GDP as a measure of welfare + HDI Flashcards
Income Inequality
If 10% of the population earn 90% of that country’s income it leads to a higher GDP per capita but the other 90% of that population have much lower living standards
Size of informal economy
The informal economy’s finances and activities aren’t declared and officially considered by the government so this means that there are services and goods being produced without the knowledge of the government, meaning that the GDP becomes more inaccurate as not all products are being considered in the measure
Nature of Government spending
expenditure on military goods, jails , policing and the judicial system will show up as a growth of GDP as the government expenditure is as an injection into the circular flow of income
PPP and Cost of Living
The Purchasing Power Parity rate might not match the (real) market exchange rate
Also, the cost of living in a country might be higher, and therefore the Purchasing Power Parity of a currency will be lower so less can be bought with the same amount
Negative Externalities
Negative externality is the indirect imposition of a cost by one party to another
For example, a chemical spill from one company which is cleaned up by the government can be seen as government spending, but is not really helping standards of living
Balance between Consumption and Investment
Consumption is the consumer spending on goods and services, and investment is firms spending on capital goods
Consumer goods improve the standard of living in the short term, whereas capital goods increase the standard of living in the long term
Volunteering + Stay at home parents
Activities like volunteering, caregiving and household work aren’t accounted for in the statistics despite them being crucial for development
They aren’t included because they are non-market activities and so nothing can be measured
However, these roles are crucial for social development as volunteering and care giving can lead to better social states of a country
What is the HDI
Human Development Index
An index used to compare countries on factors such as life expectancy, education and standard of living
HDI scores examples
Switzerland (highest) - 0.967
South Sudan (lowest) - 0.22
Advantages of the HDI
It makes a more fair comparison between countries as more social factors are taken into account
By emphasising human capital it highlights the importance of investments in education and health care
Holds government to account by judging progress in outcomes in important areas such as health and education
Disadvantages of the HDI
It does not take into account any environmental sustainability or political freedom/stability.
There are also only 3 metrics for standard of living which can give an unrealistic picture of the standard of living in a country with only 3 metrics as you need many more to get a real idea of the actual living standards as there are many factors that affect this metric
Easterlin Paradox
It is a paradox stating that at a point in time, happiness varies directly with income, but over time, the long-term growth rates of happiness and income are not significantly related
