2.1.1. economic growth
gross national happiness
1) relative income/consumption is more important in terms of happiness than absolute levels of consumption/living standards. unhappiness is a product of inequality, which creates status anxiety 2) politicians should target greater income equality rather than economic growth to improve national happiness. 3) politicians must intervene to make society more equal- to reduce status anxiety. state's duty to transfer income from the rich to the poor to promote national happiness shift policies away from the objective of economic growth and towards a direct attempt to increase happiness
the weaknesses of using GDP per capita to assess the quality of life
1. GDP FIGURES ARE oFTEN INACCURATE AND HAVE TO BE REVISED. Calculating a country's GDP is a mammoth task. imagine using the output method and having to calculate value-added created by every business in the UK! These figures are frequently revised. 2. THE DISTRIBUTION OF INCOME The distribution of income measures the degree of spread around the mean average per capita income. The UK has an uneven distribution of income. This means that there is a sizable gap between the rich and the poor. if economic growth coincides with rising income inequality it is possible that: - GDP per capita could rise - But at the same time the majority of households might be worse off this is because the fruits of economic growth have only been enjoyed by numerically small rich elite. The cause of this growing inequality is a change in the composition of GDP. Since the 1970s labour's share of GDP has fallen, whilst capital's share has risen. The bottom 99% of UK households earns most of their incomes in the form of wages. The richest 1% are asset rich. Therefore, their incomes come in the form of profits, rents and interest. immigration, the demise of trade unions and the threat of outsourcing have all contributed to a slowing of UK wage inflation. In most occupations nominal wage growth has failed to keep pace with inflation. real wages have fallen. However, these very same low wages have increased company profits. This is why UK economic growth has only benefitted the very richest households in Britain. 3. GDP DOES NOT TAKE INTO AccoUNT owNERSHIP- it could be argued that GDP per capital is a poor indicator of a country's material standard of living because it takes into account the value of output produced by foreign owned businesses operating in the UK. The profits made by foreign multinationals operating in the UK do not contribute towards our standard of living. This is because the profits made by companies such as Nissan and Google make in Britain flow out of the country to shareholders living abroad. it could be argued that GNP per capita far better measure of the material standard of living. This is because GNI considers ownership, rather than location; it measures the total income received by British households. Income matters more than the volume of goods produced by a country because income is what households have to live off. 4, GDP DOES NOT CONSIDER THE OUTPUT MIX OF THE ECONOMY - GDP does not take into account the type of goods and services produced. For example, country could experience a crime wave. To cope the government would have to build extra prisons and employ more prison officers. This would cause prison output to rise, increasing GDP per capita. The same principle also applies a natural disaster. The floods of December 2015 will probably increase UK national output, This is because homeowners will have to buy new carpets and furniture. Pollution reduces the quality of life in non-material terms. However, the process of cleaning up pollution can add to GDP. in recent years the has created GDP growth by producing more demerit goods. Demerit goods are products that are over-consumed because the consumer overestimates the private benefit of consuming he demerit good compared to the private cost. Examples of demerit goods include gambling, sugary food, pay day loans and alcohol. Most demerit goods are over-consumed due to imperfect information. As a nation, if we produce and consume more junk food our GDP per capita will rise. However, our standard of living will undoubtedly fall due to health problems caused by obesity. 5. NEGATIVE EXTERNALITIES- Negative externalities are adverse spill over effects that reduce the utility of third parties. Economic may boost country's GDP per capita. However, if production and consumption increases more negative externalities will be produced. Negative externalities reduce the quality of life in non material terms. 6. WORKING HOURS a country could achieve an increase in its GDP per capita if the population agreed to a longer working week. American GDP per capita is higher than France's GDP per capita. As a result, the material standard of living in material terms is higher in America than it is in France. However, before making an assessment of the respective standard of living in both countries it is also important to realise that the average American works a much longer working week than the average French worker. Time spent at leisure also creates utility. Shorter working hours creates a higher standard of living, other things be equal. 7. NON- MARKETED GooDS AND SERVICES official GDP figures may understate the true value of output produced by a country because official figures only include the value of goods and services that have been bought and sold. In many countries activities such as childcare are not included within official GDP figures because these services ar provided internally by households. 30 years ago most childcare provided in the UK went unrecorded because it was provided by mothers. Today, this is no longer so. Most childcare is now provided via professional nurseries and child minders who do charge for their services. As a result of this change UK GDP per capita has increased, but it could be argued that this change overstates the advances in made in the true standard of living. 