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ST ANDREWS JUNIOR COLLEGE
# JC 2 H1 ECONOMICS 202 5
# Standard of Living & Macroeconomic Indicators
Theme 3 provides students with an overview of the workings and linkages of the national and
international economy. Students will use the concepts, theories and principles from Themes 1 and 2 to
examine the problem of scarcity of resources and the concept o f tradeoffs at the national level. In
particular, students will examine how governments make policy choices at the national level to improve
living standards.
In doing so, students will discuss how governments consider competing needs, weigh costs and benefits,
recognise tradeoffs and consequences to make policy decisions. Students will first gain an understanding
of the circular flow of income model and concepts of AD -AS, before applying the concepts to analyse
macroeconomic issues and government decisions at the national level.
Students will also examine domestic and external factors that influence economic growth, price stability,
employment and balance of trade, with a focus on how these factors affect a countrys standard of living.
Additionally, students will also discuss the different policy choices available to governments and their
effectiveness in achieving higher living standards.
# Important concepts and tools of analysis
Macroeconomic Objectives
Standard of Living
-Material and non -material well -being
-Gross Domestic Product (GDP) and Gross National Income (GNI)
-Human Development Index (HDI)
-Income Inequality
-Gini Coefficient
Nominal and real concepts
Macroeconomic Indicators
# Key questions to consider
1. What are the macroeconomic objectives of the government?
2. What is standard of living?
3. What are the different types of macroeconomic indicators?
4. How are these macroeconomic indicators useful to measure the economic performance as well as
standard of living of an economy across time and space?
5. What are the limitations of using these macroeconomic indicators to measure the economic
performance as well as standard of living of an economy across time and space? 2
# Contents
Important concepts and tools of analysis ................................ ................................ ................... 1
Key questions to consider ................................ ................................ ................................ .......... 1
1. INTRODUCTION TO MACROECONOMICS ................................ ................................ .... 3
1.1. Macroeconomics vs Microeconomics ................................ ................................ ................ 3
1.2. Economic Goals ................................ ................................ ................................ ............... 4
1.3. Standard of Living & Macroeconomic Goals ................................ ................................ .... 5
2. KEY MACROECONOMIC INDICATORS ................................ ................................ ........ 9
2.1. Key Macroeconomic Indicators & Macroeconomic Goals ................................ ................. 9
3. INDICATOR OF ECONOMIC GROWTH ................................ ................................ ....... 12
3.1. National Income ................................ ................................ ................................ ............ 12
3.2. Uses of National Income Statistics ................................ ................................ ................ 19
3.3. Limitations of National Income Statistics as an Indicator of Economic Welfare ............ 20
3.4. Alternative Measures of Welfare/ Standard of Living ................................ ..................... 30
3.5. Summary: National Income & Standard of Living ................................ ......................... 32
4. INDICATOR OF PRICE STABILITY ................................ ................................ ............ 33
4.1. Inflation Rate ................................ ................................ ................................ ................ 33
4.2. The Consumer Price Index (CPI) ................................ ................................ ................... 34
5. INDICATOR OF UNEMPLOYMENT ................................ ................................ ............ 37
5.1. Unemployment Rate ................................ ................................ ................................ ..... 37
6. CONCLUSION ................................ ................................ ................................ ................. 39
7. APPENDIX ................................ ................................ ................................ ..................... 41
7.1. APPENDIX A - MEASURING ECONOMIC GROWTH: GDP VS GNP (aka GNI) ..... 41
7.2. APPENDIX B OTHER USES OF NATIONAL INCOME STATISTICS .................. 44
7.3. APPENDIX C GROWTH, DEVELOPMENT, MISERY, HAPPINESS ................... 46
7.4. APPENDIX D - BALANCE OF TRADE ................................ ................................ ..... 55 3
# 1. INTRODUCTION TO MACROECONOMICS
# 1.1. Macroeconomics vs Microeconomics
Macroeconomics is a branch of economics that deals with the structure, behaviour and
performance of a national or regional economy as a whole. In it, we analyse the national output
or income of a country instead of examining the actions of individual firms and households in
specific markets . In examining the behaviour of the economy as a whole, we use the aggregate
levels of demand or supply of the entire economy.
Let us use the demand and supply framework as an illustration of the difference between
Microeconomics and Macroeconomics.
In Microeconomics, we focus on individual markets. It studies the demand for and supply of a
particular good to determine its equilibrium price and level of output in the market. Examples
include the markets for cars, oil, tea, airline services, etc.
In Macroeconomics, however, we look at aggregate demand (i.e. the total value of goods and
services demanded in an economy at each general price level) and aggregate supply (i.e. the total
value of goods and services that producers are willing and able to supply in an economy at each
general price level).
The Aggregate Demand (AD) , together with Aggregate Supply (AS) determines the general
price level and the countrys national output . This is illustrated in Figure 1 below. The
equilibrium level of real national level of income (0Y) and general price level (GPL) facing an
economy is where AD = AS.
An understanding of the workings of the macroeconomy allows us to better understand how the
government formulates policies for the economy to achieve its macroeconomic objectives.
In this lecture series, we will study the significance and importance of the respective
macroeconomic goals and the various policies that can be put in place by the government
to achieve these goals. We will also examine the issues and consequences when these goals
are not attained and the implication on the role of the government in managing the macro
economy.
General Price Level Aggregate Supply (AS)
Aggregate Demand (AD)
> GPL
Y
Figure 1: AD/AS Model
Real National Income 04
# Key Question 1: What are the macroeconomic objectives of the
# government?
# Key Question 2: What is standard of living?
# 1.2. Economic Goals
Economists classify the goals of an economy under two categories: microeconomic goals and
macroeconomic goals.
1) Microeconomic Goals
a) Efficiency in Resource Allocation
An economy seeks to attain economic efficiency, which comprises allocative efficiency and
productive efficiency, in an attempt to deal with the problem of unlimited wants and limited
resources.
b) Equitable Income Distribution
The Government also aims to achieve a more equitable income distribution as severe income
inequality 1 would mean that a large segment of the population cannot afford basic needs of
shelter, food, education and healthcare while a small segment is living in the lap of luxury.
2) Macroeconomic Goals
The key macroeconomic aims refer to the goals that a government hopes to achieve in the
management of its macro economy.
a) Sustainable and Inclusive Economic Growth,
b) Price Stability or Low Inflation Rate
c) Full Employment of Resources
d) Favourable Position of Balance of Trade (Knowledge is not required for H1 syllabus) *
An economy, with some government intervention, would want to achieve as many of the above
macroeconomic goals to improve the standard of living of its people.
To begin, we shall now take a look at the four key macroeconomic aims / goals of an economy.
*If you wish to read up on Balance of Trade (BOT), please refer to Appendix D
> 1
Note: Equitable income distribution (equity) does not mean equal distribution (equality). It
simply means fair distribution. Refer to Market Failure lecture notes for more details. 5
# 1.3. Standard of Living & Macroeconomic Goals
Standard of living includes the material (quantitative ) and non -material (qualitative) aspects of
welfare.
Material Standard of Living
Material SOL measures the quantity of final goods and services that is available to an average
person in the country in a given time period. Real GDP per capita or real GNI per capita is
often used as a proxy measure of the material standard of living in a country over time.
Thus , the higher the real GDP per capita, the higher the material well -being of an
average person in the country, ceteris paribus.
Non -material Standard of Living
On the other hand, the non -material or qualitative aspect of SOL examines the
quality of life of an average person in the country. This includes, for example, leisure
hours, quality of physical environment and life expectancy.
In order to achieve a high standard of living, governments strive to achieve the
following four macroeconomic goals:
1. Goal: Sustainable and Inclusive Economic Growth
Economic growth comprises of actual and potential growth.
Sustained (or maintained) economic growth can only be achieved with actual and
potential growth.
Definition: Standard of living refers to the well -being of an average person
in the economy.
Definition: Economic growth can refer to Actual Economic Growth or
Potential Economic Growth .
Actual economic growth is an increase in the real output of a country .
Potential economic growth is an increase in an economys capacity to
produce goods and services. 6
Economic growth must also be sustainable in order to enable its residents to attain
a continual improvement in the living standards over time, at least quantitatively
or materially.
(Note : Sustainable growth is different from sustained growth. Sustained
growth refers to growth that is maintained over a period of time. Sustainable
growth on the other hand, suggests that the country has achieved growth that
is capable of being sustained.)
For the case of Singapore, we also consider inclusive economic growth as a key
economic goal.
Importance of attaining this goal/aim to an economy : Governments aim to achieve
sustainable economic growth so as to avoid recession 12 (negative growth) or excessive
fluctuations in short -run growth, as well as to ensure that growth can continue for
future generations.
Additionally, governments aim to achieve inclusive growth as it ensures that no one
gets left behind as the country benefits from growth.
