Lec 3: Growth & Development - concepts & measures

Question 1

How do economies grow?

Answer 1

• 2 drivers of economic growth
  
  • New resources
    ○ More people, oil, etc
  • Technological change
• Both expand the production possibilities frontier, but differently

Question 2

What is GDP?

Answer 2

• GDP: market value of all goods and services produced within a country’s borders
  
  • Doesn’t include intermediate goods

Question 3

What is GNP?

Answer 3

• GNP: Value of all domestic production, even profit that goes overseas

Question 4

What are the 5 problems with GDP?

Answer 4

• Informal sector/underground economy
  
  • Can’t be tracked
• Unpaid work
  
  • Such as housework
• Welfare enhancing vs welfare reducing activities
• Distribution of income
  
  • GDP does not correlate with welfare.
  • i.e. 2 countries with equal GDPs do not necessarily have equal welfares within the countries
• Comparisons with developing countries

Question 5

What are 2 alternatives to GDP for measuring income?

Answer 5

• Purchasing power parity (PPP)
  
  • Adjust GDP up or down depending on basket of goods
• Gross national income (GNI)
  
  • Like GDP but includes flow of income to country in form of remittance and aid
  • Important for small countries

Question 6

What are alternate measures of development, since GDP shouldn’t be used as a measure of development?

Answer 6

• Human development index (HDI)
  ○ Indicator of standard of living
  ○ 3 dimensions are health, education, and living standard
  
  • Gross national happiness index (GNHI)
    ○ Takes psychological well-being into consideration
  • Genuine Progress Index (GPI)
    ○ Income data is adjusted with income distribution and unpaid work

Question 7

How can you assess income inequality?

Answer 7

• Income shares
  ○ What % of the country captures what % of the national income or of assets (e.g. of the land)?
• Lorenz curve and Gini coefficient
  ○ Larger Gini coefficient = more inequality and line further from y=x

Gini coefficien = A/(A+B)