National Income, the Standard of Living and Economic Well-Being A2 Macro Economics
GDP and GNI – The Difference GDP – total value of income / output within a nation’s boundaries Gross National Income (GNI) measures the final value of income flowing to domestically-owned factors of production wherever they are located GNI = GDP + Net property income from abroad (NPIA) Gross National Income per capita = Gross National Income / Total Population
Remittances and GNI Remittances are transfers of money across national boundaries by migrant workers Inflows of remittance income can have a major effect on the GNI of many of the world’s poorer countries Top 10 remittance recipients in 2010 (billions): India ($55.0bn), China ($51.0bn), Mexico ($22.6bn), Philippines ($21.3bn),
Measuring The Standard of Living The baseline measure is real national income per capita Gross National Income (GNI) divided by the total population This gives us a measure of average income per head of population Real national income per capita rises when real national output grows faster than population over a period of time
Putting the change in UK per capita incomes into context
Difficulties in measuring living standards Limitations of GDP as a measure of material “well-being”
“...trying to run a complex society on a single indicator like Gross National Product is literally like trying to fly a 747 with only one gauge on the instrument panel…… ……imagine if your doctor, when giving you a full medical check-up, did no more than check your blood pressure” Hazel Henderson (economist)
Limitations of National Income Accounts – Problems of Accuracy National income accounts have numerous limitations: Problems of measurement The shadow economy (i.e. all unrecorded income & spending) Non-monetised transactions (barter, non-marketed output) Risk of double-counting in the calculation of GDP by output Errors in inflation / cost of living measures lead to further errors when calculating real income/output per head Dubious accuracy of the population statistics
How Big is the Shadow Economy? Estimated that in 2010 the UK government lost over £40 billion of unpaid taxes The shadow (black) economy means that official GDP data understates true living standards in the UK
Limitations of GDP (2) – Problems of Interpretation Inequalities in income and wealth between households Average incomes may rise but relative poverty increase Regional differences in GDP per head and other indicators Differences often greater within regions rather than between Externalities need to be considered Economic welfare can diverge from social welfare Negative externalities can add to official GDP – but clearly do not improve social welfare (e.g. Cost of cleaning up pollution) Tax burdens / quality of public services
Measuring inequality using the Gini Coefficient The Gini coefficient condenses the entire income distribution for a country into a single number between 0 and 1 The higher the number, the greater the degree of income inequality. A value of 0 corresponds to the absence of inequality, all individuals have the same household income A value of 1 corresponds to inequality in its most extreme form, with a single individual having all the income in the economy The value for the Gini-coefficient varies enormously across different countries – the next chart tracks what has happened to the coefficient for the UK since the mid 1990s
More problems of Interpretation with UK GDP Stats The changing quality of goods and services – not always reflected in market prices The balance of output between consumption and Investment – affecting living standards both today and in the future Working hours and sacrifice of leisure hours, impact on family life Valuing life expectancy and valuing years of healthy life expectancy
Indicators of Quality of Life The government has introduced an annual assessment of quality of life in the United Kingdom Range of economic and social indicators are used including Economic growth Social Investment in public assets Employment levels Health indicators Education and training Housing quality Environmental indicators Transport Land use Waste and waste disposal
Measuring The Standard of Living Other measures give a broader assessment of living standards Environmental Indicators (sustainable economic welfare) Social (Quality of Life) Indicators Human Development Index (United Nations) Index of Sustainable Economic Welfare (ISEW) Index of Economic Welfare
GDP and the Environment “If a truckload of toxic chemicals spills somewhere, the money spent cleaning it up is added to the GDP. If nearby residents can no longer use their wells for water, their expenditures on bottled water is added to GDP. If they become sick from exposure to the substance, their medical costs are also added to the official measure of well-being” Mike Nickerson (Sustainability Project, Ontario)
Human Development in Focus “Human development is the expansion of people’s freedom to live long, healthy and creative lives; to advance other goals they have reason to value; and to engage actively in shaping development equitably and sustainably on a shared planet. People are both the beneficiaries and the drivers of human development, as individuals and in groups” HDR Report, November 2010
United Nations Human Development Index The HDI is a composite measure of economic and social welfare that has three main components Knowledge: First an educational component made up of two statistics – mean years of schooling and expected years of schooling Long and healthy life: Second a life expectancy component is calculated using a minimum value for life expectancy of 25 years and maximum value of 85 years. A decent standard of living: The final element is gross national income (GNI) per capita adjusted to purchasing power parity standard (PPP).
Limitations of the Human Development Index HDI notably fails to take account of qualitative factors, such as cultural identity and political freedoms The HDI figure – takes no account of income distribution. Inequitable development is not human development. PPP values change quickly and are likely to be inaccurate or misleading The 2010 edition of the Human Development Report marked the launch of a new Inequality-adjusted HDI and also a Gender Inequality Index and a Multidimensional Poverty Index
Index of Sustainable Economic Welfare (ISEW) ISEW is devised by the New Economics Foundation and further developed by Friends of the Earth ISEW adjusts the basic GDP data for Future Damage / Loss of Natural Capital Costs of Environmental Damage Defensive Expenditures Adjusted for Service Value of Consumer Expenditure Add Non-Defensive Public Expenditure Services from Domestic Labour Income Inequality The annual growth of Sustainable Economic Welfare per capita is often lower than growth of real GDP per capita
Adjusting for a purchasing power parity standard National income data can be used to make cross-country comparisons of living standards Convert each nation’s GDP data into a common currency (normally the US dollar) Adjustment made to reflect differences in the cost of goods and services in each country The purpose of doing this is that the purchasing power of each unit of currency has (approximately) the same purchasing power
Limitations of the PPS adjustment process The actual exchange rate for a country is unlikely to be at purchasing power parity levels Not all output is traded internationally – some goods and services are produced only for domestic consumption Differences in degree of competition and monopoly power in local and national markets affect relative prices Local indirect taxes and tariffs cause differences in the cost of living
Economic Well-Being A broader measure of our economic health and happiness! Involves a degree of subjectivity about what to include and the weights given to each aspect Health outcomes Work-life balance Financial and job security Educational outcome Environment Community Life Satisfaction
Should we have a new style of happiness index?
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