1. Income & Poverty: In-Class Worksheet
ECNS 317 - INSTRUCTOR
1 Measuring Income
Here are four ways to measure national income:
1. Nominal GDP at market prices: Add up the value of all final goods and services produced in
one country then sold.
2. Nominal GDP at factor cost: Add up the cost of all factor inputs (i.e. capital, land & labor),
also known as the “value-added”.
3. GDP with Green Accounting - subtract environmental factor costs from Nominal GDP.
4. Per capital GDP (PCY) - Nominal GDP divided by national population.
5. Real GDP - GDPreal = GDPnom.
1+r Where r is the inflation rate since the year of comparison (base
year).
1.1 Practice: Income Measurement
Instructions:
1. Calculate GDP at factor cost and at market prices (without Green Accounting)
2. Calculate GDP at factor cost and at factor cost with Green Accounting
3. Calculate per capita income (use GDP without Green Accounting), Assume population=100
4. Calculate real GDP assuming an inflation rate of 15% (r=0.15).
How to use this table: Columns are each industry’s costs. Rows are each industry’s revenues.
Total revenues minus intermediate good revenue is the value of all final goods. Factor costs are
industry costs not associated with revenue from another industry.
Income Account Agriculture Industry Services Final Goods TOTAL REV.
Production Sectors
Agriculture 115 15 5 750
Industry 35 100 35 500
Services 10 30 10 250
Factors Factor Tot.
Land 165 50 35
Labor 200 100 40
Capital† 50 90 60 Imports
Imports 175 115 65
TOTAL COST 750 500 250
Environment∗ -75∗ -100∗ -10∗
Per Capita Final Goods Factor Costs
GDP (PCY) GDP
Real GDP GDP
(Grn Acct.)
†
A.K.A. profits
∗
Environmental factor costs not captured in market value
Economic Development, INSTRUCTOR

2. 2 Measuring Poverty
The most widely used measure of poverty in economics: Foster-Greer-Thorbecke (FGT). It ranges
between 0 (no poverty) to 1 (everyone’s poor with zero income). It may be used to calculate three
separate measures of poverty.
1. Headcount (α = 0)
2. Poverty Gap (α = 1)
3. Poverty Severity (α = 2)
2.1 Practice: Poverty Measurement
Let the poverty line be z = 10. Solve for each of the following FGT indices:
1. Headcount
2. Poverty Gap
3. Poverty Severity
Person Income In Poverty? Poverty Gap (Poverty Gap)2
(z − yi)0 (z − yi)1 (z − yi)2
1 1
2 4
3 7
4 8
5 9
6 14
7 15
8 27
9 30
10 45
Sum
Economic Development, INSTRUCTOR