Download GNP and Welfare

GNP and Welfare
Professor Heather Grob
St. Martin’s University, ©
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
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?
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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
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 measures
• Quantity of all goods
and services summed
up
• Economic activity
• Often its assumed
that total welfare and
economic welfare
move together
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”)
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
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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?