Chapter 7 Flashcards
National Income Defn. + formula
measure the monetary value of the flow of output of final goods and services produced in an economy over a period of time
National Income = Wage (W) + rent (R) + interest (I) + profits (P)
Circular flow model implies:
National income (households earn) ≡ national output (firms spend) ≡ national expenditure (households spend)
National expenditure formula
National expenditure = consumption expenditure (C) + investment expenditure (I) + govt expenditure (G) + net exports expenditure [export revenue minus import expenditure] (X-M)
Gross domestic product (GDP)
measures the total money value of all final goods and services produced within the geographical boundary of a country within a period of time, regardless of whether they are produced by nationals or foreigners
Gross national product (GNP)
measures the total money value of all final goods and services produced by the residents of a country during a given time period, usually a year
Net factor income from abroad formula
factor income from abroad - factor income paid abroad = net factor income from abroad
GNP GDP connecting formula
GNP = GDP + net factor income from abroad
Problems encountered in measuring national income
- Problem of non-reported and non-marketed transactions
-> some transactions are excluded because of accounting difficulties, undermining its accuracy
-> some transactions generate goods and services but does not involve monetary exchange
-> nearly impossible to measure the value of goods or services generated - Availability and reliability of data
-> information for national income statistics are collected from various data sources by the department of statistics (DOS). Many figures are simply estimates based on the sample, leading to inaccurate national income measurement
Nominal GDP and Real GDP
- Nominal GDP reflects the money value of all goods and services produced within a territory [includes inflation/deflation]
- Real GDP measures the money value of all final goods and services produced within the territory adjusted for price changes (due to inflation or deflation) [excludes inflation/ deflation]
Real, nominal GDP connecting formula
Real GDP = Nominal GDP x 100/ (consumer price index [current year])
GDP growth rate formula
Real GDP growth rate = Nominal GDP growth rate - inflation rate
Material SOL Defn.
measures the quantity and quality of goods and services accruing to each person in the country
Non-material SOL Defn.
refers to the qualitative aspect of living.
factors that affects a person’s quality of life includes the air quality, the amount of leisure time, the exposure to crime, life expectancy, literacy rates, mental health, stress levels etc. these factors are intangible but affects the quality of life
Limitations in measuring material aspects of SOL over TIME
- Inflation or deflation rates
- Population size
-> Real GDPpc = Real GDP/population size
-> %^Real GDPpc = %^Real GDP - %^population - Distribution of income
-> Gini coefficient is an inequality indicator which measures the inequality of income distribution in a country
-> 0 means perfect equality - Types of goods being produced
- Qualitative change in consumer goods
- Changes in the statistical coverage and reliability of data
- increase monetisation of an economy
Limitations in measuring non-material aspects of SOL over TIME
- Amount of leisure time
- Presence of negative externalities
Limitations of measuring material aspects of SOL over SPACE
- Inflation or deflation rates
- Population size
- Distribution of income
- Qualitative changes in consumer goods
- Difference in statistical coverage and reliability of data
- Conversion to common currency
-> Purchasing power parity (PPP) is used. PPP uses the relative prices of a basket of homogenous goods to determine the country’s exchange rate
Limitations in measuring non-material aspects of SOL over SPACE
- Amount of leisure time
- Presence of negative externalities
Composite indicators of a country’s SOL
- Human Development Index (HDI()
- Measure of welfare (MEW)
- Genuine Progress Indicator (GPI)
Human Development Index (HDI)
- Developed to replace the national income statistics as an indicator of human well-being/economic welfare, which was used to measure some aspects of non-material SOL
3 indicators:
1. Life expectancy at birth
2. Education attainment (adult literacy and years of schooling)
3. Real GDPpc (measured using PPP exchange rates)
- the higher a country’s human development, the higher its HDI (from 0 to 1)
- can be used to make over-space and over-time comparisons
Limitations:
Omits factors that have a significance influence on quality of life, such as environmental degradation, working hours per week, pollution etc.
More indicators need to be considered in order to measure SOL more holistically
Measure of welfare (MEW)
- 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:
-> value of leisure time enjoyed by the citizens
-> value of unpaid work
-> Economic output in the underground economy
-> excludes disamenity (unpleasant quality) which reduce economic welfare
Limitations:
Items which reduce welfare such as pollution, crime offences, stress, etc. may be difficult to compute due to the inability to agree upon a relevant statistic. also better to use GDPpc instead of GDP
Genuine Progress Indicator (GPI)
- it includes the economic contribution of numerous social and environmental factors which the GDP dismisses
- Uses three principles:
-> Account for income inequality while measuring GDP
-> Includes non-market benefits that are not included in GDP
-> identifies and deduct bads such as environmental degradation, human health effects, loss of leisure time etc.
Limitations:
Additional information that accounts for inflation, health and education could have been included in the GPI to make it more indicative measure of SOL
Limitations in using composite indicators to measure SOL
- Measuring the indicators
-> difficulty in quantifying the unquantifiable - Subjectivity of the composite indicators
-> different composite indicators highlights the different aspects of material and non-material SOL
-> residents may value material SOL and non-material SOL unequally - Composite indicators only focus on certain aspects of SOL
-> Eg. HDI does not reflect on inequalities, human security, empowerment etc.