> 2
Definition of recession: Operationally defined as a fall in gross domestic product . It is commonly
measured using real GDP .
Definition : Inclusive Growth is a rate of growth that is
sustained/maintained over a period of time and focuses on productive
employment opportunities for the majority of the countrys population.
In the case of Singapore, inclusive growth implies economic growth that takes
income distribution into consideration and does not contribute to worsening
income inequality.
Definition: Sustainable growth seeks to achieve a rate of growth that can
be sustained/maintained without resulting in significant environmental
degradation or resource depletion. 7
2. Goal: Price Stability or Low Inflation Rate
Importance of attaining this goal/aim to an economy :
A low and stable inflation is a macroeconomic goal that is generally seen as beneficial
for its positive effects on economic growth and the standard of living. Stable prices
can create a sound economic environment which facilitates the process of sound
economic decision -making for investments and consumption purposes.
However, in practice, this goal of low and stable inflation is difficult to achieve. The
costs of unbridled inflation can be especially high if it is also unanticipated. These
costs can possibly include a lower growth that results from a loss of confidence in the
economy.
3. Goal: Full Employment or Low Unemployment
There is no universally -agreed definition of full -employment. Another definition of
full employment is simply the absence of demand deficient unemployment. (You will
learn more about demand deficient unemployment in a later topic.)
Realistically an economys unemployment rate is never zero even when the economy
is at its full -employment level. At any point in time, both frictional and structural
unemployment would be present. The rate of unemployment that prevails when
output and employment are at the full -employment level is called the natural rate
of unemploymen t23.
Importance of attaining this goal/aim to an economy :
Government aims to keep unemployment rate in the economy low in order to satisfy
more of the peoples unlimited wants as more of the limited resources (physical and
human) are employed to produce goods and services and not left idle.
> 3The natural rate of unemployment is the level of unemployment at which the inflation rate in an
> economy stays stable and if the unemployment falls due to economic expansion, the inflation rate starts
> to accelerate. It is thus also known as the non -accelera ting inflation rate of unemployment (NAIRU).
Definition : Inflation is a situation where there is a sustained increase in
the general price level.
Definition : Full employment is a situation where whoever is willing and
able to work gets a job. In other words, there is no involuntary
unemployment. 8
> Low unemployment or full employment results in a higher level of production of
> goods and services, ceteris paribus. With the higher output of goods and services,
> more of the unlimited human wants can be satisfied and this can lead to a higher
> level of economic welfare.
4. Goal: Favourable Position of Balance of Trade *
> (Knowledge is not required for H1 syllabus) *
Generally, when a countrys total international receipt from exports to the
rest of the world exceeds the total international payment for imports from the
rest of the world, the economy is said to be in a favourable position of balance
of trade. With globalisation, there are higher trade flows between economies,
and a favourable balance of trade is a key economic aim for many
governments to achieve. Countries tend to avoid large and persistent deficits
and surpluses on the balance of trade.
The balance of trade is a component of the balance of payments.
Balance of Payments *
> (Knowledge is not required for H1 syllabus) *
> Importance of attaining this goal/aim to an economy :
> A country with favourable balance of trade position in the long run is able to sustain
> an open economy without having to confront problems related to a large and
> persistent balance of trade deficit or surplus. (You will be learning more about these
> problems in the later topics.)
Definition : The balance of trade (BOT) refers to the difference between a
countrys total international receipt from its exports and the total
international payment for its imports.
Definition : The balance of payments is a record of an economys
international transactions between its residents and those of the rest of the
world over a period of time. 9
# Key Question 3: What are the different types of macroeconomic
# indicators?
# 2. KEY MACROECONOMIC INDICATORS
Having examined the key macroeconomic goals of an economy, it is pertinent to find out
whether or not these goals are achieved. The key macro economic indicators are conventionally
used to measure the health or the performance of the economy.
These include the indicators for measuring economic growth rate , inflation rate and
unemployment rate and balance of trade .
# 2.1. Key Macroeconomic Indicators & Macroeconomic Goals
Macroeconomic Goals Key Economic Indicators
1 Sustainable Economic Growth
For case of Singapore,
Inclusive Economic Growth
Economic Growth Rate
Indicator to measure inclusive
Economic Growth:
Gini Coefficient
2 Price Stability Inflation Rate
(E.g. Consumer Price Index)
3 Low Unemployment Unemployment Rate
4 Favourable Position of Balance
of Trade * Balance of Trade * position
(Knowledge of BOT is not required for H1 syllabus) *
Definition : An economic indicator reveals a facet of the health of an economy
over a period of time. While there are many indicators that can summarise the
economic health of a country, we shall focus only on the 4 key economic
indicators which relate to the four macr oeconomic goals of an economy as shown
in the table below. 10
The above indicators 1 to 3 are applicable to assessing the state of the internal / domestic
economy while indicator 4 helps in assessing the state of the countrys external economy [i.e. its
economic performance compared to those of its trading partners.]
The economic health / performance of an economy is very much related to the attainment of the
4 macroeconomic goals.
Failure to achieve the above economic goals may be due to any of the following macroeconomic
problems:
o Negative Economic Growth (recession)
o High Unemployment
o High Inflation or Deflation
O Large and Persistent Balance Of Trade Deficit/Surplus (not required for H1 syllabus)
INTERNAL STABILITY
Economic Growth indicated by
National Income Statistics:
o Gross Domestic Product (GDP) and Gross
National Income (GNI)
Positive growth (i.e. Increasing
GDP/GNI) means the country is
producing more output over a specific
period of time.
Higher per capita earnings show an
improvement in higher material
standard of living.
Low Unemployment indicated by
o Low unemployment rate
Price Stability indicated by
o Low inflation rate, usually measured by
Consumer Price Index (CPI). It shows small
and acceptable rate of increase in the general
price level.
EXTERNAL STABILITY
A Favourable Balance of
Trade Position
o Means avoidance of
large or persistent
balance of trade
deficit or surplus.
(not required for H1)
Health of an Economy 11
Usefulness of the Key Economic Indicators to the:
a) Government
These 4 key economic indicators are useful to the government in making economic forecast.
Based on the forecast, the government can put in place the necessary policies that can help the
economy achieve its macroeconomic goals, which are factors that affect the standard of living
of its people. The macroeconomic objectives and the possible government policies will be
examined in greater detail under Macroeconomic Aims and Policies.
b) Firms and Households
A key economic indicator such as low inflation rate can be useful to firms in making their
production and investment decisions.
Similarly, consumer behavior with respect to their consumption or expenditure pattern is
affected by their perception of how well the economy is performing. For example, with economic
growth, consumers are more ready to spend on goods and services when the y expect the growth
to be sustainable. 12
# 3. INDICATOR OF ECONOMIC GROWTH
We will next look at how the various economic indicators can be used to measure the economic
performance as well as compare the standard of living of an economy over time and over space.
# 3.1. National Income
National income is an indicator of economic growth and is useful for economic analysis and
policy making at the national level to improve standard of living.
National Income measures the total market value of all final goods and services that are
produced by a given country in a given period of time (usually a year).
There are three methods of calculating national income.
They are
1) the product or output approach
2) the income approach and
3) the expenditure approach.
These three approaches should arrive at the same national income statistics, GDP or GNP,
barring any statistical errors. 13
a) Methods of Calculating National Income
i) Product or Output Approach: The product or output approach to calculating national income
involves adding up the value of all final goods and services that are produced in the
country during the year e.g. the value of cars, lollipops, garments plus the provision of
services such as haircuts, bus rides and insurance services, etc.
In short, national income can be calculated through the product approach by summing the
value of all final output produced.
ii) Income Approach: The second method involves adding up all the factor incomes that are
generated in the current production of goods and services. This is because firms must employ
factors of production to produce goods and services and in so doing, incomes for households
in the form of wages (W), rent (R), interest (I) and profits (P), are generated.
National Income = W + R + I + P
iii) Expenditure Approach: The third method adds up all expenditure on final output of goods
and services produced in the current period. This includes the following:
1. Consumption expenditure (C) . This includes all expenditure on new final goods and
services by households.
2. Investment (I) expenditure . This includes investment in capital, such as buildings and
machinery. It also includes the value of any increase or decrease in inventories of raw
materials, semi -finished goods or unsold finished goods.
3. Government expenditure (G) . This includes government expenditure on final goods and
services but excludes transfer payments, such as pensions and social security payments.
4. Net exports (X M) . Which is import expenditure by foreign sector subtracted from the
export revenue earned from the sales of goods and services to abroad.
Thus,
National Income = C + I + G + (X M)
The national income of a country can be derived by using all three methods. Regardless of the
method used,
Output Income Expenditure 14
b) National Income Statistics
National income statistics are national figures to measure the national income of a country.
