That Imperfect GDP Statistic

 

Shortcomings of GDP

How GDP understates welfare:

1. GDP doesn't include work done by yourself, which would be greater in LDCs

2. GDP does not recognize the underground economy3. GDP does not take into account quality improvements in

goods and services4. GDP does not take into account more leisure time5. GDP does not take into account greater life expectancy

More problems with GDP

How GDP overstates welfare:

1. GDP ignores negative externalities2. GDP ignores resource depletion3. GDP assumes all output is equal (should military output

count as much as production of merit goods?)4. GDP ignores distribution of income5. GDP ignores quality of life factors6. GDP doesn't consider price differences among countries

Purchasing Power Parity

Comparing countries based on GDP per capita is tricky for several reasons.  First off, most countries in the world have their own currency.  In order to compare GDPs of different countries we have to convert both to a common currency. 

The next problem is the issue of prices in different countries.  If I want a haircut in the U.S., I need $15.  I could get my haircut

15 times or more in India with $15.

Therefore, we need to use Purchasing Power Parity to really get an accurate view of differences in GDP per capita

Purchasing Power Parity

Because prices are usually significantly lower in LDCS, GDP per capita statistics need to be

modified when comparing countries.  Typically, the GDP per capita of an LDC will

be adjusted upwards to account for the cheaper prices in the LDC.  So while there is a

big difference between GDP per capita in Canada and India, it is not nearly as large when we convert the figures to Purchasing

Power Parities.

Economic Growth and Development

 

Economic growth

When a country increases the amount of goods and services it produces over a given period of time, it is said to have experienced economic growth.  We usually express that growth as:

• a % change in real GDP, or• a % change in real GDP per capita

Of course economic growth is not a given.  When an economy produces less output over two consecutive quarters, we say that economy is in _________________________________

GDP and GDP per capita

Question:  Is it possible for a country to be experiencing increasing GDP yet see it's GDP per capita fall?  If so,

somebody tell me how!

How smart you all are!

If a country is experiencing population growth at a % that is greater than the % increase in output growth, then the GDP per capita will actually be lower than it was previously.

Sources of Economic Growth

If you remember the Production Possibilities Curve, you can probably remember how economic growth is achieved.  Assume we are operating at a point below our PPC.  How can we move to a point on our PPC?

Reaching the PPC

Excellent! We can move to a point on our PPC by reducing inefficiencies and increasing the employment rate.  That would be a move from point C to point A.  But how can we get to B?

Outward Shifts of the PPC

We can shift our PPC outwards three different ways:

• by increasing the quantity of our factors of production

• by increasing the quality of our factors of production

• by developing new technology

Sustained economic growth requires one, if not a combination, of all three of the above points.

Where's the growth?

 

Questions on economic growth

Indicate for the following whether we would shift the PPC or move to a point on an existing PPC without shifting the curve:

1. Unemployment falls 2. New Oil reserves discovered3. Improvement in the health of the population4. Increase in productive efficiency5. New technologies are adopted

Growth rates from 1990-2005(real per capita GDP)

East Asia/Pacific--5.8%

South Asia--3.4%

Middle East/North Africa--2.3%

High Income Countries--1.8%

Central/Eastern Europe/Former U.S.S.R.--1.4%

Latin America/Caribbean--1.2%

Sub-Saharan Africa--.5%

Sustained real GDP per capita

Countries looking to significantly increase their GDP per capita must experience relatively high growth rates over a long period of time.  This is the challenge facing the countries of Sub-Saharan Africa at this time.

Economic Development

Economic Development sounds very similar to Economic Growth, yet the two terms suggest different things.  Do you remember the difference between growth and development?

Economic Development

Economic Development occurs when economic growth leads to an improvement in citizen's quality of life, especially in areas such as:

• reduction of poverty• increased access to goods and services that satisfy basic

needs (food, shelter, education, healthcare, sanitation)• increased employment• better distribution of income

Without these improvements, economic growth is not making the lives of the people any better.

World Bank Classifications

The World Bank classifies countries into four groups based on level of GNP per capita.  They are:

1. Low income (GNP per capita below $905)2. Lower middle income (GNP per capita b/w $906-$3595)3. Upper middle income (GNP per capita b/w $3596-$11,115)4. High income (GNP per capita above $11,116)

Category four countries are the MDCs.  Everybody else are LDCs.  

OK, I'll give you a handout of all countries so you can see where they are, but you have to ask nicely!

Characteristics of LDCs

Most LDCs experience many of the following:

• widespread poverty• little use of technology

• low levels of industrialization• high dependence on agriculture• unequal distribution of income

• high illiteracy rates• high unemployment

• high population growth rates• poor health conditions

• low life expectancy• environmental issues

Be careful not to generalize however

As we said before, just because a country is a MDC does not mean there aren't significant numbers of people within that country who have lifestyles that resemble people living in LDCS.

And even in the poorest LDCs, there are small numbers of citizens who enjoy lifestyles comparable to those enjoyed by people in MDCs.

So it's a complicated business when you try to generalize about the lives of 7,000,000,000 (and growing) people

Shifting Philosophies

Since the 1950s, strategies have evolved in terms of helping LDCs.

1950s-1960s

In these years, there was little distinction between economic growth and economic development.  It was assumed that if a country experienced economic growth, improvements in the living standards of the general population would inevitably follow.  This turned out to be wishful thinking.

The 1970s

 

The 1970s

In the 1970s, it became clear that LDCs were actually falling further behind MDCs in economic growth as well as economic development.  The idea that the benefits of economic growth "trickling down" to the poor masses was exposed as a fallacy.

1980s to today

Economists have added to the concept of economic development that was established earlier.  Economic

development is seen as urgent so as to lead to:

• increases in self-esteem

• freedom from want, freedom to make choices and freedom from ignorance and squalor

• overall improvement in all areas of human development

We'll talk more about the complexities in measuring economic development next time...................