Econ II - Session 8 Flashcards
What’s the “benevolent social planner”?
- Hypothetical, benevolent, omnipotent decision-maker
- he’s NOT the government
- Objective: Maximise the social welfare function
What is meant with ‘welfare’ in the social welfare function?
Human well-being
How has social welfare been defined in the 18th century?
- Sum of individual utility
- it can be measured, quantified, aggregated, compared
Condorcet Paradox / voting paradox
Where people A, B, C have to prioritise their choice between X, Y, Z and the outcome is X > Y > Z > X –> inconsistent ranking
Arrow Paradox / Arrow’s Impossibility Theorem
- Social welfare is the aggregation of individual preferences
- Under some desirable properties of aggregation, no reasonable social welfare function exists
Three ways to calculate GDP
- Output compilation: GDP = value of output - value of intermediate goods
- Final expenditure compilation: GDP = consumption + investment + public purchases + net exports
- Income compilation: GDP = wages + capital income + profits
GDP vs GNP / GNI
GDP: domestic, value added within a country (geographic definition)
GNP: national, value added by citizens of a country (citizenship-based definition)
GNI = GNP (World Bank terminology)
GDP paradoxes
- If a machine breaks down, GDP is unaffected
- Inventing something does not change GDP
- Unpaid work does not affect GDP
- GDP ignores consumer surplus
GDP is a measure of … and not of …
GDP is a measure of economic activity (flow), and not a measure of wealth (stock).
4 approaches to measure well-being
- Amend GDP (include total wealth or Green GDP)
- Quantified welfare function (inequality, leisure, life expectancy)
- Specific indicators and aggregates (HDI, HGD, Happy Planet Index)
- Subjective well-being
What is genuine wealth?
The sum of physical, human, and natural capital (w = K + H + R)
What is genuine savings / adjusted savings (World Bank)?
Genuine savings account for broader changes to capital stocks
The net change of genuine wealth Δw = ΔK + ΔH + ΔR
ΔK: depreciation
ΔH: education expenditure
ΔR: natural resource depletion & pollution damages
The utility function and inequality (how does it look like, what does it stand for)
The more consumption, the smaller is the utility gain. When redistributing some consumption from a rich (high consumer) to a poor (low consumer), it:
- reduces utility of the rich (a bit)
- increases utility of the poor (a lot)
- net change of utility is positive
Findings of Jones & Klenow (2016)
- GDP does not describe welfare, but it is highly correlated (0.96)
- Western European well-being is much closer to US than GDP suggests
- Welfare growth has been faster than GDP growth
Human Development Index (HDI)
Composite index to quantify human development established in 1990
Composed of three sub-indices: Life expectancy, years of schooling, GNI p.c.