The above calculations using the 3 approaches would allow us to arrive at the following
measurements of National Income.
i) Gross Domestic Product (GDP)
Real GDP vs Nominal GDP
Nominal GDP or GDP at current prices measures GDP at the market prices prevailing in
that time period.
For example, the nominal GDP in 2010 is the total value of all final goods and services produced
in the country in 2010 valued at 2010 prices.
Real GDP or GDP at constant prices measures GDP which has been adjusted for inflation .
This means that changes in the general price level over time (due to price movements) have
been adjusted to eliminate an over -statement (or under -statement) of the actual value of the
output produced in a given period due to inflation (or deflation). Witho ut such adjustment, the
value of the GDP is the nominal GDP.
To derive real GDP from nominal GDP, the following formula is applied.
Real GDP Yr 1 = Nominal GDP Yr 1 CPI Yr 0
CPI Yr 1
Definition : Gross Domestic Product (GDP) is the total market / monetary value
of all final goods and services that are produced within the geographical
boundary of a given country in a given period of time, usually one year. 15
To measure the economic growth of a country over time, the real GDP is used. This is because
any increase in the real GDP must be due to an increase in output as changes in the general
price level have already been eliminated.
Practice Exercise
The base year index is used as the basis for comparison and is always equal
to 100. Suppose the base year (Y 0) is 2007 and average prices in 2014 are
15% higher than in 2007. The price index for 2014 is 115 when measured
from Y 0.
If the nominal GDP is $150 billion in 2007 and $300 billion in 2014,
calculate the real GDP (i.e. GDP at constant 2007 prices) in 2014.
= Nominal GDP 2014 CPI 2007
CPI 2014
= $300m 100
> 115
= $260 .87m
Real income is lower than nominal income because of an increase in
the general price level. 16
ii) Gross National Income (GNI)
The difference between GNP and GDP is the Net Property Income from abroad.
Property income consists of earnings from productive assets. This comprises interest,
rent, profits and dividends.
Property income from abroad represents the income accruing to locally owned factors
of production located abroad e.g. subsidiaries of Singapore firms abroad remit part of
their incomes back to the parent company in Singapore.
Property income to abroad is the income earned by foreign -owned productive factors
located in the country e.g. Income earned by Indonesian domestic helpers which are
remitted to Indonesia.
Comparing the value of GNI and GDP gives an indication of how much of a
countrys net national income comes from abroad.
For more information on measuring economic growth using GDP vs GNI, refer to
Appendix A.
GNI = GDP + Net Property Income from abroad
Net Property income from abroad =
Property income from abroad Property income to abroad
Definition : Gross National Income (GNI) of a country is the total market /
monetary value of income received by the nationals of a country over a given
period of time regardless of where production takes place. 17
Which do you think is a better indicator of Singapores economic position:
GDP or GNI?
With the possible shifts in economic structure, there may be a need to re -
examine how economic growth is measured in Singapore. The focus will
gradually shift towards GNI from GDP. The conventional way of
assessing economic growth in Singapore, as with most countries, is by
measuring the change in the GDP. Historically, Singa pore GNI has been
lower than GDP. However, if the presence of MNCs in Singapore fades in
the longer -term and if Singapore companies are successful in venturing
overseas, then GDP could under -represent the true improvement in
Singaporean income(s). Then, GN I could surpass GDP.
You can read the following article to gain a better insight into the
important differences between GDP and GNI for some countries.
The Asian countries where GDP does not tell the full story 18
Household Income Statistics
Average household income statistics are sometimes used as an indicator for the monetary
well -being of a country's citizens. Household income is a measure of the combined incomes
of all people sharing a particular household or place of residence.
John Maynard Keynes developed a theory of consumption that i s primarily determined by
the level of disposable income. Higher disposable income leads to higher consumer spending.
i) Personal Income
Personal Income refers to the total income that is received by an individual. For an
individual who is involved in the current production of goods and services, the total income
that he receives (as a factor owner) include wages, rental income, interest ea rned from his
savings etc.
In the case of an unemployed individual, his personal income will comprise the
unemployment benefits that he receives from the state. Likewise, a retirees personal income
can be the monthly pension that he receives from his ex -employer.
Unemployment benefits and pensions are known as transfer payments because they are
received by the individuals who do not contribute to the current production of goods and
services.
ii) Disposable Income
Disposable Income is the income that is available to the households or individuals for
spending on goods and services (and saving).
It is the amount that remains after deductions for personal taxes (e.g. income tax,
inheritance tax or property tax) from the personal incomes.
Sometimes referred to as post -tax income, disposable income is a measure that is useful for
analysing consumer behaviour. It is the best measure to use if we want to see how changes
in household income affect consumption. 19
# Key Question 4: How are these macroeconomic indicators useful to
# measure the economic performance as well as standard of living
# across time and space?
# 3.2. Uses of National Income Statistics
Now that we are familiar with the various national income statistics, we can look at how they
can be used.
a) Measures Economic Growth
As mentioned earlier, national income statistics measure the level of economic activity in a
given period of time usually one year. By comparing the national incomes from year to year,
we can determine a countrys economic growth rate (i.e the rate of change in real GDP or GNI).
Economic growth rate can be measured using the year -on -year change in the real GDP (or GNI)
as shown in the formula below.
From the above practice exercise, it can be seen from Column 3 in Table 1 that between 2011
and 2012, the Singapore economy is growing (positive sign) but at a slower rate (decrease in
numerical value) and the rate rises in 2013.
= 1
> 1
100%
Practice Exercise
Using the given values in Table 1, calculate the growth rate for 2012 and
2013.
Table 1 shows the GDP of Singapore at 2010 market prices or at constant
(2010) prices and the annual growth rate. Table 1: GDP at 2010 Market Prices
> (i.e .prices are held constant at 2010 level)
Year GDP (S$m) Growth rate (%)
> 2008 281,427.4 1.8
> 2009 279,729.3 -0.6
> 2010 322,361.1 15.2
> 2011 341,886.1 6.1
> 2012 350,446.0 2.5
> 2013 363,941.9 3.9
> Source: http://www.singstat.gov.sg
20
b) Measures the Standard of Living in a Country
One of the key uses of national income statistics is to measure and compare the standard living
of a country across time and between countries. In general, the higher the real national income
per capita, the higher the material standard of living, since th ere would be more goods and
services available for consumption per person in the country.
For other uses of National Income Statistics, refer to Appendix B.
# Key Question 5: What are the limitations of using these macroeconomic
# indicators to measure the economic performance as well as standard of
# living across time and space?
# 3.3. Limitations of National Income Statistics as an Indicator of Economic Welfare
Historically, the material well -being of the average person in the country is measured by the
real GDP per capita .
However, the GDP is limited in its usefulness as a measure of welfare or the standard of living
in a country for the following reasons:
1. Difficulties in Valuation
In measuring national output, the main problem is that the output of some goods and services
goes unrecorded. Thus, GDP figures can understate the total value of output in the country.
There are two categories of items that are not included in the calculat ion of GDP.
i) Non -Inclusion of Non -Market Activities
Unpaid services, output consumed by the producers themselves, voluntary services are not
included in national income. Some examples include housekeeping and child -rearing activities ,
painting ones own house, volunteering services as well as payments -in -kind. Though these
activities do contribute to ones welfare, they are simply ignored in the calculation of GDP .
Thus, the real level of production in the economy is understated.
ii) Non -Inclusion of the Underground Economy
Closely related to non -market activities is the so -called underground economy which includes
both 1) illegal activities such as drug -dealing and prostitution, illegal money -lending and
smuggling and 2) legal activities that are not declared to evade paymen t of taxes or compliance
with regulations. 21
For example, teachers may provide paid private tuition outside their schools to supplement
their income. However, to avoid paying higher income taxes, this additional income may not
be declared. Another example is that of a self -employed man who can under -declare his income
for the same purpose.
2. Limitation in Comparison Over Time
The use of GDP as a measure of material welfare over time is limited for the following reasons:
a) Changes in General Price Level
If GDP of a country increases by 10% and the general price level increases by 15%, the amount
of goods and services available to the population is actually lower.
As such, using GDP measured at current prices (or in nominal values) may not reflect the actual
changes in material welfare over time. When comparing changes in the material welfare
(quantitative measure), real GDP figures are more accurate as they have been adjusted
for inflation .
So when real GDP increases over time, ceteris paribus, it would mean that the material welfare
of the economy has improved due to an increase in the quantity of goods and services produced
and not due to the increase in the general price level.
In dealing with real GDP growth rates , a basic formula would be:
For example, if the nominal GDP figure has risen by 8% but inflation has been 5%, the real
GDP has only increased by 3%.
b) Population Growth
If the real GDP of a country increases by 5% for the year but its population size increases by
10%, then the amount of goods and services available to the average person in country may
actually be lower.
