1. Economic growth, economic development, well-being
Should we increase it at all cost? – a question of national planning Basic Concepts

2. 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

3. GNP in the big picture Throughput – a flow based concept
Relies on input from natural capital

4. 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?

5. 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?

6. Basic Concepts GDP vs GNP Nominal or current GNP Constant or real GNP
Not accounting for inflation
Constant or real GNP
Accounting for inflation

7. Basic Concepts Constant GNP ((Current GNP)/GNP deflator)*100
Future values lower, past values higher
((Current GNP)/GNP deflator)*100
Deflators based on:
Consumer prices (400 goods)
Producer prices (2800 items)

8. Basic Concepts Deflators Example Consumer price index
CPI = ∑((Pit/Pib)*(Pit/∑Pt))

9. 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

10. Big Mac Index

11. Standard National Accounts
How to measure GNP?
3 methods:
Expenditures
Value added of production
Income

12. Standard National Accounts
Expenditures
GNP = C + I + G + (X - M)
Where:
C: Personal consumption expenditures
I: Gross private investment
G: Government expenditures
X: Exports
M: imports

13. 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

14. 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)

15. 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

16. 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

17. What does GNP measure?
Total value of goods and services produced within an economy in a given year
Measure of welfare, development, sustainable anything?

18. Definitions 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

19. Definitions
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

20. But can GDP be an indicator of human development or human welfare?

21. Longevityand GDPpercapita
Increases rapidly up to ca 4000$ per capita
Small returns after that

22. Infant Mortalityand GDPpercapita
Declines rapidly up to ca 4000$ per capita
Small returns after that

23. Literacy and GDP per Capita
Increases rapidly up to ca 4000$ per capita
Small returns after that

24. Happiness and GDP per Capita
Increases rapidly up to ca 4000$ per capita
Small returns after that
What does this mean?
What influences happiness?

25. Do changes in GDP correlate to changes in environmental quality?

26. 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.

27. ECK
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.

28. ECK 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

29. ECK
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”

30. 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

31. 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 ( USD per cap)
Others no relationship (deforestation, biodiversity
River quality, carbon, waste increases with increasing income

32. Results – Turning points

33. Implications of EKC
If exists do we not need to worry about the environment?
Tunneling through
Possible increase later on – statistical evidence?

34. Per Capita GDP

35. Increase GDP at all cost?
Should we always aim to increase GDP?
What is the ultimate gain?
Happiness?
What is the cost?
Environmental degradation?
Remember Kuznets curve and IPAT
Stress?
Depends on what GDP really measures – is it an indicator of wealth?

36. 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

37. 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

38. 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

39. 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

40. 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)

41. 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.

42. What does GNP measure? Wealth? Sustainable income? Hicksian income?
Economic development?
Sustainable development?
Economic welfare?
Human welfare?