Changes in Economic Welfare and Inequality

Unidimensional Measures

The standard approach used to measure changes in welfare is to assume real per capita expenditure as a measure of welfare (Deaton 1980; McKenzie 1983). In this approach, the consumption basket of an individual is valued at base year prices and the real per capita expenditure of a group is arrived at by aggregating real expenditure on commodities of all individuals within that group. The change in real per capita consumption of the group, thus obtained, is considered as a measure of welfare change. However, this procedure ignores the distributional issues and implicitly assumes that welfare is cardinally measurable and the marginal utility of income is constant (Slesnick 1998). This restrictive assumption is unappealing. The social welfare approach overcomes this problem. The use of SWF for aggregating individuals’ welfare involves normative judgments and presupposes prior agreement on the form of a SWF. The SWF proposed by Atkinson (1970) is widely used in the measurement of group welfare from individuals’ welfare. This paper uses the Atkinson’s Social Welfare Function for analysis of trends in welfare and inequalities.