Although the economic pie is now larger, each individual gets a smaller portion of this pie as
they have to share this pie with many more people. This leads to a fall in the material standard
Real GDP growth rate = Nominal GDP growth rate - Inflation Rate
(Measured in %) (Measured in %) (Measured in %) 22
of living for the average citizen rather than an increase as would be indicated by the increase in
GDP.
Because of this, the real GDP per capita is a preferred indicator for measuring the material
well -being of the average person as it also takes into account changes in the population size.
Hence, it can reflect the material standard of living more accurately than the GDP.
c) Unequal Income Distribution
GDP measures the total value of all final goods and services produced in an economy in a given
year, but it conveys no information about who gets to enjoy these goods and services. Hence,
an increase in the GDP does not necessarily result in a higher standard of living for the average
citizen if the increase in the GDP does not benefit everyone in the country.
A typical feature of many rapidly growing emerging economies is that some people become
wealthier while others are left behind. The result is a growing income inequity. Consequently,
although real GDP per capita may have increased, the general welfare of the majority may have
fallen. Therefore, real GDP per capita fails to be an accurate reflection of material well -being in
the economy.
Recap:
The degree of inequality in an economy can be examined by looking
at the Lorenz Curve as shown below.
Formula of Gini coefficient = Area A/(Area A + Area B)
Area A: area between Lorenz Curve and the 45 degree line
Area B: area below Lorenz curve 23
To overcome this limitation, the Gini coefficient is used together with real GDP per capita
for a more accurate conclusion about the material well -being of the average person in the
country.
The Gini coefficient measures the degree of inequality in distribution of income in a country. It
varies from 0 to 1 (0% to 100%). A Gini coefficient of 0 represents perfect equality. In contrast,
a Gini coefficient of 1 implies perfect inequality i.e. 1 p erson in the country gets all the income.
As seen in the chart below, there has been a fall in the Gini Coefficient in Singapore over the
years and this reflects the positive redistributive effects of government transfers (comparing the
Gini coefficienct before vs after accounting for taxes and tr ansfers).
d) Production DOES NOT equal Consumption
If GDP rises as a result of a rise in investment in capital goods, this will not lead to an
improvement in the current living standards even though it could lead to higher future
consumption.
By the same token, if the government increases its expenditure on defence, it is unlikely to
produce any tangible improvements in material well -being of the people even though the rise in
GDP is contributed by a larger government expenditure on defence. 24
e) Environmental Degradation and Resource Depletion
The rapid economic growth in emerging economies like China and India is reflected in their
GDP statistics. What the statistics do not record is the negative impact the production of goods
and services can have on the environment. Some examples of the negat ive environmental
impact include water, air and noise pollution, loss of bio -diversity, ozone depletion and the
problem of global warming. If these negative impacts are taken into account, the well -being of
the average person may not be as high as the GDP data suggests.
The exploitation of finite natural resources also tends to be overlooked in GDP. When an oil
company extracts and sells a barrel of oil, GDP increases by the value of the oil, but the fact
that there is one less barrel of oil in the ground, waiting to be e xtracted sometime in the future,
is not reflected in GDP.
f) Use of Non -Material Standard of Living Indicators
Welfare or the standard of living in a country comprises both material and non -material aspects
of life. Besides GDP, there are other factors to consider so as to better reflect the non -material
aspect of life.
i) Leisure Time
Over time, the GDP of a country may increase because the people work longer hours. If this is
the case, then the people in the country may not be better off. This is because the number of
leisure hours, which can be used to pursue activities that can raise a persons welfare, is reduced.
The value of leisure forgone is not priced in markets and therefore not reflected in GDP.
ii) Life Expectancy at Birth
Life expectancy at birth is defined as the average number of years that a new -born is expected
to live if he or she were to pass through life. The average life expectancy at birth for Singapore
has increased from 67.1 years in 1965 to 83.1 years in 2023 ( Source: Singstat ). This implies that
the quality of life in terms of child and maternal health has improved.
iii) Infant Mortality Rate
The infant mortality rate is the number of deaths under 1 year of age occurring among per 1000
of live births during a given year. The infant mortality rate in Singapore has dropped from 2.7
per 1000 live birth to 2.2 in 2023 ( Source: Singstat ). This is an indication of an improvement in
the quality of life in terms of better healthcare services. 25
iv) Literacy Rate
Adult literacy rate is defined as the percentage of persons aged 15 and over who can read and
write. Increase in literacy rates shows that more people are able to access information for a
better quality of life. Singapores literacy rate has increased from 82.9% in 1990 to 97.6% in
2023 ( Source: Singstat ).
3. Limitation in Comparison Over Space
The above limitations when using GDP in comparison over time can also be considered as
limitations in making comparison between countries (over space). In addition to these
limitations, the comparison over space is made more complicated when comparison is made
between developed countries and developing / less developed countries.
The use of GDP as an indicator to compare material living standards between countries is not
accurate since it has not been adjusted for the difference in population sizes . It only compares
how large the total national income of a country in nominal value is but does not reflect the
actual amount of goods and services available to an average person in the country.
Therefore GDP per capita is a preferred indicator for comparing the material well -being of the
average person living in the respective country. An average person living in a country with a
higher GDP per capita would mean he has a higher material standard of living.
However, GDP per capita may still not be the most accurate indicator to compare living
standards between countries.
The following limitations are applicable to the use of GDP per capita when comparison is made
between developed countries and developing / less developed countries.
a) Limitations in the Use of Market Exchange Rates
There is a big problem with comparing GDP figures of different countries because the GDP is
measured in the currency of the respective countries.
To enable comparison to be made, these figures have to be converted into a common currency,
e.g. US$ or , at the current exchange rate. But the exchange rate may be a poor indicator of
the purchasing power of the currency at home.
For example, US$1 may exchange for 6.4 Chinese Yuan. But will US$1 in the US buy the same
amount of goods as 6.4 Yuan in China? The answer is almost certainly no. 26
To solve this problem, GDP can be converted into a common currency at the purchasing
power parity (PPP) exchange rate. This is a rate of exchange that allows a given amount of
money in one country to buy the same amount of goods in another country after exchanging it
into the currency of the other country. GDP per capita at PPP exchange rate is a more accurate
indicator to compare standard of living across space.
Using the Big Mac Index as an example, the Big Mac costs US$5 in the US and 20 Yuan in
China. This gives an exchange rate of US$1 to 4 Yuan in PPP terms. This means that US$1
spent in US will get you the same amount of goods and services as 4 Yuan in China .
The use of PPP exchange rate thus removes any differences in cost of living between the 2
countries.
If using the actual exchange rate, 20 Yuan = US$3.13
If using Big Mac exchange rate (as a proxy for PPP exchange rate), 20 Yuan = US$5
Since a person can buy more goods and services in USD when using the PPP exchange rate, it
would suggest that China has a lower cost of living than USA.
Read the article on the Big Mac Index to understand more.
https://www.economist.com/interactive/big -mac -index 27
b) Distribution of Income not reflected in GDP Figures
A higher GDP per capita does not mean that the average individual in the developed country
is better off than one in a less developed country. Just like comparison of living standards over
time, GDP is also limited in its use as a tool for making a compari son of living standards over
space because it does not consider the income distribution in the country.
c) Size of the Underground Economy
The underground economy exists in every country in varying degrees. For example,
Swedens underground economy has been estimated to be 13% of its GDP while that of
UK is 6 to 8%. If UKs official national income figures are higher than Swedens, we
cannot say for sure that the Swedes are worse off.
Comparison between Nominal GDP and PPP -adjusted GDP
> (Source: https://www.ig.com/sg/trading -strategies/what -is -purchasing -power -parity --ppp ---191106)
28
d) Different Sources of Statistical Data
Statistical services are better developed and records better kept in the developed countries given
its higher literacy rate and its infrastructure. Thus their GDP figures are more complete and
reliable compared to those from the less developed countries.
e) Differences in the Components of GDP
Some countries spend huge sums of money on defence and less on consumption. Thus welfare
may not be higher for this country even though its GDP may be higher than another country
that does not spend as much on defence.
f) Difference in Accounting Procedures and Items Included
In developed countries, most of the activities and production go through the market and are
hence included in the computation of the GDP.
On the other hand, in less developed countries, people commonly trade services with each other
or co -operate on various tasks without making any payment to each other.
Families in these communities also tend to be relatively self -sufficient growing their own
food crops and doing many DIY projects.
Thus, the actual amount of goods and services available to the people in a less developed
country may be underestimated as many of these transactions do not go through the
market and are thus not included in the calculation of GDP.
