MODULE 2:

MONETARY
MEASURES
SocSci 13
The Economy, Society and
Sustainable Development
 Traditional
Monetary Measures
 Bretton Woods Agreement
✓ New system of economic order and international
cooperation that would help countries recover from WW
II and provide the conditions for long-term economic
growth

✓ Led to the creation of the World Bank and the

International Monetary Fund
✓ to reduce levels of poverty around the world
✓ provides loans at lower interest rates
than commercial banks
✓ gives advice to member countries about
how to improve their economic systems
 Bretton Woods Agreement

✓ US dollar as the “gold standard”

✓ US dollar as the value by which all other world

currencies are pegged against

✓ To bring uniformity to global exchange rates

 After the Bretton Woods Agreement

✓ Bretton Woods only lasted for 25 years

✓ Some countries let their currency flow freely (ex.
Japanese yen)
✓ Some countries formed currency blocs: European
Union
✓ Global monetary measures are still based on the USD
 Gross Domestic Product (GDP)

✓ the total final output of goods and services produced by the

country’s economy, within the country’s territory, by residents
and nonresidents, regardless of its allocation between
domestic and foreign claims
 Gross National Income (GNI)
✓ total domestic and foreign output claimed by residents
of a country

GNI = GDP + (income residents receive from abroad

for labor and capital - payments made to
nonresidents who contribute to the domestic
economy)
 Gross National Income (GNI)
✓ Formerly formerly GNP –Gross National Product
→ How much is earned vs how much is produced

✓ Measured per capita (total population)

✓ Determines the income classification of countries
using the Atlas method for computing
✓ smooths exchange rate fluctuations using a
three-year moving average, price-adjusted
conversion factor
 Developing Countries

✓ Countries with low-, lower-middle, or upper-middle

incomes

✓ Countries that self-identify as such

 Income Classification of Countries

✓ High-Income Economies
✓ GNI per capita of $13,846 or more (based on 2022
data)

Examples: Singapore, Italy, Japan, Switzerland, United

Kingdom, United States, Canada
 Income Classification of Countries

✓ Upper Middle-Income Economies

✓ GNI per capita between $4,466 and $13,845

Examples: Indonesia, Thailand, Malaysia, Mexico,

Argentina, Brazil, Iraq
 Income Classification of Countries

✓ Lower Middle-Income Economies

✓ GNI per capita between $1,136 and $4,465

Examples: Cambodia, Egypt, Philippines, Ukraine,

Vietnam
 Income Classification of Countries

✓ Lower Income Economies

✓ GNI per capita between $1,135 or less

Examples: Afghanistan, the Gambia, Somalia,

Mozambique , Ethiopia
 Gross National Income (GNI)

Major criticism:
✓ does not measure the relative domestic
purchasing power of different currencies

✓ Divided per capita (overall population instead of

distribution of wealth within a country)
 Purchasing Power Parity

✓ the number of units of a foreign country’s currency

required to purchase the identical quantity of goods
and services in the local developing country market
as $1 would buy in the United States

✓ adjustments are made for differing relative prices

across countries so that living standards may be
measured more accurately
 Purchasing Power Parity

✓ the number of units of a foreign country’s currency

required to purchase the identical quantity of goods
and services in the local developing country market
as $1 would buy in the United States

✓ adjustments are made for differing relative prices

across countries so that living standards may be
measured more accurately
 Purchasing Power Parity

✓ measured with respect to a basket of goods and

services, and therefore can be different for different
baskets of goods and services
✓ computed for specific expenditure groups, like
household consumption expenditure, government
expenditure, and investment
✓ also computed for commodity groups, like food,
clothing, housing, and expenditure on health and
education
 Purchasing Power Parity

✓ PPP is always measured relative to a reference

economy. The currency of the reference economy is
referred in economics parlance
✓ Sometimes, it is also referred to as the base
economy
✓ Example: Hong Kong, China is the reference
economy and HK$ is the numeraire or reference
currency
Measuring Inequality
 Distributions

✓ Individual persons or households and the total

incomes they receive

✓ Computation: divide the population into successive

quintiles (fifths) or deciles (tenths) according to
ascending income levels and then determine what
proportion of the total national income is received by
each income group
 Kuznets Ratio

✓ The disproportionate distribution of total national

income among households

✓ ratio of income between the highest-earning

households (usually upper 20%) to the lowest-
earning households, (usually the lowest 20% or 40%)
 Lorenz Curve

✓ graph depicting the variance of the size distribution of

income from perfect equality

✓ Cumulative % of income recipients on the x axis

(horizontal)

✓ Cumulative % of income on the y axis (vertical)

 Lorenz Curve

✓ Line of equality: diagonal line from the lower left to

the upper right corner

✓ Lorenz curve: actual quantitative relationship

between the percentage of income recipients and the
percentage of the total income they did in fact receive
during a given year

the more the Lorenz line curves away from the

diagonal (line of perfect equality),
the greater the degree of inequality represented
 Gini Coefficient

✓ aggregate numerical measure of income inequality

ranging from 0 (perfect equality) to 1 (perfect
inequality)
✓ calculating the ratio of the area between the diagonal
and the Lorenz curve divided by the total area of the
half-square in which the curve lies
Gini Coefficient
 Desirable Qualities of Measuring
Inequality with the Gini Coefficient

✓ Anonymity Principle
✓ the measure of inequality should not depend on who has
the higher income

✓ Scale Independence
✓ the measure of inequality should not depend on the size of
the economy or the way we measure its income
 Desirable Qualities of Measuring
Inequality with the Gini Coefficient
✓ Population Independence
✓ the measure of inequality should not be based on the
number of income recipients

✓ Transfer Principle
✓ holding all other incomes constant, if we transfer some
income from a richer person to a poorer person (but not so
much that the poorer person is now richer than the
originally rich person), the resulting new income distribution
is more equal
 Readings
15 September, Friday
Quiz: ¼ sheet of paper
1. United Nations. (2023): Global Multidimensional Poverty Index 2023

2. World Bank. (2018): Poverty and Shared Prosperity 2018: Piecing Together
the Poverty Puzzle, pp. 87-93

3. Sustainable Livelihoods Approach