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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

Economic growth, economic development, well-being

Should we increase it at all cost? – a question of national planning Basic Concepts

what is economic growth
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
GNP in the big picture
  • Throughput – a flow based concept
  • Relies on input from natural capital
economic growth
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
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
Basic Concepts
  • GDP vs GNP
  • Nominal or current GNP
    • Not accounting for inflation
  • Constant or real GNP
    • Accounting for inflation
basic concepts1
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 concepts2
Basic Concepts
  • Deflators Example

Consumer price index

CPI = ∑((Pit/Pib)*(Pit/∑Pt))

basic concepts3
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
standard national accounts
Standard National Accounts
  • How to measure GNP?
  • 3 methods:
    • Expenditures
    • Value added of production
    • Income
standard national accounts1
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 accounts2
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 accounts3
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 accounts4
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 accounts5
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
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
longevity and gdp per capita
Longevityand GDPpercapita
  • Increases rapidly up to ca 4000$ per capita
  • Small returns after that
infant mortality and gdp per capita
Infant Mortalityand GDPpercapita
  • Declines rapidly up to ca 4000$ per capita
  • Small returns after that
literacy and gdp per capita
Literacy and GDP per Capita
  • Increases rapidly up to ca 4000$ per capita
  • Small returns after that
happiness and gdp per capita
Happiness and GDP per Capita
  • Increases rapidly up to ca 4000$ per capita
  • Small returns after that
  • What does this mean?
  • What influences happiness?
the environmetnal kuznets curve
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
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
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
implications of ekc
Implications of EKC
  • If exists do we not need to worry about the environment?
  • Tunneling through
  • Possible increase later on – statistical evidence?
increase gdp at all cost
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
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 gnp1
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 gnp2
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 gnp3
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 gnp4
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 gnp5
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 measure1
What does GNP measure?
  • Wealth?
  • Sustainable income?
  • Hicksian income?
  • Economic development?
  • Sustainable development?
  • Economic welfare?
  • Human welfare?