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SOL & ITS INDICATORS :check: (Limitations of using National Y…
SOL & ITS INDICATORS :check:
SOL: level of economic & social well-being, which includes material and non-material aspects of life
MATERIAL SOL: quantity & quality of gds & srvs
NON-MATERIAL SOL: environment one lives in
NATIONAL INCOME :red_flag:
: defined as the monetary value of the final o/p of gds & srvcs produced in the economy// Y generated from production of g & s// expt on final g & s produced by economy over period of time
Compare relative SOL among countries & changes in SOL over time
National o/p=national Y=national expenditure
GROSS DOMETIC PRODUCT(GDP)
:* :red_flag: Total money value of final o/p produced within the geographical boundary of the country, regardless of the ownership of FOP, over 1 yr and b4 adjustment for depreciation
-tells us how much goods is being produced domestically
-reflect employment opportunities that production within country makes possible
NORMINAL & REAL GDP
NOMINAL GDP
: total mkt value of all final g & s produced without accounting for inflation
REAL GDP
: measures value of g & s produced adjusted for effects of inflation--> hence % change in real GDP usually used to measure EG
GNI PER CAPITA
: refers to GDP plus factor Y earned by residents overseas minus factor Y earned by non-residents in the domestic economy -*GNI IS A BETTER REFLECTION OF SOL OF THE NATIONALS THAN GDP compare between countries
Higher real GNI per capita means more g&s have been produced & available for consumption...with HIGHER real Y person each person can purchase more & better quality g&s--> SOL RISE
1) HIGHER NATIONAL Y--> higher expenditure--> govt can collect MORE TAX REVENUE e.g GST. :check:2) As NATIONAL Y RISE--> firms will declare higher profits & households will declare higher Y--> this means HIGHER CORPORATE & Y TAXES assuming tax rates constant--> MORE TAX REVENUE
with HIGHER TAX REVENUE, govt has the means to PROVIDE MORE MERIT & PUBLC GOODS--> increase variety & quality of g&s enjoyed--> INCREASE MATERIAL WELL-BEING & RAISING SOL
Limitations of using National Y statistics to measure CHANGES IN SOL OVER TIME
CHANGE IN DISTRIBUTION OF Y
not reflected
REAL GNI PER CAPITA is merely an average figure indicating amt of g&s available to each citizen--> Y distribution may be worsening-->rich minority have more of the Y while majority of ppl experience little.no increase in Y/Y may have fallen for the majority -->SOL FALLS
hence use GINI COEFFICIENT: MEASURE Y DISTRIBUTION
CHANGE IN QUALITY & COMPOSITION OF PRODUCTS
Technological changes & increased trade--> improve quality & availability of g&s-->more satisfaction to the consumers--> SOL INCREASE
hence include DATE ON OWNERSHIP OF CONSUMER DURABLES to reflect SOL
CHANGES IN AMOUNT OF LEISURE TIME
Working more hours--> o/p rise but welfare fall--> reduction in leisure time leads to increased stress and worsening health--> fall in non-material SOL
NEGATIVE EXTERNALITIES UNACCOUNTED FOR
GNI growth showing an increase in production may come at the cost of INCREASED POLLUTION, CONGESTION,and DESTRUCTION OF RAINFORESTS
Limitations if using National Y statistics to COMPARE DIFFERENCES IN SOL BETWEEN COUNTRIES
DIFFERENCES IN ACCURACY & RELIABILITY OF DATA
Non availability of important data in some countries--> LDC have more primitive method of data collection + data not as readily available due to lower levels of technology,education & literacy
IN DC, Reliability of data is questioned due to tax evasion practices
DIFF IN Y DISTRIBUTION
National income figure are average measure, does not account for Y distribution--> a country with lower Y per capita but a fairer Y distribution can enjoy higher overall SOL compared to country with higher Y per capita but large Y disparity between rich and poor
DIFF IN SIZE OF UNDERGROUND ECONOMY
transactions not accounted for in GNI figures but contribute to Y and material SOL of residents: The country with a larger underground economy will have a higher SOL assuming all else constant
HUMAN DEVELOPMENT INDEX (HDI)
: a composite indicator of SOL, takes into consideration economic, social & demographic aspects
account for population health & longevity, knowledge, education and material SOL --> HENCE HDI CAN ACCOUNT FOR BOTH MATERIAL & NON MATERIAL SOL
BUT only looks at one aspect of economic, social and demographic--> may overlook other aspects of human development such as Y distribution, gender inequalities
GINI COEFFICIENT
REFLECTS Y DISTRIBUTION within a country. HIGHER THE VALUE--> MORE INEQUITABLE THE DISTIBUTION
if GDP increases but Gini coefficient is rising as well, it suggest that majority of population may not be experiencing increase Y --> govt may redistribute wealth thru social programmes and taxation policies
Compare living standards between countries:
Converting each country's real GNI per capita to a common currency (USD) by using the Purchasing Power Parity (PPP) --> rate of exchange that would allow a given amount of money in one country to buy the same amt of gds in another after exchanging it into the currency of the other country
PPP may not be accurate--> everyone has different consumption patterns
PPP solve the problem of exchange rate