As a result, differences in GDP figures of a developed country and that of a less developed
country may exaggerate the differences in economic output, reducing the usefulness of
making comparisons between these two groups of countries.
g) Other Indicators of the Standard of Living not Reflected in GDP Figures
THINK ABOUT IT
Consider how the non -material standard of living indicators, e.g. life
expectancy at birth, infant mortality rates and literacy rates affect the
accuracy of using GDP per capita to compare the standard of living
across countries. 29
To conclude, GDP data, as a measure of welfare, should in fact be taken only as rough estimate.
As a gauge of a countrys standard of living, it is flawed as it only captures the material aspect
of welfare. Non -material aspect of living standards is largely ignored. Nevertheless, it provides
insight into how the country fares compared to the others or compared to t he past.
To supplement the GDP as a measure of well -being, other factors that are useful for
assessing qualitative aspects of standard of living must be considered. These include
Leisure time
Availability of medical and/or educational facilities per head
Nature and quality of welfare services
For a more holistic analysis of standard of living and to overcome the limitations of GDP as a
measure of welfare, economists have come up with alternative indicators to be used with GDP
statistics.
S So, does GDP measure welfare or does it not?
When Senator Robert Kennedy was running for president in 1968, he gave a critique of the
GDP, It does not allow for the health of our children, the quality of their education, or the
joy of their play. It does not include the beauty of our poetry or the strength of our
marriages, the intelligence of our public debate or the integrity of our public officials. It
measures neither our courage, nor our wisdom, nor our devotion to our country. It measures
everything, in short, except that which makes life worthwhile, and it can tell us everything
about America except why we are proud that we are Americans.
Much of what Robert Kennedy said is true but a large GDP does in fact help us to lead a
better life. GDP does not measure the health of our children, but nations with larger GDP
can afford better health care for their children. GDP does not measure the qua lity of their
education, but nations with larger GDP can afford better educational systems. GDP does
not measure the beauty of our poetry, but nations with larger GDP can afford to teach more
of their citizens to read and to enjoy poetry. GDP does not take account of our intelligence,
integrity, courage, wisdom, or devotion to country, but all of these laudable attributes are
easier to foster when people are less concerned about being able to afford the material
necessities of life.
N.Gregory Mankiw
In short, although GDP does not measure economic well -being, it is positively associated
with many things that people value, including a higher material standard of living, better
health, longer life expectancies, and high rates of literacy and educational attainment. This
relationship between GDP and economic well -being has led many people to emigrate from
poor nations in search of a better life and has motivated policymakers in developing
countries to try to increase their nations rates of economic growt h. 30
# 3.4. Alternative Measures of Welfare/ Standard of Living
Given the limitations in using GDP to measure economic welfare and standard of living, the
following alternative indicators can be used. These indicators take into account other factors to
give a more complete picture of the standard of living.
a) Human Development Index (HDI)
The most widely used alternative measure of welfare is the Human Development Index (HDI)
that measures progress in these three basic dimensions :
1) Health (measured by life expectancy at birth)
2) Knowledge (measured by combining expected years of schooling for school -age children with
the mean years of prior schooling for adults aged 25 years and older)
3) Income (GNI per capita at PPP exchange rates)
The HDI Index is based on the premise that the most basic capabilities for human development
are to lead long and healthy lives, to be knowledgeable, to have access to the resources needed
for a decent standard of living and to be able to participate in the life of the community.
Without these, many choices are simply not available and many opportunities in life remain
inaccessible.
HDI attempts to rank all countries on a scale of 0 to 1 based on the three above -mentioned
criteria. However, one limitation is that it measures relative but not absolute levels.
b) Measure of Economic Welfare (MEW)
MEW adjusts GDP and other measures of national income by adding the value of leisure, non -
marketed activities such as unpaid housework, and the value of services given by consumer
durables over the year. Deductions are made for expenditures on commuting to work, defence,
the police and externalities .
The use of MEW is not without its problems because it involves the difficult task of assigning
reliable monetary values to non -marketed goods.
c) Index of Sustainable Economic Welfare (ISEW)
Popular among environmental groups, ISEW starts with consumption, as measured in GDP ,
and then makes various adjustments to account for factors that GDP ignores like income
inequality, household production, environmental costs and resource depletion .31
How would questions that require you to make use of this understanding look like?
Have a look at the following question.
This question corresponds to Sect A Qn 3b & 5ai of your
Standard of Living & Macroeconomic Indicators Tutorial package.
Section A Q3
(b) Discuss whether the data provided in Tables 1 and 2 is sufficient to support the
view that standard of living is higher in Singapore than in Thailand in 2018.
[8]
Section A Q5
(a)(i) State two indicators that are used to determine the Human Development Index
of an economy.
[2]
THINK ABOUT IT
What other indices have been used to measure standard of living?
The World Happiness Report 2018 ranks 156 countries by their
happiness levels. In 2018, Finland was ranked first and Singapore was
ranked 34th. Overall rankings of country happiness are based on the
pooled results from Gallup World Poll surveys from 2015 -2017.
All the top countries tend to have high values for all six of the key
variables that have been found to support well -being: income, healthy
life expectancy, social support, freedom, trust and generosity. 32
# 3.5. Summary: National Income & Standard of Living
For more information on different measures of standard of living, refer to Appendix C.
Product/
Output/ Value -
Added Approach
Gross National
Income
Income
Approach
Expenditure
Approach
Gross
Domestic
Product
(commonly
Uses
1. Measure economic growth
2. Measure the material SOL of
an economy
Limitations
1. in measuring production
(e.g. housewifes services,
underground economy)
2. in measuring welfare or
standard of living
3. in comparisons over time
and space
Other measures of living standards
HDI
MEW
ISEW
Others 33
# 4. INDICATOR OF PRICE STABILITY
Stable prices of goods and services and factors of production are necessary for business
confidence. The lower degree of uncertainty due to price stability encourages economic
agents such as firms to undertake more investment projects. In doing so, the economy can
achieve a higher level of economic activit y.
# 4.1. Inflation Rate
The inflation rate is the percentage change in the general price level from year to year.
Changes in the general price level can be measured by the Consumer Price Index (CPI) .
The CPI is used to measure the change in price of a fixed basket of goods and services
commonly purchased by households over a specified time period.
Higher inflation rates means there is a faster increase in the general price level and an erosion
of purchasing power of money in the economy. This means that the same amount of money
can buy fewer goods and services and can cause a destabilizing effect on the economy.
1) Measuring the Inflation Rate
Inflation rate is usually measured using the Consumer Price Index (CPI) as shown in the
formula below.
Table 2: Consumer Price Index (2019 = 100) and Inflation Rate
Year 2015 2016 2017 2018 2019 2020 2021 2022 2023
CPI
99.0 98.4 99.0 99.4 100 99.8 102.1 108.3 113.5
Annual
inflation
rate
-0.5 -0.5 0.6 0.4 0.6 -0.2 2.3 6.1 4.8
> (Source: www.singstat.gov.sg)
Definition: Inflation is characterised by a sustained / persistent increase
in the general price level over time.
Inflation rate t = CPI t CPI t1
> CPI t1
100% (where t denotes the time period) 34
To calculate the inflation rate for 2022, we apply the above formula where t = 2022
Inflation rate 2022 = 108 .3102 .1
> 102 .1
100% = 6.1%
An inflation rate of 6.1% means that prices have increased by an average of 6.1% in 2022.
A rise in the inflation rate means that there is a faster increase in the general price level
compared to the previous year while a fall in the inflation rate means there is a slower
increase in the general price level compared to the previous year.
A negative inflation rate means a fall in the general price level which is also known as
deflation.
From Table 2, it can be seen that the consumer price index in Singapore has been
increasing from 2017 -2019 and 2021 -2023, though the rate of increase differs from year to
year. In 2015, 2016 and 2020, the consumer price index fell .
Rates of inflation may vary dramatically both over time and over space, from 1 or 2 percent
per year in low -inflation countries (such as Germany, 1.5% in 2013) to 1000% per year or
more in high -inflation countries (such as Zimbabwe, 1000% in 2006). When th e latter
happens, we say that the country, e.g. Zimbabwe, is experiencing hyperinflation.
Measuring the inflation rate over time gives the policy makers an indication of the
effectiveness of their anti -inflationary policies. If the inflation rate did not fall as projected,
the government can deduce that effectiveness of its current anti -inflationary policies was
limited and can thus work on alternative policies to solve the problem.
# 4.2. The Consumer Price Index (CPI)
1) Calculation
As mentioned, the CPI measures the change in the prices of a fixed basket of goods and services
commonly purchased by households in a specified time period.
The types and specifications of the goods and services in the CPI basket as well as their
quantities are kept constant in the base period . This ensures that any changes in the index
reflect solely the price changes over time. The CPI of the basket of goods and services in the
base period is assigned a value of 100. The CPI value in the current year is expressed as a
percentage of the base y ear value. For example, in Table 2, the base period is 2019 (CPI is
100). 35
Weights are assigned to the various goods and services in the basket based on the
consumption pattern of households. As seen in the table below, Housing & Utilities (24.8%),
Food (21.1%) and Transport (17.1%) are the top 3 expenditure groups.
