CTW Notes
CtW – Week 7
Welfare – Jonathan London
Welfare satisfaction of basic human needs and implies protection from deprivations of need in
times of adversity
Philosophical definition: welfare entails the development of human capabilities and freedoms,
the achievement and maintenance of social autonomy, and the ability not merely to function or
subsist but to thrive and pursue one’s livelihood in a dignified and meaningful way
Welfare and wellbeing can be used interchangeably
Opposite of welfare [fulfillment of needs]: poverty [deprivation of human needs]
Where expansive notions of welfare highlight autonomy and inclusion, expansive notions of
poverty center on situations of exclusion and dependence, which elevate levels of vulnerability
to extreme hardship
Human Development Index statistical composite that combines measures of national income,
years of schooling, and life expectancy has become a favored way of ordering countries in a way
that conveys ‘levels’ of human development, or welfare
Understanding of welfare doesn’t satisfy everyone, as it doesn’t address subjective elements of
welfare/wellbeing
Chang – Chapter 6: Output, Income and Happiness
GDP: the total monetary value of what has been produced within a country over a particular
period of time – usually a year, but also a quarter (three months) or even a month
In calculating GDP, we measure output – or product – by value added. Value added is the value
of a producer’s output minus the intermediate inputs it has used.
Only by counting the ‘added’ value can we measure the true size of the output
Capital goods: machines
Depreciation: the reduction in economic value of capital [machines] over time
Net Domestic Product (NDP): GDP minus wear and tear of machines NDP is more accurate
than GDP in long run, but GDP is more accurate in short run; we use GDP because there is no
one way of measuring depreciation
Also need to look at GDP/GNP figures per capita [due to population differences
Why do we need to measure economic output? (the ‘P’ in GDP)
o Serves as economic indicator of how well a country is doing
o For comparison purposes across countries
o Helpful in forming economic policy
o Changes in economic growth
Double-counting: refers to counting the value of an output more than once in the chain of
production [the value-added approach]
Limitations of GDP/GNP:
o They value outputs at market price [imputation of market values to non-marketed
outputs involves guesswork hence, some inaccuracy]
o Household work not imputed
o They don’t full represent living standards:
, May conceive grave inequalities
Doesn’t consider other things that are valued, like non-monetary things like
political freedom, happiness
Existence of positional goods
GNP:
o the total value of all national products that are produced by all nationals of a country
inside and outside of a country
o Market value of final groups produced by nationals (including companies) of a country in
a period.
o GNI = GDP + Net factor income from abroad
Real-life numbers:
o Most of world output is produced by a small number of countries
o Most developing economics produce tiny fractions of what the richest countries
produce
GDP measured through:
o Income approach: how much people make
o Output approach: the added value
o Expenditure approach: how much you spend
all these are proxy approaches
Income:
o Gross Domestic Income, or GDI
GDI: adding up the incomes of those producing within its border
In theory, should be identical to GDP as it is simply a different way of adding up
the same thing – but differs slightly in practice as some data may be collected
through different channels
o Gross National Income, or GNI and per capita GNI
Rich countries should continue to develop their economies but radically change
their production and consumption priorities
GNI per capita, considered by some to be best measure of country’s living
standard
Problem: average income may conceal greater variation
o Adjusting for different price levels: purchasing power parity
Problem: market exchange rates are largely determined by the supply and
demand for internationally traded goods and services,
Purchasing power parity (PPP): idea of an international dollar: measures the
value of a currency according to how much of a common set of goods and
services (‘consumption basket’) it can buy in different countries [as fictitious
currency]
o Income figures do not fully represent living standards, even with PPP adjustments
Why? Because we don’t live by monetary income alone [i.e. we need political
freedom, self-fulfillment, etc.], income figures don’t reflect household work, etc.
, Also, positional goods (goods whose value derive from the fact that only a small
proportion of potential customers can have them) make income an unreliable
gauge of true living standards.
Real Life Numbers
o Countries that we typically know as the richest countries have over $40,000 per capita
income
o The average person in the poorest four countries doesn’t even earn $1 a day
o There are poor countries and there are poor countries: gaps between developing
countries
o PPP adjustments show that gaps in living standards are not as severe as gaps in
productivity
With these PPP adjustments, the income differences between the rich and the
poor countries are diminished, compared with the ones calculated in terms of
market exchange rate incomes.
Happiness
o Not everything that counts can be measured, not everything that can be measured
counts: can – and should – happiness be measured?
o Adaptive preference and false consciousness: why we cannot totally rely on people’s
judgements on their own happiness
Adaptive preference: people reinterpret their situations to make them more
bearable
Many people who are oppressed/exploited/discriminated against are happy;
many oppose changes that will improve their lot [they’ve internalized the values
of the oppressors/discriminators Marxists call these cases of false
consciousness
o The Matrix and the limits of happiness studies
Idea of false consciousness difficult and has no definite solution
o Happiness studies with more objective measures
Given these limitations, most happiness studies now combine more objective
measures with some element of subjective assessment.
Real-Life Numbers
In sum, defining and measuring concepts in economics cannot be objective in the way such
exercises in physics or chemistry can be.
All of this does not mean that we should not use numbers in economics. Without having some
knowledge of key numbers – like output levels, growth rates, unemployment rates and
measures of inequality – an informed understanding of the real-world economy is impossible.
But we need to use them in full awareness of what each number does and doesn’t tell us.
Chang – Chapter 7: The World of Production
Economic growth and economic development
o Economic development as the development of productive capabilities
Equatorial Guinea richest country in Africa, achieved extraordinary growth
BUT due to oil, no due to increase in its ability to produce
, Hence difference between economic growth (Equatorial Guinea) and economic
development [process of economic growth based on the increase in an
economy’s productive capabilities (its capabilities to organize and transform its
production activities)].
o An economy with low productive capabilities cannot even be sure of the value of what it
produces
o Changes in technologies are at the root of economic development
Today, technological developments are the result of organized, collective efforts
inside and outside productive enterprises, rather than of individual inspiration.
o Technologies do not tell the whole story: the importance of work organization (i.e.
assembly line and moving assembly line)
o The rise of Fordism, or the mass production system
Taylorism/scientific management: production process should be divided into
simplest possible tasks and workers should be taught most effective ways to
perform them
Mass production system/Fordism: production costs can be cut by producing a
large volume of standardized products, using standardized parts, dedicated
machinery and a moving assembly line
o Modifications to the mass production system: the lean production system
Lean production/Toyota system [first developed in Japan]: has parts delivered
‘just in time’, thus eliminating inventory costs; works with suppliers to raise
quality of parts; uses machines that allow quick changeovers between different
models; equips workers with multiple skills and allows them to exercise a lot of
initiative
o Productive capabilities beyond the firm level are also very important
Economy’s productive capabilities also include capabilities that non-enterprise
actors – such as the government, universities, research institutes or training
institutes – have in facilitating production and improving productivity
Real-Life Numbers
o Failing to check whether growth rates are overall or per capita can distort your
perspective
If you are comparing different economies over a relatively long period of time, it
is important that you use per capita growth rates
o Why a 6 per cent growth rate is a ‘miracle’
All in all, the rule of thumb is that per capita output growth rate above 3 per
cent is good, while anything above 6 per cent is entering the ‘miracle’ territory.
Anything substantially above 10 per cent for an extended period (say, more than
a decade) is possible only through either resource bonanza, as in the case of
Equatorial Guinea discussed above, or recovery from a war.
o The power of compound rates
The use of compound rate means that what may seem to be a relatively small
difference in growth rates can create a large gap, if sustained over a sufficiently
long period of time.
