GDP CONCEPTS AND

ALTERNATIVES
CONSUMPTION,
SAVINGS, INVESTMENT
MA N K I W,AND
N . G . ( 2 0 1TRADE
6 ) , “ P R I N C I P L E S O F E C O N O MI CS ” ,
CHAPTER 23
G O O D W I N , N E VA , JO N AT H A N H A R R I S , J U L I E
N E L S O N , BRI A N RO A C H A N D MA R I A N O TO R R A S .
Dr. Manika Bora
“ MA C R O E CO N O MI C S I N CO N T E X T ” , C H A P T E R S 2 0
AND 21
 SAVINGS AND INVESTMENT
According to the spending approach,
GDP = Personal consumption + Private investment + Net exports + Government
consumption + Government investment
Which can be re-written as,
GDP – Personal consumption – Government consumption =
Private investment + Government investment + Net exports
What is left from income after spending on consumption?
Saving = Investment + Net exports
Intuitively, goods and services that are produced in our domestic economy in excess of what
we currently use for consumption can be investment goods—additions to our stock of
manufactured assets (including replacement of depreciated assets)—or can be sold to foreign
countries (in excess of the value of what we import from them).
INTERDEPENDENCE OF
COMPONENTS
Does level of personal consumption effect the investment in the
economy?
Is new investment related to growth in the economy?
What determines government’s ability to consume and invest?
What does it mean for an economy if the economic growth is
fueled by exports?
 NDP AND SAVING
Net domestic product (NDP): a measure of national production in excess of that needed
to replace worn-out manufactured capital, calculated by subtracting depreciation from
GDP
Net domestic product = GDP – Depreciation

Net saving is a better measure than gross saving of whether we are “putting something
aside for the future.”
 ALTERNATIVE CONCEPTS OF NATIONAL
INCOME
Gross national product (GNP) is the total income earned by a nation’s permanent residents
(called nationals). It differs from GDP by including income that our citizens earn abroad and
excluding income that foreigners earn here.

Net national product (NNP) is the total income of a nation’s residents (GNP) minus losses
from depreciation (Depreciation is the wear and tear on the economy’s stock of equipment and
structures, such as machines, vehicles, light bulbs wearing out).

National income is the total income earned by a nation’s residents in the production of goods
and services. It differs from net national product by excluding indirect business taxes (such as
sales taxes) and including business subsidies.
GROWTH AND DEVELOPMENT
What is economic growth?

Is it different from economic development?

What about well being?

Is GDP a good indicator of well being?

Sources: Weenhoven, R., World Database of Happiness, Distributional Findings in Nations, Erasmus University
Rotterdam. Available at: http://worlddatabaseofhappiness.eur.nl, 2010; Bureau of National Economic Accounts.
CHARACTERISTICS OF A
DEVELOPING NATION
1. Demographic characteristics
2. Occupational and production structure
3. Rapid rural –urban migration
4. International trade
GDP AS AN INDICATOR
What should we measure?

What should be used as the unit of measurement? Is that adequate

to measure other variables of well being?

Should we seek to combine disparate well-being indicators into a

single “bottom-line” number, or should we keep the variables
disaggregated?
EXCLUSION OF
HOUSEHOLD
PRODUCTION
While the global value of unpaid
domestic labour by women hovers
around 13 per cent, in India, the
number is almost 40 per cent of
its current GDP.
REFLECTING ON OTHER EXCLUSIONS
AND INCLUSIONS IN GDP
 Standard measures such as GDP do not include volunteer work despite its contribution
to social well being
 Leisure is another activity that contributes to well being but takes away time from paid
work and therefore is excluded from GDP
 Social and political factors that may significantly affect well-being include the health
and education levels of a country’s citizens are not necessarily included in the reflection
of GDP
 Products or production methods that reduce, rather than increase, well-being may show
up as additions to GDP. Unhealthy foods and drugs and dangerous equipment, for
example, may lower, not raise, overall well-being
EXCLUSIONS FROM GDP
(CONTD)
GDP generally does not account for environmental degradation and resource
depletion, while treating natural resources that do not go through the market
as having no monetary value

Increased economic activity in a country is included in GDP even if it

contributes to increase in inequality, which would clearly reduce the well
being for the society as a whole.
 ALTERNATIVE
MEASURES OF
DEVELOPMENT AND
WELL BEING
 GENUINE
PROGRESS
INDICATOR
In 1989, economist Herman
Daly and theologian John Cobb
Jr. suggested an alternative
measure to GDP that they
called the Index of Sustainable
Economic Welfare (ISEW).
This measure was later
transformed into the Genuine
Progress Indicator (GPI), one of
the most ambitious attempts to
date to design a replacement to
GDP.
 HUMAN
DEVELOPMENT
INDEX (HDI)
• Created by United Nations HDI
is calculated based on only three
components of well -being: life
expectancy at birth, years of
formal education, and real per-
capita GDP.
• Although they are denominated
in different units—both years and
money—no attempt is made to
translate one into the other.
Rather, relative performance is
presented in a scaled index.
EXERCISES
1. How are “market values” determined for goods and services
that are not exchanged in markets or when data is not available?
2. Describe the components of GDP according to the product
approach.
3. Describe the components of GDP according to the spending
approach.
4. GDP is a measure of output and not well being. Discuss