Saturday, September 15, 2007

Writing about What I am Learning

Perhaps this will help some of the Macroeconomic concepts "stick". I thought the graph here (again taken from Krugman & Wells textbook "Economics", published in 2005) was interesting in the breakout of what goes into the CPI. There is certainly a resemblance to Maslow's hierarchy of needs (funny, I keep finding good definitions on Wikipedia?), with food related and shelter related expenditures making up over 50% of a household's total expenditures. Interesting.

The following is taken from Chapter 24, page 6, Section 2 of the Paul Krugman & Robin Wells textbook "Economics" published in 2005. It offers up a bit of a clarification of what economists have been accused of doing; using GDP as the only measure of a national population's quality of life.
Although real GDP per capita can be a useful measure in some circumstances, it has well-known limitations as a measure of a country’s living standards. Every once in a while economists are accused of believing that growth in real GDP per capita is the only thing that matters—of thinking that increasing real GDP per capita is a goal in itself. In fact, economists rarely make that mistake; the idea that economists care only about real GDP per capita is a sort of urban legend. Let’s take a moment to be clear about why a country’s real GDP per capita is not a sufficient measure of human welfare in that country and why growth in real GDP per capita is not an appropriate policy goal in itself.
One way to think about this issue is to say that an increase in real GDP means an expansion in the economy’s production possibility frontier. Because the economy has increased its productive capacity, there are more things that society can achieve. But whether society actually makes good use of that increased potential to improve living standards is another matter. To put it in a slightly different way, your income may be higher this year than last year, but whether you use that higher income to actually improve your quality of life is your choice.

The United Nations produces an annual document, the Human Development Report, that tries to rank countries by measures other than real GDP per capita. These measures include data on infant mortality, life expectancy, and literacy. It compiles these measures into the Human Development Index, which is an effort to determine how well societies are doing, aside from how much they produce. The index suggests that real GDP per capita is one of many important determinants of human welfare — but by no means the only one. Countries with high real GDP per capita — like the United States, European nations, and Japan — also score very well on just about every other indicator of human welfare. But there are some relatively poor countries — like Costa Rica — that have remarkably high literacy and life expectancy along with low infant mortality. And there are some relatively rich countries — especially countries with valuable natural resources — that score quite low on these criteria.
This passage addresses my preconceptions about the study of economics, voiced in the preceding post. I suppose it's not what the economists care about (unless they are being paid by whatever industry they may be analyzing), but what government policy wonks and industrial leaders decide to do with the information. It's up to US to hold them accountable.

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