Professor Heather Grob St. Martin’s University, © GNP and Welfare Professor Heather Grob St. Martin’s University, ©

Why do we use measurements at all? What is the social goal? Central question: What measures should be used to guide economic policy? Why do we use measurements at all? What is the social goal?

Expectations Understand what GNP includes and what it measures Discuss welfare and why sustainable income measures are needed Identify alternative measures: ISEW, MEW, HNA Distinguish between growth and development

Macroeconomics Economy as whole Fiscal policy= taxing and spending Monetary policy= supply and demand of money, interest rates “Income theory” What is the goal?

Traditional Growth Theory -- Adam Smith Perfect competition is the main spur to economic activity, such that firms seek to produce at the lowest possible cost Division of labor allows increased productivity Land and capital were emphasized. Technology was discussed but not viewed as being “endogenous”, or internal, to the economic decision-making process.

The “invisible hand” quote Every individual...generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. (The Wealth of Nations, Book IV Chapter II ,1776)

What ruins Smith’s nice result? Monopoly Failure to have competitive markets Motivations other than self interest Misallocation of products Unemployment

Fallacy of composition: whatever is true for the part must be true for the whole Examples of fallacy of composition: on worker may gain employment by working for a lower wage, but this is not necessarily true for all workers because if all workers lost income, aggregate demand (demand for all goods and services) would fall, and this means that spending would drop as would jobs. The whole can be greater than the sum of its parts. The forest ecosystem functioning is due to the parts working together. In the end, we must remember that in the physical world, production and consumption, and any resulting income is really just transformation to waste. So, the GNP as it measures production and consumption as inputs to economic growth, is really just a measure for the value of things transformed. GNP also leaves out a lot of information about costs.

GNP: Gross National Product Definition: market value of all final goods and services produced and sold in a given year GNP or Y= C + I + G + X-M Y= national income C= consumption I=investment G= government expenditures X= exports M= imports

GNP does not measure Welfare Distribution of wealth Human development or capacity for development Uneconomic growth Unpaid work Inputs to production Natural resources (“first pillar of economic growth”) GNP measures Quantity of all goods and services summed up Economic activity Often its assumed that total welfare and economic welfare move together

Is growth and obsolete measure of welfare? Measured Economic Welfare (MEW) was correlated with the GNP from 1929-1965 (Nordhaus and Tobin, 1972) Index of Sustainable Economic Welfare (ISEW) was correlated for a time but turned negative after 1980 (Costanza, Farley, Templet, 2002).

How would you measure economic success?

Meeting human needs? Absolute needs Relative needs, relative poverty How much do we need to consume? to have? to function well? What will improve quality of life? What do future generations need?

Chapter Summary GNP= C + I + G + X-M GNP is not a perfect measure Real GNP is inflation-adjusted Alternative measures to welfare and development

Cobb, Evers, Daly conference Think about it! Why haven’t we moved to energy efficient technologies by now? What “public bads” are included in the GNP? Do you agree with Daly’s statement that there is something “fundamentally wrong in treating the earth as if it were a business in liquidation” ? What can or should be done? SHOW VIDEO FROM 14:00 TO 29:00 AND FROM 36:00 to 42:00