National Income Statistics

and Alternative Measures

Unit 8 - Lesson 5
Learning outcomes:
● Define all terms in orange bold in section 8.5. (AO1)
● Evaluate the appropriateness of GDP and GNI statistics for the purpose of:
(AO3)
○ Measuring economic well being over time.
○ Comparing economic well being across countries.
● Explain alternative measures of well being: (AO2)
○ OECD Better Life Index
○ The Happiness Index
○ The Happy Planet Index
Evaluating National Income Statistics
When GDP and GNI per capita increase over time we might expect the residents
of that country will experience a higher standard of living.
Also, if one country has a higher GDP and GNI per capita than another country,
we may expect that country to have a higher standard of living.
But, this is not always the case.
There are two reasons for this:
1. National Income statistics do not accurately measure the accurate output
produced in a specific country.
2. The standard of living in a country are linked to many other factors that
GDP and GNI do not account for.
The Accuracy of National Income Statistics
Why National Income Statistics do not accurately reflect the actual value of output in
an economy.
Limitations:
● GDP and GNI do not include “non-marketed” output
○ GDP measures the total output of a country that is sold in marketplaces.
■ Some output of goods and services is not sold in the marketplace and
therefore is referred to as “non-marketed” output.
● If you do repairs to your home through “DIY” projects. These
services are not included in the output for the economy.
● If you would hire a contractor to make the repairs then it would
be included in the output of the economy as they would be paid
wages.
■ “Non-marketed” output tends to be larger in less developed
countries since many households are self-sufficient with a
substantial amount of production taking place within the household.
● Therefore “non-marketed” output tends to be much greater in less
developed countries than in more developed countries.
Limitations to National Income Statistics
Limitations:
● GDP and GNI do not include output sold parallel (underground) markets
○ In contrast to “non-marketed” output, the goods traded in underground
markets do generate income; however, they are not recorded in the
calculations for GDP or GNI.
■ In Tanzania there are many informal markets where goods are exchanged.
Any transaction that is not recorded by TRA will not be included in the
calculations for GDP and GNI of Tanzania.
● GDP and GNI do not take into account quality improvements in goods and
services.
○ Quality of output improves over time, but is not considered when calculating
GDP or GNI.
○ Technological advancements allow many goods to be sold at lower prices
significantly benefiting the consumers.
○ However this does not show when calculating GDP or GNI.
Limitations to National Income Statistics
● GDP and GNI do not account for the value of spillover costs created by Negative
Externalities.
○ GDP and GNI do not consider the cost to society such as air pollution and other
socially undesirable production methods.
■ This reduces society’s well being and standard of living.
● GDP and GNI and differing prices.
○ Price level vary from country to country.
■ Country A and Country B have identical GDP per capita of $2,000
● However, the price of similar goods and services in Country B is 20%
more than Country A.
○ Though the same GDP per capita, Country B has 20% less
purchasing power than Country A.
■ Therefore the standard of living in Country B is most likely
lower than Country A.
Measures of Output to Standard of Living
Why measures of output do not accurately reflect the standard of living
within a country.
Limitations:
● GDP and GNI make no distinction about composition of output.
○ GDP considers the total amount of output produced within a country.
■ GDP fails to consider what type of goods and services are
produced.
● Do they produce more military goods than merit goods or
more merit goods than military goods.
○ Not being able to make the distinction on what type of
goods are produced limits the ability of National Income
Statistics to accurately measure standard of living.
Measures of Output to Standard of Living
● GDP and GNI do not measure the achievement levels of education,
health and life expectancy.
○ Education and health of a country’s citizens is an important measure of
the standard of living within a country.
○ GDP and GNI do not account for this and thus the statistics do not help
us understand accurately the standard of living within a country.
● GDP and GNI do not identify how the income is distributed among the
poplulation.
○ Is the wealth of a country concentrated in the hands of a few?
○ Is the wealth of a country more evenly distributed among the population?
■ The more evenly the income is shared among the population the better
the standard of living as a whole within a country.
● GDP and GNI do not account for this.
Measures of Output to Standard of Living
● GDP and GNI do not take into account increased leisure time
○ Some countries have a decreasing number of hours worked on average
per week which correlates to increased time to pursue leisure activities.
■ If the average number of hours spent on leisure increases the better
the standard of living.
● GDP and GNI do not account for quality of life factors
○ Standard of living depends on many non-economic factors such as:
■ Well functioning government, crime rates, good working conditions,
political freedoms
○ Though a country may have a high GDP or GNI per capita not
accounting for the non-economic factors listed above does not allow
both GDP or GNI to accurately measure the standard of living within a
country.
National Income Measures Comparison Over Time
Comparison over time:

