Download Economic growth, economic development, well

Economic growth, economic
development, well-being
Should we increase it at all cost?
– a question of national planning
Basic Concepts
What is Economic Growth?
• An increase in Gross National Product (GNP)
or GDP
GNP: Measures the dollar value of all goods and
services that an economy produces during a
specified timeperiod - the throughput of stuff
flowing through an economy
GNP in the big picture
• Throughput – a flow
based concept
• Relies on input from
natural capital
Economic Growth
• Is a quantity based concept - not quality
based
• A direct measure of changes in the size
of the economy
– Is it a measure of welfare?
– Development?
– Sustainable development?
Importance of Economic
Growth (via GNP)
• Political Importance
– Domestic (4 year planning)
– International (Must be better to have higher
GNP/Cap., than lower); IMF Policies
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Humanitarian Importance
As an indicator of welfare?
As an indicator of development?
As an indicator of sustainable development?
What can we really use it for?
Basic Concepts
• GDP vs GNP
• Nominal or current GNP
– Not accounting for inflation
• Constant or real GNP
– Accounting for inflation
Basic Concepts
• Constant GNP
– Future values lower, past values higher
((Current GNP)/GNP deflator)*100
Deflators based on:
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Consumer prices (400 goods)
Producer prices (2800 items)
Basic Concepts
• Deflators Example
Consumer price index
CPI = ∑((Pit/Pib)*(Pit/∑Pt))
Basic Concepts
• PPP; Purchasing power parity
• Law of one price: in an efficient market,
identical goods must have only one price
• A purchasing power parity exchange rate
equalizes the purchasing power of different
currencies in their home countries for a given
basket of goods.
• Often used to compare standard of living
• Big Mac Index, Tall Latte index
Big Mac Index
Standard National Accounts
• How to measure GNP?
• 3 methods:
– Expenditures
– Value added of production
– Income
Standard National Accounts
Expenditures
• GNP = C + I + G + (X - M)
• Where:
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C: Personal consumption expenditures
I: Gross private investment
G: Government expenditures
X: Exports
M: imports
Standard National Accounts
• Production side
• The sum of value added: the difference
between revenue and cost.
• Accounted for all sectors of the
economy e.g.
– Agriculture, construction, manufacturing,
trade, finance, services, government
Standard National Accounts
• Income side:
– Income earned by all factors of production
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Employee compensation
Rents (return to housing)
Interest payments (return to lenders of capital)
Payment to owners (return to capital)
Indirect business taxes (return to government)
Standard National Accounts
Net National Product
• NNP = GNP - Depreciation
Depreciation: reduction in capital stock due to
use causing wear and tear.
National Income
• NI = NNP - indirect taxes
Available for spending
Standard National Accounts
• Personal Income:
PI = NI - Corporate profits - contribution to
social insurance + transfer payments +
interest income + dividend income
• Disposable personal income:
DPI = PI - personal tax payments
What does GNP measure?
• Total value of goods and services
produced within an economy in a given
year
• Measure of welfare, development,
sustainable anything?
Definitions
• Welfare: measures quality of life
• Development: Quality based concept
• Economic income:Value of goods and
services
• Sustainable income:How much we can
spend without running down capital stocks can maintain same level of spending in
perpetuity
Definitions
• Hicksian income: Income a man can
consume during a week and be as well off at
the end of the week as he was in the
beginning - living of the interests of both man
made and natural capital
• Economic Welfare: GNP corrected for
expenditures on various regrettable
necessities
• Human Welfare: Separation of means from
ends - a direct measure of well-being
But can GDP be an indicator
of human development or
human welfare?
Longevity and GDP per capita
• Increases rapidly up
to ca 4000$ per
capita
• Small returns after
that
Infant Mortality and GDP per capita
• Declines rapidly up
to ca 4000$ per
capita
• Small returns after
that
Literacy and GDP per Capita
• Increases rapidly up
to ca 4000$ per
capita
• Small returns after
that
Happiness and GDP per Capita
• Increases rapidly up
to ca 4000$ per
capita
• Small returns after
that
• What does this
mean?
• What influences
happiness?
Do changes in GDP correlate
to changes in environmental
quality?
The Environmetnal Kuznets
Curve
• Kuznets curve (KC) is the graphical
representation of Kuznet’s theory from
the 1940’s that economic inequality
increases over time, then at a critical
point begins to decrease.
• Environmental KC (EKC) shows a
hypothesized relationship between
various indicators of environmental
degradation and income per capita.
ECK
• In the early stages of economic
growth degradation and
pollution increase,
• Beyond some level of income
per capita (which varies for
different indicators) the trend
reverses, so that at highincome levels economic
growth leads to environmental
improvement.
• This implies that the
environmental impact indicator
is an inverted U-shaped
function of income per capita.
ECK
• Various functional form found: EKC
does not always apply
– Logistic Increase – e.g. carbon dioxide
emissions
– Constant Decrease – e.g. bacteria in
drinking water
– Inverted U – sulfur dioxide concentration
ECK
• Scale effect: Economic growth
increases environmental pollution if
there is no change in other factors
• Other factors explain the shape e.g.:
– Change in output mix
– Change in input mix
– State of technology
– Production efficiency
– Demand for “improved environment”
The Model
ln(ED) = a +
b1*ln(GDP/P) b2 *(ln(GDP/P))**2 +
error term
What to look for?
• Coefficents
• T-stats
• R - squared
Evidence for the EKC
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Jury still out
Lots of bad stats, theory statistically weak
What about trade effects?
Turning points vary
– Low for local pollutants (3000-4000 USD per cap)
– Others no relationship (deforestation, biodiversity
– River quality, carbon, waste increases with
increasing income
Results – Turning points
Implications of EKC
• If exists do we not
need to worry about
the environment?
• Tunneling through
• Possible increase
later on – statistical
evidence?
Per Capita GDP
Increase GDP at all cost?
Should we always aim to increase GDP?
What is the ultimate gain?
Happiness?
What is the cost?
Environmental degradation?
– Remember Kuznets curve and IPAT
Stress?
Depends on what GDP really measures – is it
an indicator of wealth?
What is (not) included in
GNP?
1. Ignores income distribution
•
Can be fixed using Gini coefficient
2. Rough measure of employment
3. Must use real or constant values
•
Always use deflators
4. Does not capture well quality of products
What is (not) included in
GNP?
5. Excludes some non-market and nonproductive transactions - but not all
– Excluded
– Things produced at home
• If women only counted
• Childcare
• Subsistence production
– Things that are resold or reused
• Increased durability reduces growth
What is (not) included in
GNP?
5. Excludes some non-market and nonproductive transactions - but not all
– Included
• Consumption/production at farms of food and
fuel
• Rental income of all houses
What is (not) included in
GNP?
6. Depreciation of the capital stock
– Neither man-made (Included in NNP) increased depreciation increases growth
– Nor natural capital
What is (not) included in
GNP?
7. Treats some expenditures as final use even if some are intermediate factors of
production:
a) defensive expenditures
• Households (included)
• Firms (excluded)
• Government (included)
b) Army expenditures (included)
What is (not) included in
GNP?
8. No measure for leasure;
• Increased work increases GNP
9. Urbanization increases GNP
10. Includes various expenditures such as:
1.
2.
3.
4.
Commuting
National defense
Police
Sanitation etc.
What does GNP measure?
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Wealth?
Sustainable income?
Hicksian income?
Economic development?
Sustainable development?
Economic welfare?
Human welfare?