National Income •  GDP is the total value of all final goods and services. •  Final goods and services are goods and services sold to the final or

end user. Why final goods & services? •  3 main methods to calculate GDP:

–  Add up the total value of the production of final g/s through a survey(value added approach)

–  Add up aggregate spending on domestically produced final g/s in the economy( Y= C + I + G+ (X-M)

–  Add up the total factor income earned by households from firms in the economy.

Do you think these 3 methods lead to the same results? Let’s see how it works? Let’s consider a hypothetical economy that consist of 3 firms: Ghana mines, Ghana Steel and Ghana Motors

Calculating GDP

GH mines Ltd

GH. steel GH. Motors Total Factor Income

Values of Sale

$4200(ore) $9000(steel) $21500(car)

Intermediate goods

0 4200(ore) 9000(steel)

Wages 2000 3700 10000 15700 Interest payment

1000 600 1000 2600

rent 200 300 500 1000 profit 1000 200 1000 2200 Total expenditure

4200 9000 21500

Value added per firm

4200 4800 12500

Na#onalIncome

Value added approach: Value added of a firm is the value of its sale minus the value of its input purchases. From the table we get: $4200 + 4800 + 12500 = 21500 Aggregate Spending Approach: Adding up aggregate spending by sector of the economy. C + I + G + (X-M). From the table; final expenditure in this economy is $21500(value of the car) Factor Income Approach: Adding up income earned by factors of production in the economy. Wages(labor) + rent(land)+ interest(capital) + profit(shareholders). From the table, 1570 0+ 2600 + 1000 + 2200=21500. Additional notes on what is included and not included in GDP: Included: Domestically produced final goods Not Included: Intermediate goods, inputs used goods, financial assets(stocks and bonds), foreign-produced goods and services. When a person marries the household cook, GDP falls!

USGDP

WhatdoesGDPtellusaboutacountry?

It is a measure of the size of the economy of a country .eg US GDP in 2016 was $ 18.56 trillion, China ($11.2 trillion) etc. What is the problem with that interpretation? Real GDP vrs Nominal GDP. In 2010, Japan’s output decreased by an annual rate 6.3% but at the same time, Japan’s GDP in yen rose by 4.8%. Why? Inflation! Real GDP is nominal GDP adjusted for inflation. Nominal GDP: is the total value of all final goods produced in an economy in a given year using that year ( current year) prices. Real GDP is the total value of all final goods and services produced in an economy in a given year using the prices of a selected base year. Real GDP is a measure of a country’s aggregate output but can be misleading. Why? Population! Real GDP is positively correlated with population. To account for population size, we calculate real GDP per capita(real GDP divided by population)

What else could be wrong with GDP? •  It does not tell the full story of the well-being of people in the country.

Why? Income disparity The constituents of GDP Environmental resources.

Economic growth vrs Economic development. Economic development is a quantitative growth in GDP (economic growth) and a qualitative transformation of the economy. However, GDP is highly correlated with good quality of life.

Green Accounting-Sustainable income Measurement

Attempt to recalculate national income by adjusting for the use of environmental resources to properly reflect changes in welfare. Proponents of this system advocates that the selling of natural resources and including the proceeds in the GDP is wrong on both economics and accounting grounds. Environmental resources must be considered as assets. Thus, proper value value added measure must subtract depreciation of this asset. Green Accounting proponents defines 2 main types of sustainability. Weak Sustainability: It refers measuring income to reflect the keeping-capital-intact accounting principle. Thus, income should include only value added and exclude the proceeds of asset(environmental resource) sale. Strong sustainability: Requires maintaining the stock of natural capital intact. For nonrenewable resources, this implies that the equivalent of the user cost of depletable resource should be invested in developing a renewable substitute.

Environmental Kuznet Curve(EKC)-Growth vrs Pollution

•  According to the EKC hypothesis, there is an inverted U-shape relationship between environmental degradation and income per capita.

•  At the early stages of development, the use of natural resources(land clearance, extraction of natural resources) is rapid but at higher levels of development, better technology, improved environmental awareness and enforcement and structural change in favor of information-intensive production technique lead to improved environmental condition

•  Thus, economic growth would eventually reduce environmental

impacts of economic development.

ExampleoftheEKC(Sulphurdioxide)

Cri#quesoftheEKC•  Environmental damage may not be easily reversible, and the effects

of widespread environmental damage may affect economic growth.

•  Mixed empirical evidence.

•  Aggravation of other environmental problems: As the economy develops, the mix of effluent typically shifts from sulphur and nitrogen oxides to carbon dioxide and solid wastes but the total pollutants per capita may not necessarily decrease.

Popula#onandResourceUse

Popula#onandResourceUse

Fer#lityRate

Popula#onandResourceUse•  The world’s population increased from about 3.85 billion(1972) to 6.1

billion(mid-2000) and is currently growing by 77 million people per year(UNFPA).

•  Most of this growth is concentrated in developing regions with about two-thirds in Asia and the Pacific. Six countries accounted for 50% of the annual growth; India(21.1%), China(13.6%), Pakistan(4.8%), Nigeria(3.9%), Bangladesh(3.7%) and Indonesia(3.6%).

•  Population of industrialized nations(1.2 billion) is expected to change marginally in the next 50 years whereas that of developing regions is projected to increase from 4.9 billion in 2000 to 8.1 trillion by 2050.

•  Fertility rate is responsible for this difference. Less developed regions recorded fertility rate of 3.1 children per woman between 1995 and 2000 whereas their developed counterparts recorded 1.57.

•  The gap in life expectancy between the developing and developed narrowed from 22 to less than 12 years from 1960 to 2000.

Population and Resource Use

•  The world GDP grew by 3.1% annually between 1980 and 1990 and 2.5% (1990-1998)

•  What is the implication of this population trend based on the EKC? •  What about urbanization? •  Economists and ecologists have different perspective on population

growth, economic growth, and the environment. •  Economists emphasize the role of institutions and incentives while

ecologists emphasize the human/environmental interactions and the far reaching consequences of the ecosystem damage.

•  Economists generally suggests that population growth may have neutral, beneficial or detrimental outcomes on resource use depending on specific circumstance and existing institutions.

•  Ecologists have the perspective that base on the law of thermodynamics, there must be a sustainable limit on population growth and consumption levels.

Population and Resource Use•  They point out that the ecosystem has a limited resiliency. When

that resilience is exceeded, there will be catastrophic consequences for humanity. They cite the resurgence of diseases due to antibiotic resistance as an example.

Ecological Footprints

•  EF is an estimate of the human pressure on on the global ecosystems expressed in area units.

•  Each unit corresponds to the number of hectares of biologically productive land required to produce the food and wood people consume, the infrastructure people use and to absorb the C02 produced from burning fossil fuels.

•  The footprint takes into account the total impact people have on the environment.

•  Ecological footprint is a function of population size, average per capita consumption of resources, and the resource intensity of the technology used.

•  The world’s ecological footprint increased from 11000 million area units to more than 16000 million area units between 1970-1996