● We learned earlier in this chapter to make comparisons over time we must

use “Real” figures (keeping price levels constant).
○ However, even when we do measure the “Real” value of income and
output the numbers may be misleading.
■ From the previous slides, a “Real” percentage increase in income
and output may underestimate or overestimate the standard of
living for a country.
● These statistics do not take into account quality changes,
leisure time, education and health to name a few.
Comparisons between Countries

The inability of National Statistics to

accurately measure output and the
many standard of living factors limits
their ability to make accurate
comparisons between countries.
● The previous limitations
discussed about National Income
Statistics due to output
inaccuracies and standard of
living limit their ability to allow
economists to accurately make
comparisons between countries.
Alternative Measures of Well Being
OECD Better Life Index
● OECD - Organisation of Economic
Co-operation and Development
○ Founded in 1961 and consists of
36 member countries.
■ Purpose is to provide a forum
where member countries can
meet to discuss common
problems and discuss policy
solutions for economic
well-being.
■ Most members are from more
economically developed
countries.
OECD Better Life Index
There are two groups of factors that determine
the “Well Being in the Present”

● Quality of Life
○ Includes 8 indicators
● Material Conditions
○ Includes 3 indicators

Both the Quality of Life and Material

Conditions factors depend on. Each of these
factors is essential to the well being of society.

● Natural Capital
● Economic Capital
● Human Capital
● Social Capital
OECD Better Life Index Criticisms
● Criticised for not taking “equity”
into account when measuring the
index.
○ Currently working to include
“equity” as a factor in the
index.
● Difficulty in measuring certain
dimensions of the index which calls
into question its validity.
Happiness Index
Created by the United Nations Sustainable Development Network in 2012.

● Organisation was created to gather scientific and technological information to

encourage sustainable development policies including the implementation of
the Sustainable Development Goals (SDGs)
○ Goal is to address the interdependent social, economic and environmental
challenges facing the world today.
■ Happiness Index included data from 156 countries based on:
● Real GDP per capita
● Social support
● Health and life expectancy
● Freedom to make life choices
● Generosity
● Perception of corruption
Happiness Index
Limitations and criticisms include:
● Some data and variable limitations
● Happiness is very difficult to
measure and quantify.
○ Happiness means different
things for different people
■ Meaning across cultures
are very different.
● Makes it less reliable
for comparisons
between countries.
Happy Planet Index
Happy Planet Index (HPI) was developed by New Economics Foundation (NEF), a
non-governmental organisation (NGO).
● Explores and develops economic models based on “equality, diversity and
economic stability”.
○ Happy Planet Index is intended to be a measure of sustainable
well-being. Factors considered include:
■ Life expectancy, how people feel about their own well being which then
are adjusted to account for ecological footprint and inequalities.
HPI = life expectancy x wellbeing x inequality of outcomes divided by ecological
footprint
Happy Planet Index
● Life expectancy is the expected number of years an individual will live based
on United Nations data estimates.
● Wellbeing is taken be a population satisfaction taken from the Gallup World
Poll.
● Inequality of Outcomes refers to inequality between life expectancy and
wellbeing.
● Ecological footprint is the impact on the environment that each individual
has on average in a population.
○ Measured by the amount of land required to provide for all requirements
of society.
○ Amount of land needed to absorb all CO2 emissions.
Criticisms and further points to consider...
Happy Planet Index and Happiness Index refer to very different things.

● Happiness Index is concerned with measuring personal happiness

● Happy Planet Index is a measure of happiness of the planet therefore
much more concerned with sustainability.
○ How resources are being allocated to support a populations wellbeing.

Criticisms:

● For its measure of wellbeing

● Ecological footprint is based on a controversial concept not accepted by
all.