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									MEASURES OF
David Anderson
Centre College
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
The final value of the goods and services produced
  within a country’s boundaries.
3 Methods of Calculating GDP
   Value Added
   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.
Value Added Approach
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    $3 worth
of Green   of Roasted   $20 worth
 Coffee      Coffee     of Coffee
  Beans       Beans
$1 worth         $3 worth
of Green        of Roasted   $20 worth
 Coffee           Coffee     of Coffee

  Beans            Beans
$1 worth         $3 worth
of Green        of Roasted        $20 worth
 Coffee           Coffee          of Coffee

           +1                +2
  Beans            Beans
$1 worth          $3 worth
of Green         of Roasted        $20 worth
 Coffee            Coffee          of Coffee

           +1                 +2               +17
  Beans             Beans

           GDP = 1 + 2 + 17 = 20
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
Rental income received by landlords
Corporate profits
Proprietor's (that is business owners’) income
Income Approach
Adjustments add items that are part of the value of
 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
  and remove items that count toward income but not
  toward production,
    such as government subsidies.
Income Approach

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)

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.

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
           Standard of Living    Standard of Living
           Income Distribution       Income
           Spirituality             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
   - 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
   - long-term environmental damage
   + net capital growth + change in net intergenerational position
Net National Welfare
 + 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
Index of Sustainable Economic Welfare



Human Development Index
Genuine Progress Indicator



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