By assigning weights based on the consumption pattern of households, the CPI can more
accurately reflect the price changes of individual items and their impact on inflation.
For example, if there is a 10% price increase for both food and healthcare, the price increase
in food would have a greater impact on the overall CPI than the price increase in healthcare
(17.1% vs 6.6%).
Source: Singstat.gov.sg
IMPORTANT NOTE
We CANNOT compare different types of sub -indices to draw conclusions about absolute
price levels.
Take for example that under the index heading Cooked Food, the sub -indices are cooked
food at hawker centre and cooked food from restaurant.
If the index for cooked food at hawker centres is 110 in a given period and that for
restaurant food is 105, it does not mean that cooked food at hawker centres is more
expensive than restaurant food!
What it means is that the price of cooked food at hawker centres has increased by 10%
since the base year period, and that of restaurant food, 5%. In other words, the price of
hawker food at hawker centres has increased twice as much as that of restaurant food
since the base period. 36
In measuring the change in general price level, the p rice index measures the change in value
of money as well. Higher prices of goods and services result in a fall in the internal value of
money i.e. one can now buy less goods and services with a given amount of money in the
country. To put it simply, the purchasing power of money in the country falls.
2) Uses of CPI
The CPI is closely monitored by businessmen, economists and government officials. Analysis
of movements of the CPI and comparisons with other major cities and countries are carried
out for economic and business planning.
The CPI is often used in the formulation of policies and to identify the sources of inflation.
For example, the Singapore government makes regular adjustments to various economic
and social schemes after taking into consideration the inflation rate as indi cated by the CPI.
These include the minimum sum that individuals have to put aside in their Central
Provident Fund (CPF) at age 55 and the amount of public assistance to be given to the needy
as prices rise.
The CPI is also a key indicator used by the National Wages Council (NWC) in Singapore in
its deliberations and recommendations on wages each year and by trade unions in their wage
negotiations with the employers. Changes in wages have implications on the c osts of
production facing the firms and hence their profitability.
As mentioned in the earlier segment of this theme, we use the CPI as a price deflator in the
calculation of real economic statistics and indicators such as the GDP at constant prices
which is the value of real GDP.
THINK ABOUT IT
How does inflation affect the cost of living? How then would it
affect the standard of living?
If general price levels rise, the cost of living would rise. The cost of
living is the cost of maintaining a certain standard of living. It is a
measure of changes in the average cost for a household of buying a
basket of different goods and services.
If the cost of living rises faster than wages, then the quantity of final
goods and services that can be enjoyed by an average person would
fall, affecting material SOL. However if the real incomes continues
to rise, then despite the higher cost of living, the material SOL might
still increase. 37
# 5. INDICATOR OF UNEMPLOYMENT
# 5.1. Unemployment Rate
The unemployment rate is calculated as the percentage of unemployed persons to the labour
force.
In Singapore, the labour force refers to persons aged 15 years and above who are either
employed or unemployed (but are willing to work) during the reference period. This group is
also known as the economically active population.
Note: Labour force Population!
Economically inactive persons refer to those who are not working, do not have a job to return
to and are not looking for a job during the reference period. Full -time students, unpaid home -
makers, retirees, and people unable to work because of disabilities are examples of
econo mically inactive people and are not part of the labour force.
The unemployed persons refer to individuals aged 15 years and above who are without work
during the reference period but are available for work and were actively looking for a job.
They include persons who were not working but are taking steps to start the ir own business
or taking up a new job after the reference period.
The higher the unemployment rate, the harder it is for each individual who wants a job to
find work. In general, a high rate of unemployment indicates that the economy is performing
poorly.
This is because the unemployment rate indicates the amount of unemployed human
resources in the economy. The existence of unemployed resources involves an opportunity
cost and has an impact on the income / growth prospects of the economy.
Definition: Unemployment refers to a situation where there are people who
are willing and able to work but cannot find jobs .
.
Unemployment Rate = No . of unemployed in the labour force
> Labour force
100% 38
Table 3: Labour Force and Unemployment Rate, Singapore
Year 2016 2017 2018 2019 2020 2021 2022 2023
Labour force
(000) 3,672 3,657 3,675 3,742 3,713 3,607 3,754 3,936
UnN rate (%) 2.1 2.2 2.1 2.3 3.0 2.7 2.1 1.9
Source: Manpower Research & Statistics Department, MOM
THINK ABOUT IT
How does unemployment affect standard of living?
Unemployment rates could impact material SOL to some extent. Rising
unemployment rates would usually be accompanied by falling national
income. If unemployment rates have been rising, this could mean that the
average person, could not enjoy as much goods a nd services as before due
to the loss of income.
There could also be exceptions where the rise in national income did not
result in the creation of more jobs. Hence, it might be useful to also look
at unemployment figures when assessing SOL.
Unemployment rates could also affect non -material SOL. If high
unemployment rates bring about high levels of anxiety, this would affect
non -material aspect of SOL. 39
# 6. CONCLUSION
Economists spend a lot of time analysing key economic indicators because they offer a
snapshot about the general economic health and success of a country.
For example, because of the Covid -19 situation, Singapore experienced a severe recession in
the second quarter of 2020. Economic growth rate was a negative 13.2% while
Unemployment rate was at 2.9% in in the second quarter of 2020.
You can understand the situation better by learning how economists calculate national
income statistics and how governments use them to implement policies to deal with the
situation. It is from these indicators that we can conclude whether Singapore is doi ng well,
and whether Singapore has been able to achieve her macroeconomic goals or not.
How would questions that require you to make use of this understanding look like?
Have a look at the following question.
This question corresponds to Sect A Qn 2b & 7b of your
Standard of Living & Macroeconomic Indicators Tutorial package.
Section A CS Q 2
(b) Comment on the reliability of the use of any two indicators in Table 2 to measure
the changes in Chinas standard of living over time.
[6]
Section A CS Q 7
(b) Assess the extent to which national income indicators like real GDP per capita can
be used to compare living standards between Serbia and Singapore.
[8]40
DID YOU KNOW?
In the history of the world, several countries China, the USA, Britain and
India - have all had a claim to be the worlds largest economy. China was once,
centuries ago, the worlds biggest economy and India, prior to colonisation, was
later the same. Britain, during the nineteenth century and prior to World War
One, c ould claim to be the worlds largest economy. The twentieth century saw
the global dominance of the USA.
However, the rise of China and India have threatened this dominance in the
current century. Indias economy has recently posted the fastest economic
growth among major economies, putting it on track to be the worlds third
largest before the end of the cur rent decade, according to financial forecasts.
Take a look at the 2 articles below to learn more about the world economy.
Article 1
Economics Today Jan 2023
Is India on the right path to
development?
Article 2
Economics Today Sept 2023
When will China overtake the USA
economy? 41
# 7. APPENDIX
# 7.1. APPENDIX A - MEASURING ECONOMIC GROWTH: GDP VS GNP (aka GNI)
Which is the wealthiest nation in the world? Which nations are currently experiencing high levels
of economic growth? Are all nations within the Eurozone currently in the same part of the
economic cycle?
There are many questions that economists are asked and in order to answer them, there needs
to be some mechanism of measuring the level of economic activity within an economy. There
are also broader questions, such as are living standards in South Sudan, n ow the world's newest
independent country, higher than in the neighbouring north? Or, which is the least developed
nation on the planet? This notion of development is a far wider ranging concept and one which
we will return to in a later edition of Economi cs Today .
In order to answer these questions, economists have devised a set of national accounts. These
are published each year in the Blue Book and they can be downloaded from the national
statistics website.
The circular flow of income shows the amount of money flowing around the UK economy. There
are three ways that one can calculate the value of the UK. Each has a different method, but
they all arrive at the same answer.
The first is the Income Approach; adding up all of the income by the various different economic
agents within the economy. The second is the Output Approach, adding up the total value of
goods and services within the economy, and finally the Expenditure Ap proach. Let us look at
the last one in more detail. Within an economy consumers spend money (Consumer Spending
C), Firms spend money (Investment I), Governments spend money (Government Spending G)
and then foreigners spend money on buying our products (Exp orts X). To avoid double
counting, we must take away our nations spending on foreign produced goods (Imports M).
We can show this sum in the following formula: C + I + G + (X - M)
The numerical answer to this formula is known as a nations Gross Domestic Product (GDP).