8, GDP DOES NOT TAKE INTO ACCOUNT THE INFORMAL SECTOR OF THE ECONOMY- The informal sector of the economy consists of so-called Black Markets. Black Market activities are not declared to the government This is usually because either the entrepreneur is breaking the law, e.g. ng drugs, or because they want to illegally evade tax. In many countries GDP statistics do not include the value of goods produced within the informal sector of the economy, Therefore, it could be argued that official GDP figures understate the true level of economic activity taking place within a country. GDP 9, FREEDOM FROM SERVITUDE n addition to the number of goods and services consumed per capita, the duality of life can also be enhanced by religious and political freedoms. For example, a decision m to ban trade unions might reduce the number of working days lost to strikes. As a result the economy might grow and in materia terms the standard of living will improve. But, at what cos It could be argued that the o belong to a trade union and to strike is a fundamental human right. in recent years GDP per capita in China has risen because economic growth has risen faster than population growth. However, it could be argued that the quality of life in China would really improve if a decision was made to establish a democratic form of governance.
in terms of material living standards, whats more important, GDP or GNI
GNI - foreign owned factories operating in the UK's profits will not add to UK living standards as the profits will go to foreign share holders. GDP - the factory will still create jobs, incomes and business opportunities, which all add to UK prosperity
arguments to support that rising per capital incomes lead to a higher material standard of living
HIGHER REAL GDP PER CAPITA LEADs To GREATER HousEHOLD coNSUMPTION- The utility generated when goods and services are consumed adds to the material standard of living. Households finance consumption from disposable income. If per capita incomes rise, households will able to buy more goods and services. Households will receive more utility if they buy more. This is why higher per capita incomes lead to higher living standards. Higher incomes will also enable households to purchase better quality products that are more expensive. Many of these products will generate more utility than older products that they have replaced. HIGHER GDP PER CAPITA LEADS To HIGHER TAX REVENUES Increases in GDP per capita usually arise because the economy has grown at a faster rate than the population. A bigger economy means that there is more economic activity for the government to tax; even if the government maintains tax rates, the government will collect more tax in total if GDP rises. This additional tax income could be used to finance government spending on health and education. If health and education standards have got better the quality of life will improve people; will live longer lives (due to better health care that extends life expectancy) and more enriched lives (better schools will enable the population to gain pleasure from a country's culture). 3. HIGHER GDP PER CAPITA CREATES INCREASED EMPLOYMENT oPPORTUNITIES When economy grows the economy produces more goods and services than it did the year before. To raise output firms will need additional factors of production, including labour. Therefore, economic growth tends to cause an increase in the derived demand for labour. The new jobs created by expanding firms will reduce unemployment. The quality of life improves when unemployment falls because those without work have to live off benefits. Benefit income tends to be well below the average wage rate Therefore, the unemployed will have a lower material standard of living because they will not be able to consume as many goods and services. In addition, unemployment can also cause social problems such crime. In countries where GDP per capita is high there should be fewer of these social problems; the quality of life should be higher.
how to convert nominal GDP at current market prices into real GDP at constant prices.
a GDP deflator is used. the GDP deflator utilises consumer price index inflation that records inflation over time. GDP in the current year at current prices X CPI in the constant price year (base year- where CPI was 100) / CPI in the current year at current prices e.g. 2002 GPD at current prices was £140 bn 2018 GDP at current prices was £200 bn. CPI inflation for this is 2002: 100, 2018:160. 2018 GDP at constant 2002 prices is £200 bn x 100/160
what are the seven big factors affecting happiness according to gross national happiness
family relationships (divorce, bereavement), financial situation (a fall in income), work (unemployment), community and friends (not feeling part of a community), health (chronic pain or mental illness), personal freedom (political freedom, presence of war), personal values (lack of religious faith or inability to look for comfort 'within')
what are the different measures of national income
gross domestic product, gross national income
what are the three methods of measuring national income
income method: measuring the nation's output by adding up all the factor incomes paid to produce the nation's output. rent + wages + profit + interest = national output expenditure method: valuing the nation's output by adding up how much was spent on buying up what the country produced. C + I + G + (X-M) = national output output method: add up the value added created by each firm in the economy because the firm's finished product is often another firm's raw material. value added= price - raw material costs. calculating national income is very time consuming and complex- often calculation errors so GDP and GNI figures often have to be revised.
