Welfare economics

WELFARE ECONOMICS(GROWTH AND DEVELOPMENT)

Welfare Economics

• deals with topics on justice, equity, freedom and other pertinent topics geared toward economic growth and progress.

• It is concerned with the welfare of individuals. The individuals are us, the consumers. Welfare Economics assumes that individuals are the best judges of their own welfare.

Social Goals and Social Choice

• Various societies have different goals, but members of these societies seem to concur to the same objectives of justice, equity, freedom and growth and progress in the economy.

• Justice, In Economics pertain to equitable distribution or specifically, equity in terms of the distribution of wealth and income.• Freedom, In Economics, pertains

to the choice of consumption, occupation and employment.

ECONOMIC GROWTH VIS-A-VIS ECONOMIC DEVELOPMENT

The term “progress ”implies a movement for the better…..

Pareto Optimality or Parentian Optimum

- it declares that a change w/c makes somebody richer but nobody poorer is desirable.

Economic Growth

- shows an increase in per capital income.

Economic Development- a process whereby the real per

capital income of a country increases over a period of time.

Balanced Growth Thesis- Underdevelopment must be

overcome through simultaneous investment in diff. fields.

Unbalanced Growth Thesis

- some sector in the economy lead in initiating Economic Growth.

Two major strands to the study of Development

Stages of Economic Growth

- development is seen as a series of successive stages through w/c all countries must pass.

Structural-Internalist Theories

(a)Neo-Colonical (or Neo-Marxist)/ Dependence Model

(b)False Paradigm Model

Modernization school

Walt Whitman Rostow, American Economist Historian.. – proponent

Key characteristics:

• It is evolutionist

• It is unilinear

• It is internalist

• It is recapitulationist

Dependency school

Andre Gunder Frank,American Economist.. -proponent

Key Characteristics:

It is externalist

It is bilinear

It is stagnationist

It is discontinuist

Perspective of development

Psychological – speeds up or delays behaviors, attitudes and values; its basis is the human person which in fact is the root in which human society thrives.

Behavioral – requires the analysis of its determinants or that which affect responses.

Kelburn Workshop

• Literacy, education, and skills

• Health

• Income and economic welfare

• Choice, democracy and participation

• Technology

Economic Development Theories

The three building blocks of most Growth Models are:

The production function

The saving function; and

The labor supply function

Harrod-Domar Model

ag = _s_ k

by Sir Roy Harrod of Britain and E.V Domar of USA.

commonly used during the early postwar times by developing countries in economic planning.

Exogenous Growth Model( Neoclassical Growth Model)

An economic theory that outlines how a steady economic growth rate will be accomplished with the proper amounts of the three driving forces: labor, capital and technology. 

Surplus Labor Model

- is an economic development model and not an economic growth model.

- the development process is triggered by the transfer of surplus labor in the traditional sector to the modern sector in which some significant economic activities have already begun.

The Stages of Economic GrowthThe theory is intended as a direct counter

to the Marxist Stage Theory of Capitalist Development. The basic proposition is that all countries are located in one of a hierarchy of developmental stages:

• Traditional Society

• Transitional Stage: Preconditions for Take-Off

• Take-Off

• Drive to maturity

• High Mass Consumption

The Big Push/Balanced Growth

- the "big push" was to develop industry and not agriculture, although agriculture could not be ignored. This was the way to break the vicious circle of poverty. The vicious circle of poverty is perpetuated by the lack of capital.

Unbalanced Growth- Unbalanced Growth recognized both

backward (inputs create demand for other products) and forward (Inputs to other industries) linkages.

SUSTAINABLE DEVELOPMENT

- Human Welfare is the essence of development. Human development. Human development is the process of enlarging people’s choice. There are three(3) essential areas of opportunity:• to lead a long and healthy life.• to acquire knowledge • to have access to resources needed for a

decent standard of living.

Human Development

• "Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. It contains within it two key concepts:

• the concept of needs, in particular the essential needs of the world's poor, to which overriding priority should be given; and

• the idea of limitations imposed by the state of technology and social organization on the environment's ability to meet present and future needs."

National Income Accounts and Related Issues

• Gross National Product (GNP)

is the market value of final goods and services produced in a year by domestically owned factors of production.

• Final Goods

are goods that are ultimately consumed rather than used in the production of another good.

• National Income

is the flow of income and expenditure measures of the country.

• Nominal GNP

is the market value of a nation's aggregate production of final output based on current prices for the goods and services produced during the year.

• Real GNP

is the measure of the value of a nation's aggregate output of final products obtained by using market prices prevailing for products during a certain base or reference year.

• Aggregate Real Income

is the nominal (money) income of a nation, adjusted for inflation, expectations of equivalent to real GNP.

•Net Export

is any excess of expenditures on export over imports.

Aggregate Expendituresthe nominal income of a nation, adjust for inflation. The four (4) categories are:

• Personal Consumption Expenditures

• Gross Private Investment

• Government Purchases of goods and services

• Net Exports

Components of the aggregate incomes of individuals & corporations

• Compensation of Employees

• Proprietor’s Income

• Corporate Profits

• Net Interest

• Rental Income

• Other income components of GN

GNP per person is often used as a measure of people’s welfare.

Limitations to the usefulness of GNP as a measure of welfare:

• Measure of GNP typically exclude unpaid economic activity.

• GNP takes no account of the inputs used to produce the output.

• Comparison of GNP from one country to another may be distorted by movements in exchange rates.

• GNP does not take into account many factors that maybe important to quality of life.

GNP adjustment for price changes

• GNP is precise if prices and the value of the peso remain constant.

• Inflation

-increase in the price level

• Deflation

-decrease in the price level

Aggregate demand components

• Aggregate Demand

- demand for the total output of the economy.

Formula to get the total demand for output:

AD=C+I+G+(X-M)

GNP=C+I+G+(X-M)

AD= aggregate demand X= exports

C= consumption expenditures M= imports

I= investment expenditures

G= government expenditures

Consumption

• Represents the household expenditure in the country for goods and services.

• Consumption is the value of goods and services bought by people. Individual buying acts as aggregated over time and space.

Composition According to Durability:

• Durable (goods)

- Cars and Television Set

• Non-Durable (goods & services)

- foods and restaurant expenditure.

According to the Need it Satisfy

• Food

• Clothing and Shelter

• Health

• Education

• Transport

The Methods of Computing/Measuring National Income

•The product method•The expenditure method•The income method

The Product Method or Value Added Method

• measures GDP as the difference between value of output less the value of goods and services used in producing these outputs during an accounting period.

Precautions for Product Method

• Double Counting

• Value Addition in Particular Year

• Stock Appreciation

• Production for Self Consumption

Expenditure Method

The Expenditure Approach measures National Income as total spending on final goods and services produced within nation during a year.

Consumption Expenditure (C)

- expenditure on all goods and services produced and sold to the final consumer during the year.

Investment Expenditure (I)

- expenditure incurred on by business firms on (a) new plants, (b) adding to the stock of inventions and (c) on newly constructed houses.

Government Expenditure (G)

- all government expenditure on currently produced goods and services but excludes transfer payments while computing national income.

Net Export Expenditure (X - M)

- National Income calculated from the expenditure side is the sum of final consumption expenditure, expenditure by business on plants, government spending, and net exports.

NI = C + I + G + (X - M)

Income Approach

- is another alternative way of computing National Income. This method seeks to measure National Income at the phase of distribution.

4 categories of payments are briefly described below.

• Wages

• Rents

• Interests

• Profits

Burgonio, Rhose – AnnGamba, JinkieMadronio, Ramon Noriel M.Hernandez, JobethOrane, Nerlyn