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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

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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

  • 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:

    • 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


  • GNP = C + I + G + (X - M)

  • Where:

    • 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

      • 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?


  • 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


  • 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.


  • 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 high-income levels economic growth leads to environmental improvement.

  • This implies that the environmental impact indicator is an inverted U-shaped function of income per capita.


  • 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


  • 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

  • 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?


What is the cost?

Environmental degradation?

  • Remember Kuznets curve and IPAT


    Depends on what GDP really measures – is it an indicator of wealth?

What is (not) included in GNP?

  • Ignores income distribution

    • Can be fixed using Gini coefficient

  • Rough measure of employment

  • Must use real or constant values

    • Always use deflators

  • Does not capture well quality of products

What is (not) included in GNP?

5. Excludes some non-market and non-productive 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 non-productive 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

  • Includes various expenditures such as:

    • Commuting

    • National defense

    • Police

    • Sanitation etc.

What does GNP measure?

  • Wealth?

  • Sustainable income?

  • Hicksian income?

  • Economic development?

  • Sustainable development?

  • Economic welfare?

  • Human welfare?

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