what is national income
it's the total output of the economy in a year
comparison of rates of economic growth between countries
most countries have their own currencies. to make international comparisons the figures have to be converted into a third currency so that like can be compared with like. usually, the US dollar is used as the common unit of account. The exchange rates used to convert sterling into dollars, and euro into dollars will obviously affect the dollar value of both the UK's and France's GDP measured in dollars. For example, if sterling appreciated against the dollar, the UK economy's GDP per capita in dollars would rise. This would imply that the uK economy had grown, when it had not Market exchange rates are extremely volatile. They can change by the hour according to the supply and demand for currencies on FOREX markets. Market exchange rates are also influenced by monetary policy. For xample, if Bank of England increased interest rates, sterling would become a more attractive currency to the As a result, hot money would flow into sterling. The resulting increase in the demand for sterling would cause sterling to This appreciation would increase the size of the UK economy when measured in us dollar terms. Market exchange rates are also subject to speculation, which adds to the volatility Market exchange rates are therefore unsuitable for use when making international comparisons. using market exchange rates is not reliable when converting GDPs into dollars for international comparison because it is volatile- the supply and demand for it in foreign markets which can change because of monetary policy (increase in interest rates) or foreign speculation. sterling appreciates against dollar -> one sterling buys more units of dollars -> uk gap per capita in dollars would rise -> looks like economic growth but not. economists use purchasing power parity exchange rates to convert currencies into US dollars. purchasing power parity exchange rates is the exchange rate that equalises the cost of living in the two countries that are being compared. a purchasing power parity exchange rate allows comparisons between countries to be made taking into account differences in the cost of living between countries. purchasing power parity exchange rates are more reliable than market exchange rates because they are more stable and are unaffected by foreign currency speculation and by changes in monetary policy. the purchasing power of a currency is determined by the differences in the relative cost of living. by equalising the cost of living, the purchasing power exchange rate equalises the two currencies' purchasing power. this means that the quantity of the currency needed to purchase a given unit of good can be determined and compared to calculate the PPP exchange rate: cost of buying an average basket of goods in country B, in country B's currency / cost of buying the same basket of goods in country A, in country A's currency
nominal vs. real GDP
nominal GDP is measured at current market prices. therefore it does not take into account inflation. real GDP is measured at constant prices. this type of GDP does take into account inflation.
some economists claim that some governments underestimate the rate of inflation. by doing so they can claim that nominal increases in GDP as real term increases. this creates phantom economic growth that does not really exist
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what is a purchasing power parity exchange rate
purchasing power parity exchange rates is the exchange rate that equalises the cost of living in the two countries that are being compared. the purchasing power of a currency is determined by the differences in the relative cost of living. by equalising the cost of living, the purchasing power exchange rate equalises the two currencies' purchasing power. this means that the quantity of the currency needed to purchase a given unit of good can be determined and compared. once the amount of money needed to buy the same average basket of goods is compared, the differences in the quantity of the currency needed to pur case a given unit of a good can be compared. to calculate the PPP exchange rate: cost of buying an average basket of goods in country B, in country B's currency / cost of buying the same basket of goods in country A, in country A's currency
what is gross national income (GNI)/ gross national produce (GNP)
the total money value of all goods and services produced by UK owned companies operating both here in the UK and abroad. GNI does consider ownership.
what is gross domestic product (GDP)
the total money value of all goods and services produced by firms operating within the UK over the last 12 months. GDP does not consider ownership.
how to calculate national income measured in value terms
volume national output x average price level across the economy thus the country's national income in money terms could rise if either: i) the economy has produced a greater volume of goods and services ii) an increase in the average price level (i.e. inflation) but only an increase in goods will raise living standards
what can national income be measured in
volume terms: the quantity of the nation's output, measured in units value terms: the quantity of the nation's output measured in money terms
