NI AND SOL Flashcards
what is the definition of gdp
gdp is the value of all final goods and services produced by FOPS within a countrys geographical boundaries during a given period of time
what is the definition of gni
gni is the value of all final goods and services produced by FOPs that are owned by residents of a country regardless of geographical boundaries.
why is real income used to account for changes in SOL
to account for changes in the GPL. by valuing a countrys final output at fixed prices, any increase in value must be due to a rise in the economys output reflecting an economy that is better able to satisfy the needs and wants of its people. Since a rise in noninal income could be due to increase in prices, in this case there will be negligible increase in output and no improvement in material SOL
why is per capita used to account for changes in SOL
to account for changes in population size over time. as long as the countrys real income rises faster than its population growth, then this implies that the average persons purchasing power and thus level of consumption of goods and services has increased, leading to an improvement in material well-being.
what are the limitations in using real national income per capita
- presence of underground economy
- changes in the size of non-market economy
- distribution of national income
- changes in composition of national income
- ignores non-material aspect of SOL
how does the growing size of the underground economy limit comparison of living standards over time
the underground economy is the sector which transactions are not reported to the govt. transactions like the illegal production such as that of illegal firearms and drugs and legal activities like moonlighting and casual jobs. these unrecorded transactions understate the countrys NI leading to an understated change in living standards
how does the distribution of national income limit the comparison of living standards over time
an increase in real GDP per capita may not necessarily reflect an increase in income for all residents equally since GDP reports the income of an average citizen. If the increase in income was concentrated in the hands of a rich minority then the typical well-being on an individual may not have improved
how does the change in composition of NI limit the comparison of living standards over time
a countrys output is measured by both the consumer and investment goods produced by their economy. however, material SOL of the people is indepedent on the level of capital goods produced and only dependent on consumer goods. this means an increase in production of capital goods will raised NY but only lead to a future improvement in SOL. rise in NY from exports will overstate rise in SOL if the income generated form exports is not spent on consumer goods.
how does ignoring the non-material aspect of SOL limit the comparison of living standards over time
negative externalities - many production processes create by-products which harm the environment but NY takes no account of externalities. Increase in production often causes noise and environment pollution because profit motivated firms are unlikely to take into consideration the cost on third parties. this leads to poorer health of residents and offset increase in material well-being. increase in NY may be due to ppl working longer and harder hours becoming more stressed and tired, having a lower non-material SOL.
what are some other indicators to use along side real NY per capita
- GINI coefficient
- human development index
- combines education index, income index and life expectancy index
how does the GINI coefficient help address limitations of real NY per capita
GINI coefficient measures the degree of inequality between a country and assigning it a value between 0 and 1 where the higher the value the more income inequality there is. it indicates the extent to which GDP/GNI reflects to living standards of a typical person in that country
how does the life expectancy index account for limitations of real NY per capita
a country with higher life expectancy suggests greater access to quality healthcare goods and healthy food options for better nutrition. it also suggest better work-life balance as with this, stress levels will be lower leading to better health. it may also suggest better air quality as higher quality means risk of negative health impacts is lower.
