MEASURES OF GROWTH AND DEVELOPMENT David Anderson Centre College

GNP The final value of goods and services produced by the citizens of a country. Most U.S. Economists switched to GDP in 1991.

GNP

GDP The final value of the goods and services produced within a country’s boundaries.

3 Methods of Calculating GDP  Value Added  Income  Expenditure GDP is calculated by the Bureau of Economic Analysis, an agency within the U.S. Department of Commerce. The Trick is to avoid double counting.

Value Added Approach The value added approach avoids double counting by looking only at the incremental change in the value of goods at each stage of production.

$1 worth of Green Coffee Beans $3 worth of Roasted Coffee Beans $20 worth of Coffee

+1 $1 worth of Green Coffee Beans $3 worth of Roasted Coffee Beans $20 worth of Coffee

+1 $1 worth of Green Coffee Beans +2 $3 worth of Roasted Coffee Beans $20 worth of Coffee

+1 $1 worth of Green Coffee Beans +2 $3 worth of Roasted Coffee Beans +17 $20 worth of Coffee GDP = = 20

Income Approach The value of income is an estimate of the value of output because payments for output become someone’s income.

Income Approach Double counting doesn’t occur because payments for raw materials and intermediate goods come out of the earnings of retailers as they purchase goods and become the income of workers at intermediate stages of production.

Income Approach For example, when Starbucks earns $20 for a bag of coffee, it pays $3 to the roasters, who pay $1 to the growers, so: the income of Starbucks workers/owners is $20-$3=$17; the income of roasters is $3-1=$2; the income of growers is $1.

Income Approach National Income includes Employee compensation Interest payments, as on bank deposits and bonds Rental income received by landlords Corporate profits Proprietor's (that is business owners’) income

Income Approach Adjustments add items that are part of the value of production but not part of the value of income, such as net foreign factor income (what foreign investors earn on assets in the U.S. minus what U.S. investors earn on assets elsewhere), capital depreciation; and remove items that count toward income but not toward production, such as government subsidies.

Income Approach 2009 Gross domestic product $ trillion Gross national product $ trillion National income $ trillion

Expenditure Approach Sum the value of expenditures on qualifying output: Consumption spending by households Investment spending by businesses (e.g., buildings not bonds) Government spending Net exports (exports minus imports) C + I + G + N

Expenditure Approach Double counting is avoided by looking only at “final” goods and services and not raw materials and intermediate goods. Goods are counted in the year in which they are made. Used goods are not counted. C + I + G + N

GDP as a measure of welfare The Problem: GDP growth can be good or bad

GDP Grows with Divorce, Disaster, Disease

GDP ignores leisure, home production

GDP doesn’t account for pollution or a healthy environment

Standard of Living vs. Quality of Life Standard of Living  Income  Possessions Quality of Life  Freedom  Health/Fitness  Education/Literacy  Environment  Beauty  Family/Friends  Leisure  Standard of Living  Income Distribution  Spirituality

Alternative Measures  the Measure of Economic Welfare (MEW)  Net National Welfare (NNW)  the Index of Leading Cultural Indicators (ILCI)  the Index of Social Health (ISH)  Economic Aspects of Welfare (EAW)  the Green GDP  the Genuine Progress Indicator (GPI)  the Index of Sustainable Economic Welfare (ISEW)  Human Development Index

Index of Sustainable Economic Welfare ISEW = personal consumption / distribution inequality + household labor + value of services from consumer durables + streets and highways + public expenditures on health and education - consumer durables – defensive private expenditures on health and education - national advertising – commuting costs – cost of urbanization - cost of auto accidents – cost of water, air, and noise pollution - loss of wetlands and farmlands – depletion of non-renewable resources - long-term environmental damage + net capital growth + change in net intergenerational position

Net National Welfare NNW = GDP + nonmarket output – externality costs – pollution abatement and cleanup costs – depreciation of created capital – depreciation of natural capital.

Human Development Index The HDI combines three basic dimensions:  Life expectancy at birth, as an index of population health and longevity  Knowledge and education, as measured by the adult literacy rate (with two-thirds weighting) and the combined primary, secondary, and tertiary gross enrollment ratio (with one-third weighting).  Standard of living, as measured by the natural logarithm of gross domestic product (GDP) per capita at purchasing power parity (PPP) in United States dollars.

Index of Sustainable Economic Welfare Time GDP ISEW

Human Development Index

Genuine Progress Indicator ndicators/GPI.html Time GDP GPI

Create your own!