### Measures of Growth and Develpment

MEASURES OF
GROWTH AND
DEVELOPMENT
David Anderson
Centre College
GNP
The final value of goods and services produced
by the citizens of a country.
Most U.S. Economists switched to GDP in 1991.
GNP 1947 - 2010
GDP
The final value of the goods and services produced
within a country’s boundaries.
3 Methods of Calculating GDP



Income
Expenditure
GDP is calculated by the Bureau of Economic Analysis,
an agency within the U.S. Department of Commerce.
The Trick is to avoid double counting.
The value added approach avoids double counting by
looking only at the incremental change in the value
of goods at each stage of production.
\$1 worth
of Green
Coffee
Beans
\$3 worth
of Roasted
Coffee
Beans
\$20 worth
of Coffee
\$1 worth
of Green
Coffee
Beans
+1
\$3 worth
of Roasted
Coffee
Beans
\$20 worth
of Coffee
\$1 worth
of Green
Coffee
Beans
+1
\$3 worth
of Roasted
Coffee
Beans
+2
\$20 worth
of Coffee
\$1 worth
of Green
Coffee
Beans
+1
\$3 worth
of Roasted
Coffee
Beans
+2
\$20 worth
of Coffee
GDP = 1 + 2 + 17 = 20
+17
Income Approach
The value of income is an estimate of the value of
output because payments for output become
someone’s income.
Income Approach
Double counting doesn’t occur because payments for
raw materials and intermediate goods come out of
the earnings of retailers as they purchase goods
and become the income of workers at intermediate
stages of production.
Income Approach
For example, when Starbucks earns \$20 for a bag of
coffee, it pays \$3 to the roasters, who pay \$1 to
the growers, so:
the income of Starbucks workers/owners is \$20-\$3=\$17;
the income of roasters is \$3-1=\$2;
the income of growers is \$1.
Income Approach
National Income includes
Employee compensation
Interest payments, as on bank deposits and bonds
Corporate profits
Proprietor's (that is business owners’) income
Income Approach
production but not part of the value of income,
such as net foreign factor income (what foreign
investors earn on assets in the U.S. minus what U.S.
investors earn on assets elsewhere), capital
depreciation;
and remove items that count toward income but not
toward production,
such as government subsidies.
Income Approach
2009
Gross domestic product \$14.26
trillion
Gross national product \$14.56 trillion
National income \$14.50 trillion
Expenditure Approach
Sum the value of expenditures on qualifying output:
Consumption spending by households
Investment spending by businesses (e.g., buildings not bonds)
Government spending
Net exports (exports minus imports)
C+I+G+N
Expenditure Approach
Double counting is avoided by looking only at “final”
goods and services and not raw materials and
intermediate goods.
Goods are counted in the year in which they are
made. Used goods are not counted.
C+I+G+N
GDP as a measure of welfare
The Problem:
GDP growth can be good or bad
GDP Grows with Divorce, Disaster, Disease
GDP ignores leisure, home production
GDP doesn’t account for pollution or a
healthy environment
Standard of Living vs. Quality of Life
Quality of Life
Freedom
Health/Fitness
Education/Literacy
Environment
Beauty
Family/Friends
Leisure
Standard of Living
Income Distribution
Spirituality
Standard of Living
 Income
Possessions
Alternative Measures









the Measure of Economic Welfare (MEW)
Net National Welfare (NNW)
the Index of Leading Cultural Indicators (ILCI)
the Index of Social Health (ISH)
Economic Aspects of Welfare (EAW)
the Green GDP
the Genuine Progress Indicator (GPI)
the Index of Sustainable Economic Welfare (ISEW)
Human Development Index
Index of Sustainable Economic Welfare
ISEW = personal consumption / distribution inequality
+ household labor + value of services from consumer durables
+ streets and highways + public expenditures on health and
education
- consumer durables – defensive private expenditures on health
and education
- national advertising – commuting costs – cost of urbanization
- cost of auto accidents – cost of water, air, and noise pollution
- loss of wetlands and farmlands – depletion of non-renewable
resources
- long-term environmental damage
+ net capital growth + change in net intergenerational position
Net National Welfare
NNW = GDP
+ nonmarket output
– externality costs
– pollution abatement and cleanup costs
– depreciation of created capital
– depreciation of natural capital.
Human Development Index
The HDI combines three basic dimensions:
 Life expectancy at birth, as an index of population
health and longevity
 Knowledge and education, as measured by the adult
literacy rate (with two-thirds weighting) and the
combined primary, secondary, and tertiary gross
enrollment ratio (with one-third weighting).
 Standard of living, as measured by the natural
logarithm of gross domestic product (GDP) per capita
at purchasing power parity (PPP) in United States
dollars.
Index of Sustainable Economic Welfare
GDP
ISEW
Time
http://community.foe.co.uk/progress/java/ServletISEW
Human Development Index
Genuine Progress Indicator
GDP
GPI
Time
http://www.sustainablemeasures.com/Training/I
ndicators/GPI.html