Question

Explain the concept of real income. Explain why, due to the presence of externalities, real national income in itself cannot be treated as a true index of welfare.

Answer 1

Real income refers to the income of an individual or group after taking into consideration the effects of inflation on purchasing power. due to presence of externalities,real income in itself cannot be treated as true index of welfare because an increase in the real income is associated with increased levels of pollution, accidents, disasters, shortage and depletion of natural resources, etc.