Exam: Growth and Development Flashcards
Qualitative/historical description of economical growth:
- Traditional society
(External trigger) - Preconditions for take-off
(installation of infrastructure, organisation, social/political elite) - Take-off
(Large investment in manufacturing, development of institutions) - Drive to maturity
(Exploitation of advantages in international trade) - High mass consumption
Two ways to calculate
- Gross Domestic Product (GDP):
Expenditure approach:
GDP = C + G + I + (X-M)
C: Household consumption (products and services)
G: Government consumption
I: Investment (buildings, mines, factories, machinery etc.) (X-M): Export –Import
Not included:
(transactions between different parties)
-companies buying from other companies
-households buying from other households
-financial products (the stock market)
-informal sector (not taxed or monitored)
Product approach:
GDP = sum(value added)
over all production sectors
Mini-economy with two companies
Company (A): Potato producer Sells potatoes for 100 $ to consumers and 60 $ to company (B)
Company (B): Chips producer Sells chips for 90 $ to consumers What is the GDP?
Expenditure approach:
Product approach:
Expenditure approach:
C(100+90)+G(0)+I(0)+(X-M)(0)=190
Product approach: Value added: Company A: 100+60 = 160 Company B: 90-60 = 30 Total: 190
But also you buy things to grow potatoes, you pay the people working there, and they might buy the potatoes/chips etc..
GDP
GDP/Capita
GDP(PPP)
GDP/Capita(PPP)
GDP : Gross Domestic Product
GDP/Capita : per person
PPP : Purchasing power parity
-to account for differences in price levels between countries
-based on the price of a ”basket of goods”
-countries with low prices get relatively higher GDP using PPP
(Comparing quality of life welfare)
Three measures of economic activity
Gross domestic product (GDP)
sv. Bruttonationalprodukt (BNP)
Economic activity within country boarders
Gross national income (GNI)
sv. Bruttinationalinkomst (BNI)
Value added from companies owned by a country’s citizens
Net domestic product (NDP)
sv. Nettonationalprodukt (NNP)
GDP minus depreciation of capital goods
50 years of global economic growth (1967-2017):
GDP:
x5.8 (+3.6%/yr)
(Increase of resource use)
GDP/capita:
x2.7 (+2.0%/yr)
(Development, quality of life)
Population:
x2.2 (+1.6%/yr)
Annual changes % (global 1967-2017)
Population and GDP
Population growth is slowing down
GDP growth is increasing
Drivers of economic growth (GDP/cap) :
• Hours worked:
Employment rate, Hours per employee
• Increased productivity:
Improvements in technology (in a wide sense) and trade (also systems, organisation, etc)
- More output per input of labour, capital or resources
- Drives down production costs and prices
- Stimulates demand - Increased output
“Beyond GDP” measures
- Index of Sustainable Economic Welfare (ISEW)
- Genuine Progress Indicator (GPI)
Net domestic product
+ value of services from domestic labour
(still a service, even if you do it yourself)
- “defensive consumption” (security, military)
- costs of environmental degradation
- depreciation of natural capital
(Costs that could be avoided in a “better world”)
GDP and environmental impact:
Environmental Kuznets Curve (EKC) hypothesis
Pre-industrial/industrializing economy:
- Environmental impact increase with income/capita growth
Industrial economy:
- Turning point. Environmental impact will stop increasing with increased income/capita growth
Post-industrial economy (service economy):
- Environmental impact now decrease with increased income/capita growth.
Does usually not correlate with reality, apart from chemical harmful emissions.
(Maybe we just haven’t reached the service phase yet)
CO2 emission growth closely related to GDP growth
Quality of Life
Two different approaches:
- Objective indicators, with domains
- e.g. HDI, capabilities, needs
(They can be measured, but someone stil have to decide what factors to use)
- Instrumental values
- Tend to increase with GDP - Subjective indicators
- Quality of life as a mental state Wellbeing (happiness)
- Final values
- Tends to not be directly linked to GDP
(Habituation, happy or sad at first but then you get used to it)
Objective Quality-of-life index
(Economist Intelligence Unit, EIU)
Health (life expectancy at birth)
Family life (divorce rate)
Community life (church attendance, union membership) Material well being (GDP per cap, PPP)
Political stability and security (ratings)
Climate and geography
Job security (unemployment rate)
Political freedom (indexes of political and civil liberties) Gender equality (ratio of male and female earnings)
Subjective theories:
Quality of Life as a mental state
• Satisfaction of human needs are not absolute but depend on expectations, adaptationand comparisonto others.
(Habituation, happy or sad at first but then you get used to it)
Subjective Well-being (SWB): • Affective component: - To feel happy, to feel well • Cognitive component: - Life satisfaction These are used separately or together (hybrid theory)
50 % :
Genetics and early upbringing (personality)
10 % :
Life circumstances Income, material possessions, physical environment
40 % :
Intentional activities Working towards our goals, socialising, exercising, meaningful work and leisure activities
Societies with high SWB
(Subjective Well-being)
have:
- Functioning democracy and institutions
- Trust
- Economic equality
- Gender equality
- Low unemployment
- Income level above some threshold
Similar to objective measurement
Utility maximization:
Concept within economics of humans as informed and narrowly self-interested actors with the ability to make optimal choices.
People’s consumption choices reveal their preferences. (Samuelson, 1938)
Utility maximization:
- is not supported by research on actual choices (psychology)
- but can be a useful simplification in models
