National income statistics and alternative measures

why national income statistics (GDP/GNI) do not accurately measure then ‘true’ value of output

GNI and GDP do not include non-marketed output
- non-marketed output: goods and services is not sold in the market and does not generate any income
  - one’s own work on repairing and improving one’s home
  - agricultural production
    - taking place for a household’s own use and consumption
    - never reaching the market place
- in developing countries households are often quite self-sufficient
- non-marketed output therefore is likely to be far greater in developing countries compared to more developed ones
GNI and GDP do not include output sold in underground (parallel) markets
- goods are traded in markets and generate incomes, but they go unrecorded and therefore not inluced in GDP/GNI
- underground/informal/parallel market
  - exists whenever a buying/selling tranaction is unrecorded
GDP and GNI do not take into account quality improvements in goods and services
- the quality of many products improves over time, yet this is not taken into account in calculating the value of the total output
- technological advances permit improved products to be sold at lower prices(mobile phones and computers)
  - this process(lower prices) offers significant benefits to consumers, which do not show up in GDP and GNI figures
GDP and GNI do not account for the value of negative externalities, such as pollution, toxic wastes and other undesirable by-products of production
- virtually all countries contribute to environmental degradation, reducing society’s well being
- this is not reflected in the GNI and GDP figure
GDP and GNI do not take into account the depletion of natural resources
- the depletion of natural resources (rainforests, wildlife, agricultural soils) also reduces society’s well being
- this is not taken into consideration
GDP and GNI and differing domestic price levels
- goods and services sell for very different prices in different countries
- if comparisons of GDP between different countries do not consider the differing price levels, the result is highly misleading picture of standards of living in different countries
- PPP should be used

alternative measures of well being

OECD Better Life Index
- provide a more accurate representation of well-being and to form the basis of policies intended to improve the quality of life and well-being more generally
- factors include
  - state of health, work-life balance, education and skills, social connections, civic engagement, environmental quality, personal security, subjective well-being, income and wealth, jobs and earnings, and housing
Happiness Index
- based on the following dimensions
  - real GDP per capita
  - social support
  - healthy life expectancy
  - freedom to make life choices
  - generosity 慷慨程度
  - perceptions of corruption 腐败感知
- While GDP measures economic output, the happiness index provides a broader evaluation of well-being by incorporating social, psychological, and institutional factors.
Happy Planet Index
- is intended to be a measure of sustainable well-being
- in takes into consideration life expectancy, how people fell about their own personal well-being, which are adjusted for inequalities and ecological footprint
- HPI = (life expectancy*well-being*inequality of outcomes)/ ecological footprint
- life expectancy
  - average number of years a person expects to live
- well-being is taken to be a population’s satisfaction measured by data collected by the Gallup World Poll
- Inequality of outcomes refers to inequalities between people with regard to life expectancy and well-being.
- ecological footprint is the impact on the environment of each individual in a society on average.

National income measures and comparisons of economic well-being over time and between countries

comparisons over time
- an increase in real GDP of some percentage for a particular country may over or underestimate the true change in the society’s economic well being and living standards
- because of such factors are improved as product quality, improvements in health and education, increased leisure, improvements(or degradation) in quality of quality of life factors, possible changes in the value of non-marketed output, or in the size of underground markets, etc.
comparisons between countries
- limiting the validity of international comparisons by use of GDP and GNI measures
- one country may have a high level of GDP per capita, which is concentrated among a small percentage of the population, while another may have a lower level of GDP per capita, which is more equally distributed.
- a comparison of GDP/GNI won’t reveal any valuable information at this point

Why measures of the value of output (GDP/GNI) cannot accurately measure economic well being

GDP and GNI make no distinctions about the composition of output
- whether a country produces military goods or merit goods(education, health care, clean water supplies), GDP and GNI include the value of all without any distinctions about the degree to which they contribute to standards of living.
- one country may have a lower gdp per capita than another, but higher levels of social services and merit goods provision than the other.
- it is hard to say which one has higher living standards by using GDP or GNI
GDP and GNI cannot reflect achievements in levels of education, health and life expectancy
- a society’s level of health, education, and life expectancy significantly contribute to standards of living
- these factors remain unaccounted in measures of GDP and GNI
GDP and GNI provide no information on the distribution of income and output
- measures of GDP or GNI per capita cannot address any of the following questions, they only provide an indication of average output or average income per person
- 1. are the wealth and income of a nation highly concentrated in relatively few hands while larger portions of the population are unable to satisfy their basic needs?
- 2. are inequalities increasing or decreasing?
- 3. Are the benefits of a growing GDP concentrated amoung a small group?
GDP and GNI do not take into account increased leisure
- average number of hours worked per week has declined significantly, with the number of hours of leisure correspondingly increasing
- this contributes to the society’s standard of living, but are not reflected in GPD or GNI meaures
GDP and GNI do not account for quality of life factors
- society’s well being depends upon a number of non-economic factors
  - crime rates, a sense of security, peace arising from relations with other countries, well-functioning institutions, stress levels from working conditions, insecurities from one’s jobs, the degree of political freedom
- GDP and GNI cannot account for any of these non-economic factors