3. Factors Determining Level of well
Being (How rich you are?)
• The savings rate, which determines the
person’s ability to accumulate capital.
4. Factors Determining Level of well
Being (How rich you are?)
• The growth rate of the efficiency of labor,
which depends on :-
Education
Cumulative Knowledge
Adaptive Social skills
Same factor determine well being of country.
5. Factors Determining Level of well
Being (How rich you are?)
• In past, when efficiency of labor was growing
slow, inherited wealth also played important role
in determining people’s station. Now days
inherited wealth matters relatively less and your
personal earning and saving matters more.
• Now day the growth rate of your personal
"efficiency of labor" will be a big factor in
determining your place in the distribution of well-
being.
6. Who is rich?
• Economists looked at capital accumulation as
the main factor in economic growth and
individual wealth.
• In Marxist economics, it is capitalists who
save and accumulate the economy's capital.
7. Does saving leads to wealth?
• However, saving is not the only road to
wealth, for a nation or for an individual.
• Most people living under communist
dictatorships are worse off than ordinary
workers under capitalism, because communist
dictatorships do not do well at adapting to
advances in knowledge.
8. Measures of economic well-being
• Income is the amount of money that an individual
or a household earns in a year. Income is a flow.
• Consumption is the value of goods and services
that an individual or a household consumes in a
year. Consumption is a flow.
• Wealth is the value of the assets of an individual
or a household at a point in time. Wealth is a
stock.
9. Income as a measure of well-being
• Income has a transitory component. Some years, people
earn windfalls, due to unusually large bonuses or high
profits from personal businesses. In other years, people
earn less than usual, because they might be laid off part of
the year or they may own a business that does poorly that
year.
• Income also has a "life-cycle" component, meaning that it
depends on where you are in the life cycle. A graduate
student may have a low income, but once he/she
completes his/her degree their income will likely take a
leap. A retired person may have a low income, but he has
sufficient wealth to sustain a lavish lifestyle.
10. Wealth as a measure of well-being
• Wealth also has some shortcomings as a measure of
well-being.
• Statistical measures of wealth count only financial
assets, without taking an individual's earning power
into account.
• A new graduate of medical school may have no wealth
(in fact, he could be carrying a large debt on a student
loan), but his prospects for future earnings may be
bright.
• In general, younger people have less wealth than what
they will be able to accumulate later in their lives.
11. Consumption as a measure of well-
being
• People seem to make consumption decisions
more on the basis of long-term income and
wealth than on the basis of current income and
wealth.
• It makes sense to focus on consumption as an
indicator of how people view their economic
circumstances.
• Using consumption as a measure, economists
tend to find that poverty in the United States is
shrinking.
12. Rich and Poor Countries
• International inequality is inequality between
countries.
• Economic differences between rich and poor
countries are considerable.
• According to the United Nations Human
Development Report 2004, the GDP per capita in
countries with high, medium and low human
development was 24,806, 4,269 and 1,184 PPP$,
respectively (PPP$ = purchasing power parity
measured in United States dollars).
13. Facts about distribution of wealth
• Richest 1% of adults alone owned 40% of global
assets in the year 2000.
• Richest 10% of adults accounted for 85% of the
world total assets.
• The three richest people possess more financial
assets than the poorest 10% of the world's
population, combined.
• As of May 2005, the three richest people in the
world have assets that exceed the combined
gross domestic product of the 47 countries with
the least GDP.