GDF AND ECONOMIC WELFARE AND STANDARD OF LIVING

By Prof. Dr. PAULSON MATHEW CHUNKAPURA

President & Prof. Of Economics & Business,
London City College & American City University.

ODr. Paulson, November, 2003

All rights reserved with the author.
No part of this publication
may be produced in any form
or by any means, by any one.

Living Standards refer to the basket of Goods and Services available to the individuals. To be precise,
standard of living refers to the quantity, quality and variety of goods & services enjoyed by the people of a
county. Economic welfare is usualy measured in tems of the amount of goods and services that
become availabie for consumption by society over any given period of time. GDP is impotant in
determining the standard of Living because it is the measure of the money value of all goods and services
becoming availabie to the nation from all economic activities.

An increase in GDP means people are generally better off because more goods and services are being
produced. An increase in GDP will shift the production possibilities curve of a country to the right.

WHY IS GDP AN IMPERFECT MEASURE OF THE ECONOMICWELL-BEINGOF THE PEOPLEOF

THE COUNTRY?
An increase in real GDP will promote the Economic Growth of a country with many benefits:
1.Economic growth increases our standard of living.
2.Economic growth can make it easier to reduce the difference in income and wealth between the rich
and poo.
3.Economic growtih means more leisure.
4.Economic growth can mean more military power.
5.Economic growth means more social services
Standard of Living of the people under certain
However, an increase in GDP may not improve the
circumstances.
terms. If the prices are rising, GDP will rise
even when the
[11 INFLATION: GDP is measured in money the standard of living of
services. What is relevant for increasing
county is not producing more goods and GDP should be re-valued at 'Constant
this problem, the money
the people is REAL GDP. To overcome
Prices' by applying the prices prevailing in a common base year.
in rises faster than the REAL GDP, then there
country
21 REAL INCOME PER HEAD If theinpopulation
a
about living
the
will be fewer goods for each person population. Thus order to draw conclusions
in
GDP by the population. The result is referred to
standards in a country, it is essential to divide the REAL is the
PER CAPITA INCOME. Real Per Capita Income most
as 'REAL GDP PER CAPITA' or REAL
and standard of Living of the people of country.
a
appropriate m e a s u r e of the economic well being

Standard of Living =REAL GDP = REAL PER CAPITA GDP

Population
increase in the Standard of Living and the
An increase in the value of NNP Per Capita implies an

economic welfare of the people of the people due to a

the well being (Economic Welfare)
Even Per Capita Real GDP may fail
to measure

wide range of limitations and tells nothing

an average figure
REAL GDP PER CAPITA is only
[3]DISTRIBUTION OF INCOME: is unequal and only a
small 1
dist+bution of income. If the distribution of income in a country
a00ut the
percentage of population receives the benefits of increased REAL GDP, then the REAL GDP PER
CAPITA figures may give a misleading picture of the Living Standard ofthe average people.
41 SACRRIFICE OF LEISUREor DOES NOT MEASURE THE QUALITY OF LIFE:
REAL GDP figures do not measure the human costs of production such as sacrifice of leisure, inferior
working conditions and stress. REAL GDP PER HEAD may have increased as a result of a longer
working week and increased stress and strain. With less leisure time, there may be a reduction in the wel

beingof the society even when the REAL IINCOME PER HEAD increases.
5 NO MEASUREMENT OF QUALITY OF GOODS:The REAL PER CAPITA GDP does not meesure
the quality of goods produced. A car purchased in 2003 will give a better performance and be more
reliable and therefore, confer a larger increase in welfare than a car purchased in 1960.
[61 NEGATIVE EXTERNALITIES: If an increase in REAL GDP PER CAPITA results in negative
externalities such as pollution, noise, congestion and crime, It does not increase the economic Welfare of

