Economic Welfare

Readers Question. What is economic welfare? can you please elaborate on how it affects an economy?

Definition of economic welfare: The level of prosperity and quality of living standards in an economy. Economic welfare can be measured through a variety of factors such as GDP and other indicators which reflect the welfare of the population (such as literacy, number of doctors, levels of pollution e.t.c)

Economic welfare is a general concept which doesn’t lend to easy definition. Basically, it refers to how well people are doing. Economic welfare is usually measured in terms of real income/real GDP. An increase in real output and real incomes suggests people are better off and therefore there is an increase in economic welfare.

However, economic welfare will be concerned with more than just levels of income. For example, people’s living standards are also influenced by factors such as levels of health care, and environmental factors, such as congestion and pollution. These quality of life factors are important in determining economic welfare.

Factors influencing economic welfare


  1. Real income – influencing potential consumption
  2. Employment prospects – unemployment significant cost
  3. Job satisfaction – satisfaction at work as important as income and wage
  4. Housing – High income but unaffordable housing diminishes economic welfare. Good, cheap housing essential to economic welfare
  5. Education – opportunities to study through lifetime, influence welfare
  6. Life expectancy and quality of life – access to healthcare, also are lifestyles healthy, e.g. levels of obesity/smoking rates
  7. Happiness levels – normative judgements on whether people are happy.
  8. Environment – economic growth can cause increased pollution, which damages health and living standards.
  9. Leisure time – high wages due to working very long hours diminishes economic welfare. Leisure has economic value.

Economic Welfare and Utility

Economics is concerned with ideas of utility. Utility represents the satisfaction/happiness of a consumer. For example, if you are willing to pay £10 for a CD, then presumably you get a utility of at least £10 worth from the good.

Welfare Economics

This is a branch of economics devoted to determining the optimal allocation of resources in society. It is concerned with allocative efficiency and social efficiency.

Measure of economic welfare (MEW)

This was developed in 1972 as an alternative to GDP. It was developed by William Nordhaus and James Tobin. (Nordhaus, WD and Tobin, J (1972) Is Growth Obsolete?

It adjusts the measure of total national output, to include only items that help improve economic well-being.

In addition to GNP the MEW includes:

  • The value of leisure time enjoyed by citizens.
  • Value of unpaid work
  • Economic output in the underground economy (not measured by official GDP statistics)

The MEW also excludes factors which reduce economic welfare, such as

  • Environmental damage

It is also known as net economic welfare (NEW) (Samuelson and Nordhaus, 1992).

Index of Human Development Index HDI

A related concept is that of Human development index (HDI)


This is a measure which seeks to look at the available choices that people have. It is a composite indicator comprised of 3 basic factors affecting living standards – income, life expectancy and education. The three components are:

  1. Real GDI per Capita, adjusted for the local cost of living (PPP)
  2. Life expectancy
  3. Education – levels of literacy

The highest human development is given a value of 1. Low levels of Human development are given a value close to 0.

Well-being index


This is a measure of economic well-being and life satisfaction, created by the ONS. It looks at health, relationships, education and skills, what we do, where we live, our finances and the environment. It includes positive data but also includes surveys and questionnaires – it also uses quite a new methodology and is experimental in terms of economic data.

What is GDP? and why it is over-rated

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