Download Ch 7--That Imperfect GDP Statistic

That Imperfect GDP Statistic
Shortcomings of GDP
How GDP understates welfare:
1. GDP doesn't include work done by yourself, which would be
greater in LDCs
2. GDP does not recognize the underground economy
3. GDP does not take into account quality improvements in
goods and services
4. GDP does not take into account more leisure time
5. GDP does not take into account greater life expectancy
More problems with GDP
How GDP overstates welfare:
1. GDP ignores negative externalities
2. GDP ignores resource depletion
3. GDP assumes all output is equal (should military output
count as much as production of merit goods?)
4. GDP ignores distribution of income
5. GDP ignores quality of life factors
6. GDP doesn't consider price differences among countries
Purchasing Power Parity
Comparing countries based on GDP per capita is tricky for
several reasons. First off, most countries in the world have
their own currency. In order to compare GDPs of different
countries we have to convert both to a common currency.
The next problem is the issue of prices in different countries. If
I want a haircut in the U.S., I need $15. I could get my haircut
15 times or more in India with $15.
Therefore, we need to use Purchasing Power Parity to really
get an accurate view of differences in GDP per capita
Purchasing Power Parity
Because prices are usually significantly lower
in LDCS, GDP per capita statistics need to be
modified when comparing
countries. Typically, the GDP per capita of an
LDC will be adjusted upwards to account for
the cheaper prices in the LDC. So while there
is a big difference between GDP per capita in
Canada and India, it is not nearly as large
when we convert the figures to Purchasing
Power Parities.
Economic Growth and
Development
Economic growth
When a country increases the amount of goods and services it
produces over a given period of time, it is said to have
experienced economic growth. We usually express that growth
as:
• a % change in real GDP, or
• a % change in real GDP per capita
Of course economic growth is not a given. When an economy
produces less output over two consecutive quarters, we say
that economy is in _________________________________
GDP and GDP per capita
Question: Is it possible for a country to be experiencing
increasing GDP yet see it's GDP per capita fall? If so,
somebody tell me how!
How smart you all are!
If a country is experiencing population growth at a % that is
greater than the % increase in output growth, then the GDP per
capita will actually be lower than it was previously.
Sources of Economic Growth
If you remember the Production Possibilities Curve, you can
probably remember how economic growth is
achieved. Assume we are operating at a point below our
PPC. How can we move to a point on our PPC?
Reaching the PPC
Excellent! We can move to a point on our PPC by reducing
inefficiencies and increasing the employment rate. That would
be a move from point C to point A. But how can we get to B?
Outward Shifts of the PPC
We can shift our PPC outwards three different ways:
• by increasing the quantity of our factors of production
• by increasing the quality of our factors of production
• by developing new technology
Sustained economic growth requires one, if not a combination,
of all three of the above points.
Where's the growth?
Questions on economic growth
Indicate for the following whether we would shift the PPC or
move to a point on an existing PPC without shifting the curve:
1. Unemployment falls
2. New Oil reserves discovered
3. Improvement in the health of the population
4. Increase in productive efficiency
5. New technologies are adopted
Growth rates from 1990-2005
(real per capita GDP)
East Asia/Pacific--5.8%
South Asia--3.4%
Middle East/North Africa--2.3%
High Income Countries--1.8%
Central/Eastern Europe/Former U.S.S.R.--1.4%
Latin America/Caribbean--1.2%
Sub-Saharan Africa--.5%
Sustained real GDP per capita
Countries looking to significantly increase their GDP per capita
must experience relatively high growth rates over a long period
of time. This is the challenge facing the countries of SubSaharan Africa at this time.
Economic Development
Economic Development sounds very similar to Economic
Growth, yet the two terms suggest different things. Do you
remember the difference between growth and development?
Economic Development
Economic Development occurs when economic growth leads to
an improvement in citizen's quality of life, especially in areas
such as:
• reduction of poverty
• increased access to goods and services that satisfy basic
needs (food, shelter, education, healthcare, sanitation)
• increased employment
• better distribution of income
Without these improvements, economic growth is not making
the lives of the people any better.
World Bank Classifications
The World Bank classifies countries into four groups based on
level of GNP per capita. They are:
1. Low income (GNP per capita below $905)
2. Lower middle income (GNP per capita b/w $906-$3595)
3. Upper middle income (GNP per capita b/w $3596-$11,115)
4. High income (GNP per capita above $11,116)
Category four countries are the MDCs. Everybody else are
LDCs.
OK, I'll give you a handout of all countries so you can see
where they are, but you have to ask nicely!
Characteristics of LDCs
Most LDCs experience many of the following:
• widespread poverty
• little use of technology
• low levels of industrialization
• high dependence on agriculture
• unequal distribution of income
• high illiteracy rates
• high unemployment
• high population growth rates
• poor health conditions
• low life expectancy
• environmental issues
Be careful not to generalize however
As we said before, just because a country is a MDC does not
mean there aren't significant numbers of people within that
country who have lifestyles that resemble people living in
LDCS.
And even in the poorest LDCs, there are small numbers of
citizens who enjoy lifestyles comparable to those enjoyed by
people in MDCs.
So it's a complicated business when you try to generalize about
the lives of 7,000,000,000 (and growing) people
Shifting Philosophies
Since the 1950s, strategies have evolved in terms of helping
LDCs.
1950s-1960s
In these years, there was little distinction between economic
growth and economic development. It was assumed that if a
country experienced economic growth, improvements in the
living standards of the general population would inevitably
follow. This turned out to be wishful thinking.
The 1970s
The 1970s
In the 1970s, it became clear that LDCs were actually falling
further behind MDCs in economic growth as well as economic
development. The idea that the benefits of economic growth
"trickling down" to the poor masses was exposed as a fallacy.
1980s to today
Economists have added to the concept of economic
development that was established earlier. Economic
development is seen as urgent so as to lead to:
• increases in self-esteem
• freedom from want, freedom to make choices and freedom
from ignorance and squalor
• overall improvement in all areas of human development
We'll talk more about the complexities in measuring economic
development next time...................