GDP is measured in money. In order to produce some meaningful comparison, it is useful to 42
convert all nations GDP to the same currency, generally the $US and calculate the GDP per
head of the population. In addition to this, when comparing growth rates in GDP, it is also
necessary to discount the figure for inflation, in order to see if the ec onomy has grown or
whether the increase in GDP is simply due to price rises. The resultant measure is therefore Real
GDP per Capita (per head) measured in $US. See the IMF website (www.imf.org) which shows
the GDP per capita for nations around the world an d therefore allows easy comparison to be
made. It makes clear that the G20 nations in the more developed world have high levels of GDP
per capita, whilst nations in central Africa and generally across the equator, tend to have low
levels of GDP per capita.
Why two measurements GDP and GNP?
Having explored the concept of GDP, let us turn to Gross National Product or GNP. Why do
we need two variables? The difference between the two relates to two things Location and
ownership .
GDP measures all economic activity which is located within a nations boundaries. Therefore,
all production and economic activity which is based within the UK will be counted in the UKs
GDP. This includes all output from the Nissan factory based in the No rth East and the Toyota
factory based in Derby, despite the fact that they are not owned by UK enterprises.
On the other hand, Gross National Product considers ownership. In the case of GNP, what is
important is whether the output is owned by UK firms. Therefore, GNP will not include output
from factories such as Nissan and Toyota and Panasonic as these are fore ign -owned
organisations which are based in the United Kingdom. On the other hand, it will include the
output of UK -owned organisations which have bases overseas. For example, British Petroleum
has bases all around the world which make profits that are repa triated back to the UK. Likewise,
in the service sector, Tesco has expanded into America Fresh and Easy and also into China.
These overseas sections of the business will be included in the UKs GNP, but not its GDP
indeed, they will contribute to the G DP of the nation that they are based in.
The statistical difference between GDP and GNP is called Net Property Income from Abroad
or NPIA. NPIA is made up of profits, interest and dividends coming into the UK from the
assets that UK enterprises own abroad. GNP = GDP + NPIA (where NPIA can be posi tive or
negative).
Table 1 shows that in the case of Ireland its GDP is significantly higher than its GNP. But in
the 1970s this was not the case when its GDP and GNP were similar. However, throughout the
1990s and into the new century, Ireland attracted many multinational organisations who have
located in the country. This has led to a significant outflow from Ireland as profits are
repatriated back to the various home nations. In 2010, the Irish Government announced that
GNP was a better measurement for the nation, as it more accurately reflects the actual state of
the nation: in its 2010 -2014 Recovery Plan it expects GNP to fall to only 73% of GDP.
Therefore, using GDP as an official measure, would significantly overvalue the level of economic
activity. 43
For the UK, the opposite is the case in the sense that GNP is higher than GDP. In 2009, the
GNP for the UK totalled 1,423,136,000, whereas GDP totalled 1,392,705,000. This shows
that there is a slight positive net inflow of income from assets abroad, a nd more significantly,
the economy is far more balanced than its Irish neighbour in terms of income arising from both
home and overseas assets.
Source: Economics Today Vol 19 Issue 1 44
# 7.2. APPENDIX B OTHER USES OF NATIONAL INCOME STATISTICS
In addition to measuring economic growth and standard of living, national income statistics
can also be used for the following purposes:
a) Determines Contribution from Various Sectors of Economy
The output approach of calculating national income shows the relative percentage contribution
of each sector in the economy. This shows the relative importance of the different sectors and
industries in the economy in terms of their respective contributions to national income and the
percent of the total labour force employed by these sectors.
The relative contribution of the different sectors can be used as a reflection of the stage of
development of a country with the primary sector being a major contributor in a developing
country and the secondary sector being the main contributor in an indu strialised country.
Comparison of the national income statistics over time therefore reveals the trend of growth of
various sectors. From the comparison, we will know whether a sector of the economy is growing
or declining. Such figures reflect 1) the engine of growth in the economy and 2) the effectiveness
of government policies at restructuring the economy.
b) Shows Distribution of National Income among the Different Factors of Production
The income method of calculating the national income indicates the distribution of income
among different income groups such as workers, landlords and capital owners since it shows the
national income share of each group. The distribution of the national i ncome between wage,
rent, interest and profit is significant in determining whether a countrys income is fairly
distributed or the extent to which income is unequally distributed between the working class
(wage earners) and the asset owners (rent, interes t and profit earners).
c) Serves as a Guide for Formulating Policies and Strategies
i) To the Government
National income statistics provide information on the state of the economy and it serves as a
guide to the government in formulating economic policies. For instance, it is crucial for the
government to know the current value of output and the patterns of expenditure when it
formulates policies to combat unemployment, inflation a nd balance of payments disequilibrium.
Knowing the patterns of expenditure in the economy will also enable the government to know if
too much money is being spent on consumption at the expense of investment. If there is too little
investment, the government will have to think of ways to encoura ge investment and build up its 45
capital stock. It can do so through giving incentives such as subsidies, lower taxes and higher
(capital) depreciation allowances.
The government can thus use national income statistics for economic planning as well as to
evaluate policies and to regulate the economy.
ii) To the Firms
National income data can also guide firms in assessing the economic climate (interpret economic
trends) because the data could show the probable direction in which the economy is heading.
Producers can use national income statistics to make forecast and plan their investment or
output accordingly. This helps firms to formulate their business strategies as the national income
statistics enable them to know the expenditure pattern of the economy.
d) Gauges the Economic Strength of Different Countries
The comparison of GDP or GNP data of different countries makes it possible to gauge the
relative economic strengths of different economies. It can be used to identify those countries
in need of assistance. The United Nations categorises countries into developed or under -
developed based on their respective GDP per capita.
GDP data is also used as a basis for calculating a countrys contribution (often as a percentage
of its GDP) to international agencies such as the World Bank and the International Monetary
Fund (IMF).
Real GDP per capita = Real GDP Total Population 46
7.3. APPENDIX C GROWTH, DEVELOPMENT, MISERY, HAPPINESS
Evidence A: GDP Gross Domestic Product
This is the main measure of economic activity, normally counted per year. The focus is on goods
and services produced, bought and sold. Positive changes in GDP show economic growth and
negative changes for two or more quarters indicate recession. In essenc e, we add together all
purchases for the expenditure approach; though adding incomes or output should give the same
total. The formula C + I + G + X M shows the components: consumption, investment,
government spending and exports, minus imports which are products of another economy.
There are some complications. For example, government services are often provided free or
heavily subsidised, so there is no payment or at least not one reflecting the cost and value of the
service. GDP includes such services as the cost of providing them. Owner -occupiers of homes
dont pay themselves rent; an estimate for the value of this is added. Underground (or hidden)
activity is ignored, so are most activities for which no payment is made.
Evidence B: HDI Human Development Index
The HDI gets beyond expenditure to a wider view of economic development. It does this by
combining data on GDP per capita, life expectation and education. Raw GDP figures are
adjusted to purchasing power parity and converted to US dollars for comparisons. The United
Nations Development Programme (UNDP) modified the educational data in 2010, removing
adult literacy to focus on average and expected years of schooling.
Norway topped the HDI rankings in 2013, ahead of some countries with a higher GDP per
capita but less years of education or life expectation. During the last 20 years, many Asian
economies have seen rapid development as measured by the HDI. Sub -Saharan Afr ica made
slower progress until recently and includes some countries which still do relatively badly on all
three HDI components. 47
This index is relatively straightforward, with the relevant data available for most countries. Its
focus on three variables still takes a fairly narrow view of development and it relies on averages
so gives no indication of inequality. An inequality -adjust ed version is also published by the
UNDP.
Evidence C: Misery Index
A web search for misery index can lead in two ways. A USA music group called Misery Index
specialises in death metal but tells us little about economics. Also originally in the USA, but
with more relevance, economists have created an index based on the t wo variables most linked
to unhappiness: unemployment and inflation. Simply adding together percentage data on
unemployment and inflation creates one indicator of how badly an economy is doing. Going
back 60 years is necessary to find a lowest US figure of 2.97 in July 1953. Their worst total since
then was 21.98 in June 1980. The current UK figure will be around 10.4, using CPI inflation
data and the ILO survey for unemployment.
The strength of this index is its simplicity. It also ignores preoccupation with income, growth
or economic development, as well as other objectives on the environment and on trade. It has
no weighting, so gives equal importance to its two variables. If we look a little closer, we see
that both variables can be estimated in different ways. Is it appropriate to use CPI rather than
RPI? Is the ILO survey data our best measure of unemployment? Can we trust unemployment
data when some people hide underground covert employment and others are excluded as they
work part -time, even if they want full -time work?
