these stresses and strains of city life are not included in the national income estimates. Eccentrically, the efforts made by the governments to remedy the ills of the city life are included in the GNP for the reason that they involve public outlay. Alternatively, in places where there is no congestion, people enjoy fresh air and the beauty of nature the quality of life tends to increase. But this is not reflected in GNP.

  1. Non-Market Transactions

    Some of the non-market transactions hike welfare but they are not included in national income estimates. The services of housewives within the home and community activities such as religious functions, affect the welfare of the people but they are excluded from the estimates of GNP because no market transaction is involved in providing these services.

  1. Externalities

    Likewise, there are externalities which tend to hike or decrease welfare but they are not included in GNP estimates. “An externality is a cost or benefit conferred upon second or third parties as a consequent of acts individual production and consumption.”

  1. Nature of Production

    GNP estimates do not reflect the capacity of different goods to provide different levels of satisfaction to the community. The same amount of money spent on a nuclear bomb or on building a dam across a river adds equally to the national income. But they provide different levels of satisfaction to the community. A bomb does not hike welfare while a dam increases welfare.

  1. Standard of Living

    National income also does not reflect standard of living of the community which determines its welfare. If more national expenditure is incurred on the production of arms and ammunitions and on capital goods and less on producing consumption goods, this difference is not reflected in GNP estimates.

    But the reduction in production of consumption goods tends to decrease the welfare of the people, while the increase in the expenditure on armaments and capital goods does not increase welfare.

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