Section 3: Macroeconomics
3.1 Measuring national income
·
· circular flow of income: to give structure to the national economy by classifying the economy into sectors
· methods of measurement: to total the value of production of the firms sector
income:
The values of all four payments for factors of production – rent/land, wages/labour, interest/capital, profit/entrepreneurship – that contribute to the production of each and every good and service are totalled.
GDP at factor cost = rent + wages + interest + profit
= R + W + I + π
[This results in a figure for the total income derived from each product, and therefore its value. When summed, this calculates the value of all production in the firms sector.]
expenditure:
The total spending on final goods and services (finished products) is totalled according to who these products are purchased by:
households: consumption
firms –the producing firm: investment
-other firms: investment (in stocks)
government: government spending
overseas customers: exports
However, national income only counts the value of domestic products à spending on imports must be subtracted.
GDP at market prices = consumption + investment + government spending + exports – imports
= C + I + G + (X – M)
output:
The sum of production of all firms is calculated by totalling the value added by each firm to each product.
The value added is equal to the sales of each firm in the “production chain” minus the value of intermediate goods (to avoid the “double counting” intermediate firms’ production).
The change in stocks of the firm must also be taken into account.
GDP at market prices = value added by all firms
= (sales – value of intermediate goods + Δ stocks) of all firms
· distinction between:
gross & net: Gross National Product (GNP) vs Net National Product (NNP)
During the process of producing goods and services, capital resources depreciate. This loss of resource value represents a loss of income – depreciation.
“Net” takes this depreciation into account:
NNP = national income = GNP (at factor cost) – depreciation of capital
national & domestic: Gross Domestic Product (GDP) vs Gross National Product (GNP)
GDP is the value of all goods and services produced in an economy, in a given time period.
Some of the income generated from this production does not belong to the citizens of the country – it is sent overseas. Likewise, there is some income that is earned overseas that is not included in GDP.
“National” takes this into account:
GNP = GDP + overseas property income earned – property income paid overseas
= GDP + net overseas property income
nominal & real: real GDP/GNP/NNP/National Income vs nominal GDP/GNP/NNP/National Income
GDP/GNP/NNP/National income measures are recorded in current year prices and dollars (nominal).
Inflation may inflate the prices used in calculations.
“Real” takes this into account:
Eliminates effects of inflation by use of index numbers to deflate nominal figures
total & per capita: GDP/GNP/NNP vs GDP/GNP/NNP per capita
The size of an economy (and so its national income) can be affected by its population.
Per capita measures allow the national incomes of countries to be compared regardless of population.
eg GDP per capita =
3.2 Introduction to development
· economic growth: an increase in the production of goods and services over time
It is measured by calculating national income (GDP/GNP/NNP).
· economic development: the reduction or elimination of poverty, inequality and unemployment within the context of a growing economy
It should lead to a general improvement in the living standards of the average person.
· differences between economic growth and economic development:
-see Section 1: · choice –diagrams showing economic growth and economic development
...
· GDP vs GNP as measures of growth:
GNP measures the amount of income actually belonging to the people of the country, not foreign investors etc. GDP measures the income stemming from production in the country.
∴ ...
· limitations of using GDP as a measure to compare welfare between countries:
-income distribution: Income distribution may be uneven, that is, the average income is not the amount that the majority of people receive. Developing countries often have an elite high-income group along with widespread poverty.
-different costs of living in different countries: Average income may have differing purchasing power ($ value may not accurately reflect amount of products able to be bought).
-exchange rates (to US$): Conversion to US$ using the market exchange rate may not accurately reflect cost differences between the countries – currency may be overvalued or undervalued.
-non-market production: Informal markets that are ignored in official statistics may exist, thus some production is not counted (eg subsistence farming).
-non-financial factors: Other factors that affect standard of living are not factored in: environmental, security/safety, political freedom etc
-type of production: Production that is focused on capital goods (as opposed to consumer goods) does not add to welfare – eg spending on military goods.
-work-leisure balance: Leisure adds to welfare but has no $ value (ie no. of hours worked per week).
-collection methods/errors/falsification of data: Poorer countries may have poor data collection. Political interference with data may occur.
· allowance for differences in purchasing power when comparing welfare between countries:
Some of the difference in purchasing power between countries may be allowed for through the use of purchasing power parity (PPP). The relative cost (usually compared to in the USA) of a standard basket of goods is measured in terms of points (USA = 100 points), and this may used to adjust average income or GNI per capita figures.
eg GNI per capita Cost of a basket of goods relative to USA
Country A: local A$4000 80 points
Country B: local B$2000 65 points
In PPP terms, country A has:
GNI per capita = $4000 × = US$5000
In PPP terms, country B has:
GNI per capita = $2000 × = US$3077
· alternative methods of measurement:
sectoral transition:
Economic development should lead to a decline in agricultural production and employment, and an increase in manufacturing, and then service industries. That is, low income countries tend to be dominated by agriculture and developed countries by services.
human development index (HDI):
Composite social indicators such as HDI and Physical Quality of Life index attempt to produce a broader quantitative measure of development. Several social indicators (see below) are statistically combined to result in a numerical figure representing the extent of development.
The Physical Quality of Life index combines life expectancy at birth, infant mortality and adult literacy.
HDI combines GDP per capita (PPP-adjusted), life expectancy at birth and adult literacy (aims to measure longevity, knowledge and income). The weighting of the 3 aspects may vary – the index may be adjusted for gender disparity and income distribution.
This combination results in an average deprivation index – a number between 0 (no human progress) and 1 (maximum human progress).
social indicators:
These relate to the 3 “core values” of economic development: life sustenance, self-esteem and freedom/ability to choose – but most prominently life sustenance.
Development should result in the improved provision of basic needs and the elimination of absolute poverty. That is, improved access to food, water, shelter, health services etc and possibly rising incomes, access to education, more income equality and employment opportunities.
examples: calorie intake / protein intake (food)
square metres of floor space (shelter)
life expectancy / infant mortality / people per doctor or nurse (health services)
literacy / % primary and secondary school attendance (education)
income distribution quintile figures (income equality)
changes in social structures/attitudes/institutions:
Economic development often requires or results in changes in social structures, popular attitudes and national institutions.
social structure: family – less focus on family, more focus on individual
tribal loyalties – can result in conflict and civil war which hinder development
popular attitudes: enterprise – acceptance of risk-taking / possible business failures
innovation – new methods, as opposed to traditional methods in production
Miss-Alice