the people.
If the PER CAPITA GDP of a country
DOES as
7increases NOT MEASURE THE COMPOSITION OF OUTPUT:
a result of the increased production of weapons and Narcotic drugs, it will not increase the
SOL (standard of living) and welfare of the society.
OUTPUT PRODUCED IN THE BLACK ECONOMY: REAL GDPfigures
81 DOES NOT MEASURE THE which is illegal, where services are exchanged
do not measure in the
transactionseconaomy, underground
figures fail to economic welfare
payment of taxes. Thus, the GDP
measure
for cash in order to avoid
accurately. REAL GDP figures are an inaccurate
[9] DOES NOT MEASURE NON-MARKETED ACTIVITIES: such as
measure do not reflect the value of activity that is not marketed,
of the SOL because they
subsistence farming and do-it-yourself work. and national insurance overtime means that a
BURDEN: An increase in the burden of taxation
101 TAX needed to maintain the same Standard
of Living.
higher REAL GDP PER HEAD is London is much more than the cost of living
DIFFERENCES: The cost of living in
111 REGIONAL the cost of housing. REAL GDP figures
fail to measure these
elsewhere in Britain particularly because of
differences. COUNTRIES:
IN DIFFERENT
STANDARD OF LIVINGconditions
121 COMPARIINGsocial In Canada, people need to
in different countries.
There are and geographical
different
in Jamaica will have no such need.
spend a lot on heating, whereas people
RATES.
DIFFERENCES IN EXCHANGE
[13] THE COMPOSTION OF
OUTPUT.
[14] DIFFERENCES IN EXTERNALITIES VARIES BETWEEN COUNTRIES.
[15] THE EXTEND OF OF INCOME VARIES
BETWEEN COUNTRIES.
[16] THE DISTRIBUTION
CONDITIONS AND HOURS
VARY BETWEEN CONTRIES.
[17] WPORKING PROCEDURES ARE USED TO CALCULATE GDP IN DIFFERENT
[181 DIFFERENT STATISTICAL relative value of each country's GDP. For this
rate can affect
in the exchange
COUNTRIES: Changes PURCHASING POWER PARITIES
are increasingly being
compared with the use of
reason GDP figures then GDP should be
costs 30 pounds in the UK and 60 dollars in USA,
(PPP). Eg.: If a basket goods
of
2.
rate of Pound1 Dollars
converted at an exchange

(MEW)
MEASURABLE ECONOMIC WELFARE
and James Tobin adjusts by GDP adding the
William D. Nordhaus
MEW devised by two Professors housework and deducting expenditure
house repair and unpaid
value of leisure time, do
it yourself
on defence, police
and
externalities. 3 sets of
road maintenance and negative by introduced UN in 1990. It is based on

HUMAN DEVELOPMENT INDEX

(HDI)The HDlSHCOOLING
was
AND ADULT LITERACY
and
REAL GDP (i) MEAN YEARS OF
indicators: (i) to use
(ii) LIFE EXPECTANCY alsothe ability of the people
and services produced but
These take into account
not only the goods
to enjoy them. Economic Well-being
of the
them and the time they have Standard and the
indicator of the Living
REAL GDP PER CAPITA
is a useful
of these concepts.
not a completely
satisfactory m n e a s u r e
people, but it is
 DETERMINATION OF THE EQUILIBRIUM LEVEL OF NATIONAL
INCOME OR GNP
There are three methods of achieving Equilibrium level of National Income. They
are
1. Aggregate Expenditure Aggregate Income Approach
AE AY Approach
2 LEAKAGES =

Injections Approach and

W =J Approach
3. Aggregate Demand =Aggregate supply Approach
AD AS Approach

1 AE =AY Approach
According to this Approach, a country will achieve Equilibrium Level of National
Income when Aggregate Expenditure (AE) is equal to Aggregate Income (AY), as
shown in the figure:

EOUILIBRIUM POINT
AF=AY

A=C+T+G+(X-Mn

EQUILIBRIUM LEVEL OF
NATIONAL INCOME

45
NATIONAL TNCOME

2) WITHDRAWLS
=
INJECTIONS APPROACH
(W) ()
Equilibrium
this
Approach, Level of GNP is achieved when planned
According to

Leakages (W) are equal to planned Injections (J).

WITHDRAWALS (W): Withdrawals are leakages from the circular flow of
that is not passed on to the Domestic
income. A leakage is any part of Income
Households for current consumption within the circular flow. Savings (S).
Taxation (T), and Import (M) are leakages from the circular flow.

INJECTIONS (j); Injections are additions to the circular flow of Income.

a Domestic Household ODR
Injections are any expenditure that is passed on to
Domestic Business Fim. An Injection does not come
from the Expenditure of
Domestic Households. The three
Investment (1), Government Injections to the circular flow of Income are:
EQUILIBRIUM LEVEL OF Expenditure (G) and Exports(X).
N.I IS ACHIEVED WHEN
W-J that is

S+T+M= +G+X_As shown in the following figure:

W S+T+M
EQM
POINT

WJ
J= I+G+X

EQM LEVEL OF N.I

Y N.I

3) AD-AS APPROACH
According this Approach, Equilibrium Level of GNP is
achieved when Aggregate Demand is Equal to Aggregate Supply.

AS

PRICE LEVEL

EOUILIBRIUM POINT

EQUILIBRIUM AD
PRICE LEVEL
EQM LEVEL OF INCOME

GNP