This document discusses various measures used to assess national income, living standards, and economic well-being. It explains that gross national income (GNI) per capita is a baseline measure but has limitations. Other indicators discussed include the human development index, index of sustainable economic welfare, Gini coefficient for inequality, and quality of life indicators. The document examines factors like remittances, purchasing power adjustments, and difficulties in accurately measuring concepts like standard of living.

1. National Income, the Standard of Living and Economic Well-BeingA2 Macro Economics

2. GDP and GNI – The DifferenceGDP – 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 locatedGNI = GDP + Net property income from abroad (NPIA)Gross National Income per capita = Gross National Income / Total Population

3. Remittances and GNIRemittances are transfers of money across national boundaries by migrant workersInflows of remittance income can have a major effect on the GNI of many of the world’s poorer countriesTop 10 remittance recipients in 2010 (billions): India ($55.0bn), China ($51.0bn), Mexico ($22.6bn), Philippines ($21.3bn),

4. Measuring The Standard of LivingThe baseline measure is real national income per capitaGross National Income (GNI) divided by the total populationThis gives us a measure of average income per head of populationReal national income per capita rises when real national output grows faster than population over a period of time

5. Real GNI per capita for Brazil

6. The path of rising income for the BRIC nations

7. Putting the change in UK per capita incomes into context

8. Difficulties in measuring living standardsLimitations of GDP as a measure of material “well-being”

9. “...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)

10. Limitations of National Income Accounts – Problems of AccuracyNational income accounts have numerous limitations:Problems of measurementThe 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 outputErrors in inflation / cost of living measures lead to further errors when calculating real income/output per headDubious accuracy of the population statistics

11. 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

12. Limitations of GDP (2) – Problems of InterpretationInequalities in income and wealth between householdsAverage incomes may rise but relative poverty increaseRegional differences in GDP per head and other indicatorsDifferences often greater within regions rather than betweenExternalities need to be considered Economic welfare can diverge from social welfareNegative 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

13. Income Inequality in the UK

14. Measuring inequality using the Gini CoefficientThe Gini coefficient condenses the entire income distribution for a country into a single number between 0 and 1The 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 incomeA value of 1 corresponds to inequality in its most extreme form, with a single individual having all the income in the economyThe 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

15. The Gini Coefficient for the UK

16. Gini Coefficients for a selection of countries

17. Another way of looking at inequality

18. More problems of Interpretation with UK GDP StatsThe changing quality of goods and services – not always reflected in market pricesThe balance of output between consumption and Investment – affecting living standards both today and in the futureWorking hours and sacrifice of leisure hours, impact on family lifeValuing life expectancy and valuing years of healthy life expectancy

19. Indicators of Quality of LifeThe government has introduced an annual assessment of quality of life in the United KingdomRange of economic and social indicators are used includingEconomic growthSocial Investment in public assetsEmployment levelsHealth indicatorsEducation and trainingHousing qualityEnvironmental indicatorsTransport Land useWaste and waste disposal

20. Measuring The Standard of LivingOther measures give a broader assessment of living standardsEnvironmental Indicators (sustainable economic welfare)Social (Quality of Life) Indicators Human Development Index (United Nations)Index of Sustainable Economic Welfare (ISEW)Index of Economic Welfare

21. 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)

22. 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

23. United Nations Human Development IndexThe HDI is a composite measure of economic and social welfare that has three main componentsKnowledge: 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).

24. Improvements in Mortality Rates

25. Limitations of the Human Development IndexHDI notably fails to take account of qualitative factors, such as cultural identity and political freedomsThe 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 misleadingThe 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

26. Index of Sustainable Economic Welfare (ISEW)ISEW is devised by the New Economics Foundation and further developed by Friends of the EarthISEW adjusts the basic GDP data for Future Damage / Loss of Natural CapitalCosts of Environmental DamageDefensive ExpendituresAdjusted for Service Value of Consumer ExpenditureAdd Non-Defensive Public ExpenditureServices from Domestic LabourIncome InequalityThe annual growth of Sustainable Economic Welfare per capita is often lower than growth of real GDP per capita

27. GNI per capita - Making a PPP adjustment!

28. Adjusting for a purchasing power parity standardNational income data can be used to make cross-country comparisons of living standardsConvert 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

29. Limitations of the PPS adjustment processThe actual exchange rate for a country is unlikely to be at purchasing power parity levelsNot all output is traded internationally – some goods and services are produced only for domestic consumptionDifferences in degree of competition and monopoly power in local and national markets affect relative pricesLocal indirect taxes and tariffs cause differences in the cost of living

30. Economic Well-BeingA broader measure of our economic health and happiness!Involves a degree of subjectivity about what to include and the weights given to each aspectHealth outcomesWork-life balanceFinancial and job securityEducational outcomeEnvironmentCommunityLife Satisfaction

31. Should we have a new style of happiness index?

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