MEASURING ECONOMIC

ACTIVITY AND WELFARE

 ECONOMIC WELFARE

The level of prosperity and quality of living

standards in an economy. Economic can be
measured through a variety of factors such as
GDP and other indicators which reflect welfare of
the population (such as literacy, number of
doctors, levels of pollution e.t.c)
 NORDHAUS AND TOBIN
During the late 1960s, many economists began to
question the over-reliance of governments and
agencies on narrow, exclusively GDP-based,
measures of economic welfare. It was at this time
that the adverse environmental effects of
uncontrolled economic growth began to be
considered, prompting the search for a wider
measure of welfare, not exclusively based on raw
GDP figures.

This was developed in 1972 as an alternative to

GDP. It was developed by William Nordhaus and
 MEASURING ECONOMIC WELFARE

(MEW)
It adjusts the measure of total national output, to
include only items that help improve economic
well-being.

In addition to GNP the MEW includes:

The value of leisure time enjoyed by citizens.
Value of unpaid work
Economic output in the underground economy
(not measured by official GDP statistics)

The MEW also excludes factors which reduce

economic welfare, such as:
Environmental damage
MEASURING ECONOMIC WELFARE
GDP, GNP AND NNP
 Gross Domestic Product

The most important concept of national income is

Gross Domestic Product. Gross Domestic Product
is the money value of all final goods and services
produced within the domestic territory of a
country during a year.
 Gross Domestic Product

GDP includes the following types of final goods and

services. They are:
Consumer goods and services.
Gross private domestic investment in capital
goods.
Government expenditure.
Exports and imports.
 Gross Domestic Product
Algebraic expression under product method is,

GDP=(P*Q)

where,
GDP=Gross Domestic Product
P=Price of goods and service
Q=Quantity of goods and service
denotes the summation of all values.
 Gross Domestic Product
According to expenditure approach, GDP is the
sum of consumption, investment, government
expenditure, net foreign exports of a country
during a year.

Algebraic expression under expenditure approach

is,

GDP=C+I+G+(X-M)

Where,
C=Consumption
I=Investment
 Gross National Product

Gross National Product is the total market value

of all final goods and services produced annually
in a country plus net factor income from abroad.
Thus, GNP is the total measure of the flow of
goods and services at market value resulting from
current production during a year in a country
including net factor income from abroad.
 Gross National Product

Hence, GNP includes the following:

Consumer goods and services.

Gross private domestic investment in capital
goods.
Government expenditure.
Net exports (exports-imports).
Net factor income from abroad.
 Net National Product

Net National Product is the market value of all

final goods and services after allowing for
depreciation. It is also called National Income at
market price.
 Net National Product

When charges for depreciation are deducted

from the gross national product, we get it. Thus,

NNP=GNP-Depreciation

or, NNP=C+I+G+(X-M)+NFIA-Depreciation
 GDP, GNP & NNP
Net national product (NNP) is the most
comprehensive measure of economic activity,
but it is of little practical value due to the
problems of accounting for depreciation. Gross
concepts are more useful.

Analysts tend to say that GDP is a better

measure than GNP, and that now seems to have
been accepted by all the major industrial
countries. When reviewing longer-term trends, it
is advisable to check net property income to see
if it is making GNP grow faster than GDP.
 OMISSIONS FROM GDP DATA
There are many things which are not in GDP,
including the following.
Transfer payments. For example, social security
and pensions.
Gifts. For example, a $10 gift on your birthday.
Unpaid and domestic activities. If you cut your
grass or paint your house the value of this
productive activity is not recorded in GDP, but it
is if you pay someone to do it for you.
 OMISSIONS FROM GDP DATA
Barter transactions. For example, the exchange
of a sack of wheat for a can of petrol.
Second-hand transactions. For example, the sale
of a used car (where the production was
recorded in an earlier year).
Intermediate transactions. For example, a lump
of metal may be sold several times, perhaps as
ore, pig iron, part of a component and, finally,
part of a washing machine (the metal is included
in GDP once at the net total of the value added
between the initial production of the ore and its
final sale as a finished item).
 OMISSIONS FROM GDP DATA
Leisure. An improved production process which
creates the same output but gives more
recreational time is recorded in the national
accounts at exactly the same value as the old
process.
Depletion of resources. For example, oil
production is recorded at sale price minus
production costs and no allowance is made for
the fact that an irreplaceable part of the nation's
capital stock of resources has been consumed.
Environmental costs. GDP figures do not
distinguish between green and polluting
 OMISSIONS FROM GDP DATA
Allowance for non-profit making and inefficient
activities. The civil service and police force are
valued according to expenditure on salaries,
equipment, and so on (the appropriate price for
these services might be judged to be very
different if they were provided by private
companies).
Allowance for changes in quality. You can buy
very different electronic goods for the same
inflation-adjusted outlay as a few years ago, but
GDP data do not take account of such
technological improvements.
 SURVEYS AND SAMPLING

Many of the figures which go into GDP are collected

by surveys. For example, governments ask
selected manufacturing or retailing companies for
details of their output or sales each month. This
information is used to make inferences about all
manufacturers or all retailers.
 SURVEYS AND SAMPLING

Sample evidence is supplemented by other

information, including documentation required
initially for bureaucratic purposes such as customs
clearance or tax assessment. Such data take a long
time to collect and analyze, which is why economic
figures are frequently revised even when they are
several years old.
 UNRECORDED TRANSCATIONS

Deliberately concealed transactions form the

black, hidden or shadow economy. This is largest
at times when, and in countries where, taxes are
high and bureaucracy is smothering. Estimates
of the size of the shadow economy vary
enormously.
The only industrial countries that adjust their
GDP figures for the shadow economy are Italy
and the US and they may well underestimate its
size.