GDP and Welfare

Are growth and development

synonymous to each other?

Different development goals of any society

Rising income and standard of living

Equity in the distribution of income and wealth
Expanded role for women, minorities and all social
classes in public life
Equality of opportunity
Increased opportunities for education and selfimprovement
Expanded availability of and improvements in health care
Public and private safety nets to protect the vulnerable
A clean and healthy environment
Efficient, competent and fairly administered public sector
A reasonable degree of competition in the private sector

Measuring Economic Growth and Development

What is the criterion for development?

1.

2.

The economic growth / income criterion:

GNP, GDP, rate of growth
Simple and easy to use
Yet does it really capture development?

The indicators criterion:

HDI, PI, GDI, PQLI
More comprehensive and realistic
Yet difficult to measure and use for international comparisons

The economic growth or economic income criterion

Gross National Product (GNP) is the total value of all income (=

value of final output) accruing to residents of a country,
regardless of the sources of that income.

Gross Domestic Product (GDP) is the total value of all income (=

value of final output) created within the borders of a country,
regardless of whether the ultimate recipient of that income
resides within or outside the country.

Difference between GNP vs. GDP

If an economy were closed, GNP = GDP.

With capital & labor flows across borders, GNP & GDP
diverge from one another.
profits
dividends
interest payments
worker remittances
Net income from the rest of the world= income flows into the
country from the ROW income leakages from the country to
the ROW
If inflows > outflows, then GNP > GDP
If inflows < outflows, then GDP > GNP

GDP & Welfare: Issues

(1) Distribution of GDP

GDP may increase, but welfare may not rise.

In a year, a country has 100 individuals, each earning Rs 10. so

GDP = Rs 1000.
In the next year, 90 individuals earn Rs 9 each & 10 earn Rs. 20
each. So GDP = 1010
Even though GDP has increased but 90% of people have seen a
drop in their income by 10%(10% people income increased by
100%)

GDP & Welfare: Issues

(2) Non monetary exchanges

Lead to under valuation of GDP.

When a chef prepares a meal & sells it in a restaurant, it is a part of

GDP but when he prepares for his own family, it is not.
Childcare provided in a day care is a part of GDP but taking care of
own kids is not.

GDP & Welfare: Issues

(3) Externalities
The value added by an oil refinery is a part of GDP
What about the water pollution it has caused by dumping pollutants
in the river?
Fishermen may loose their source of livelihood.

Thus the value of GDP gets overestimated when negative

externalities exist & have not been accounted for.

GDP & Welfare: Issues

(4) Ignores certain aspects like leisure

Suppose, as individuals become more affluent, they decide to work

for fewer hours.

The measured GDP will go down but the welfare will go up.

Using GNP or GDP for Ranking Nations: Five Necessary

Adjustments
1. Adjusting for Population Size

GNP per capita

GNP
total population

GDP per capita

GDP
total population

Using GNP or GDP for Ranking Nations: Five Necessary

Adjustments
2. Adjusting for Nominal Income

Total nominal GDP = i=1n PiQi

n :the no. goods and services produced;
P the price of each good
Q the quantity of each good
Real GDP at base years prices
2008 GDP at 1992 prices = i=1n Pi,1992 Qi,2008
Alternatively:
Real GDP = nominal GDP / GDP deflator
total nominal GDP in 2008 = US$3,337 million,
the price index for 2008 (deflator)= 331.7
1992, the base year deflator = 100
Then 2008 total GDP x 100 = US$3,337 million x 100
2008 Price Index
331.7
= US$1,006 million

Using GNP or GDP for Ranking Nations: Five Necessary

Adjustments
3. Accounting for Income Distribution: Gini Coefficient
Hypothetical income distribution for a country:

Using GNP or GDP for Ranking Nations: Five Necessary

Adjustments
4. Accounting for value of home or non-market production

Non-market activities left out:

Home-baked cake vs. market bought cake
Kindergarten care vs. home care
Cleaning lady vs. self-cleaning

Yet very important

Womens unpaid activities estimated around 50% of
global GDP
they account for an important share of a populations
consumption contributing to higher life standards.
After all isnt this what development is all about? Higher
life standards.

Using GNP or GDP for Ranking Nations: Five Necessary

Adjustments
5. Accounting for environmental destruction:

A number of productive activities that detract from quality of life,

production of military weapons
operations that cause environmental destruction of forests,
production processes that
spew toxic wastes into the air and water and then force
society to pay for their clean-up or
which create health problems requiring remediation
These are still counted as positive contributions to the
measured level of GNP and GDP.
Rather than adding to welfare, actually these are negative
externalities of the production process.

High-quality growth

Over the 1990s, the IMF seemed slowly to be learning from the
criticisms of its policies .

Now, the IMF sees itself as promoting so-called `high-quality

growth,

defined as growth that is sustainable, brings lasting gains in

employment and living standards and reduces poverty. Highquality growth should promote greater equity and equality of
opportunity. It should respect human freedom and protect the
environment. Obviously, growth cannot be high quality ... if it does
not benefit fully, tangibly, and equitably a group that constitutes
more than one half the population of the world and still bears the
primary responsibility for the care, nutrition, and education of the
worlds children. Achieving high-quality growth depends, therefore,
not only on pursuing sound economic policies, but also on
implementing a broad range of social policies. IMF(1995)

The Indicators Criterion of Development

Measure of Economic Welfare (MEW)

Human Development Index (HDI)

Gender-related Development Index (GDI)

Human Poverty Index (HPI)

Measure of economic Welfare (MEW)

Human Development Index (HDI)

The HDI was introduced in 1990 as part of the United Nations

Development Programme (UNDP) to provide a means of measuring
economic development in three broad areas - per capita income,
heath and education.

The HDI tracks changes in the level of development of countries

over time.

The introduction of the index was an explicit acceptance that

development is a considerably broader concept than
growth, and should include a range of social and economic factors.

Human Development Index (HDI)

An index, which is based on three equally weighted components:

Longevity, measured by life expectancy at birth
Knowledge, measured by adult literacy and number of
years children are enrolled at school
Standard of living, measured by real GDP
per capita at purchasing power parity
HDI = 1/3 L + 1/3 E + 1/3 Y

A scale from 0 (no development) to 1 (complete development).

Human Development Index (HDI)

Countries are classified into four categories

low development - for example, Nepal with 0.540

medium development Maldives with 0.698

high development Uruguay with 0.790.

very high development Norway with 0.944.

A country is in the very high group if its HDI is in the top quartile, in
the high group if its HDI is in percentiles 5175, in the medium group
if its HDI is in percentiles 2650, and in the low group if its HDI is in
the bottom quartile.

Adjustments to the HDI

The gender-related development index: GDI

takes into account the differences between women and men on
the values of the indicators that enter the HDI.

The human poverty index: HPI

corrects for another weakness of HDI in that it does not show
whats happening to the poorest members of society.
slightly different variables in the index e.g. % of people not
using improved water sources; % of children under five who are
underweight, etc.

NET ECONOMIC WELFARE (NEW)

Is a proposed national income measure that attempts to put a value

on the costs of pollution, crime, congestion, and other 'negative'
spinoffs, in order to find a better measure of true national income.

To date, it has not been widely adopted.

Adjustments for leisure would swell per capita NEW growth beyond
per capita GNP growth.

Disamenities of modern urbanisaton (pollution, etc) slow down NEW

growth.