Evidence D: HPI Happy Planet Index
This indicator measures the efficiency of countries at providing long and happy lives. Life
expectation is measured using the UN Human Development Report. A Gallup ladder of life
world poll is used to measure happiness. People are asked to rate their liv es from 0 (worst
possible) to 10 (best possible life). Efficiency is measured by how many hectares of land are
needed to support average consumption, which is termed the ecological footprint. This
measure was introduced by The World Wildlife Fund and dev eloped by the Global Footprint
Network. The final index is calculated as:
Life expectation x experienced well -being
--------------------------------------------------
Ecological footprint
The results of this calculation are thought provoking. Costa Rica currently tops the rankings
with life expectation of 73.1 years, well -being at 6.9 and an ecological footprint of 2.5. 48
Bangladesh is relatively poor, yet is highly ranked as its ecological footprint is just 0.7. The
U.S.A. has life expectation of 73.4 years and well -being of 6.7 which are comparable with Costa
Rica, but an ecological footprint of 7.2 pulls the country rank ing down to 104th. Costa Ricas
ranking is based on relative happiness and longevity achieved with less resource use. More
information and data is available at happyplanetindex.org.
Questions
1. (a) What is meant by economic development (Evidence B)? (2 marks)
(b) What is meant by sustainable (Evidence D)? (2 marks)
2. Explain three types of reason why changes in GDP (Evidence A) might not reflect changes in
the material standard of living. (9 marks)
3. Analyse the impact of inequality on the value of indices such as the HDI (Evidence D).
(10 marks)
4. Assess the case for adding weightings to the misery index (Evidence C).
(12 marks)
5. Many of the things you can count, dont count. Many of the things you cant count, really
count Albert Einstein. To what extent can happiness and sustainability be counted?
(15 marks) 49
Suggested Approach to the Questions
1. (a) What is meant by economic development (Evidence B)? (2 marks)
Economic development means change in the economic situation, taking a wider view than just
material well -being as measured by GDP. It is concerned with the quality of life an economy
provides for its citizens. The inclusion of life expectation and years of education in the Human
Development Index illustrates two aspects of development. Broad trends in economic
development are positive, but negative developments which reduce the quality of life, such as
extra pollution, are also possible.
1. (b) What is meant by sustainable (Evidence D)? (2 marks)
Something which is sustainable can be continued indefinitely. Our resource use is unsustainable
if we use stocks faster than they can be replenished. For example, catching fish at sustainable
rates would mean limiting catches rather than depleting fish sto cks by over -fishing so that less
(or nothing) is available in future. The Happy Planet Index uses the ecological footprint to
highlight the fact that rates of consumption in many developed countries are not necessarily
sustainable. Climate change poses a l ong term challenge, raising major questions about what is
sustainable on this planet.
2. Explain three types of reason why changes in GDP (Evidence A) might not reflect changes
in the material standard of living. (9 marks)
If we simply look at GDP at current prices, we ignore other variables which are relevant to the
material standard of living. Population and inflation are clearly relevant. If the population
increases by 4% whilst GDP rises just 2%, average living standards will have fallen. Similarly,
if inflation is at 10% and GDP at current prices rises by 5%, real GDP will have fallen. Looking
at real GDP per capita gives a better reflection of changes to the material standard of living.
These adjustments give a better m easure of material living standards than just current price
GDP data.
Some issues in the method by which GDP is counted are less easy to compensate for. First, we
focus on paid transactions and so ignore much unpaid activity. For example, if I buy Microsoft
Word from a UK retailer to produce documents with, that transactio n is counted in GDP. But
if I download Open Office instead, there is no charge for that so no recorded transaction. Thus
a similar item is not counted in GDP. If I grow or buy the raw ingredients and cook a meal, my
expenditure will be less than if I hav e a takeaway meal or go to a restaurant. The food might
be similar but the contribution to GDP is not. 50
Where we add estimates for items too big to ignore, those estimates might not reflect the real
value to consumers. Government expenditure is included at cost. If a government cuts back its
workforce and wage bill that will reduce GDP, even if some services are largely unaffected.
There will be some people who value the security offered by billions spent on Trident missiles
at more than the cost; others will disagree and feel that this spending makes little contribution
to their standard of living or their sense of wellbeing. These estimated amounts added to GDP
are unlikely to accurately reflect living standards.
The figures collected as the basis for GDP estimates are also unreliable and incomplete. This is
demonstrated by the revisions made as more data become available. For example, in March
2012 the estimate for 2011 quarter 1 UK exports was raised by 2,276m a nd the estimate for
imports by 1,476m. There is no reliable way of collecting all the relevant information. We
know that there is some undercover activity which is hidden to avoid tax or sometimes to
support benefit claims, but we cant know how much. Thu s, some records of transactions are
based on deliberate distortion.
For all of the reasons listed above, GDP is an unreliable indicator of the standard of living.
Despite this, it is the main available indicator of the level of activity. As the current real value
of GDP is lower than the 2008 estimate, we can be reasonably confident that there has not been
net growth in the UK economy over the last five years. Such broad trend observations are safer
than precise comparisons.
3. Analyse the impact of inequality on the value of indices such as the HDI (Evidence D).
(10 marks)
Any total that adds together different figures and divides by the number of items gives an
average. Changes in inequality might make figures for HDI (or GDP or HPI) misleading. If the
incomes of a minority of people increase, this could lead to an increase in total income and so
GDP per capita. However, the majority might have seen no improvement in their incomes.
Though they are less obvious, there are also variations in life expectation. The most recent
estimates for England give an average expectation of 83 years of life in East Dorset whereas the
figure for Blackpool is 73.8. People in some counties around London average significantly more
years in education than most northern counties. HDI figures might not reflect what is typical,
or the mode, in the population.
The extent to which averages are misleading is greater if a minority moves further away from
the norm or mode. If, for example, a tiny minority of very high incomes receives the bulk of
any income increases, this will shift the average further away from the real experience of most
people. At the opposite extreme, in a society with high infant mortality amongst a minority
living in poverty, it is possible that infant deaths could reduce average life expectation below
the length of life that is a reasonable expectation for most people. Inequality makes averages
unreliable indicators. 51
The trend in many developed economies has been for inequality to increase over the last 30
years. This increases the probability that averages fail to reflect the circumstances of many
individuals. During the financial crisis and recession which started 5 years ago, average incomes
fell. Despite that, some people saw no fall in their own incomes and some even had increases.
HDI figures based on averages seem likely to underestimate the impact of poverty on low
income groups when inequality increases.
In their book The Spirit Level, Wilkinson and Pickett argue that greater inequality has
negative impacts on wider society, not just on the disadvantaged. Their research includes
evidence that both life expectation and educational performance tend to be poo rer in countries
with more inequality. As HDI includes life expectation and years in education, it could capture
some of the consequences of increased inequality in the long run.
The United Nations Development Programme takes the impact of inequality seriously and also
publishes inequality -adjusted HDI data. This index attempts to capture the impact of
inequality on development, but in the process loses some of the simplicity of th e original HDI.
Increasing the complexity and sophistication of statistical techniques can give extra insights,
but can also reduce the clarity shown by simpler data. 52
4. Assess the case for adding weightings to the misery index (Evidence C)
(12 marks)
Weightings in an inflation index (for example) can capture the relative importance of different
items in expenditure in a useful and positive way based on recorded data. By contrast, the
case for weightings in the misery index is more normative, based on a judgement that one of
the variables is more significant than the other.
It can be argued that unemployment is more significant than inflation because of the major
impact it can have on incomes and living standards. Besides the direct impact on those who lose
jobs, unemployment also has an impact on the confidence, expectations and behaviour of the
wider community. One of the problems of recession is that rising unemployment causes
uncertainty over future incomes and so can lead people to consume less, at a time when
aggregate demand is already low.
The direct impact of inflation can be felt by everyone, whereas unemployment has a direct
impact on a small minority. When, for example, unemployment is 8%, less than one person in
twelve is looking for a job. When fuel prices rise, everyone feels the cons equences of that so
inflation has a broader direct impact. Like unemployment, inflation can also influence
household confidence and behaviour. This suggests that a lower weighting for inflation might
not be justified.
However, price rises dont just increase payments for buyers; they also increase the receipts of
sellers. Therefore at least some incomes will rise when prices rise. This should reduce the impact
of inflation on real incomes. There are two situations in wh ich price increases might not lead to
corresponding increases in household incomes. If prices increases are a result of indirect tax
increases (e.g. VAT is increased), the government is withdrawing more from the circular flow of
income. This will not bring a rise in household incomes if the government (say) is seeking to
reduce its borrowing. Where inflation is due to rising prices of imports or depreciation of the
currency, the extra flow of payments goes out of the country rather than to households within
the economy. The impact of inflation will normally be felt unevenly, just as the impact of
unemployment is. Besides some people gaining from higher receipts when prices rise, there will
be groups who are in a stronger position than others to defend their real incomes at times of
inflation. The current UK public sector pay freeze means that millions of households have seen
their real incomes fall due to inflation, yet other groups have seen their real incomes rise. In
2010, for example, average total earnin gs for FTSE company directors rose by 49% (Incomes
Data Services, October 2011).
Both unemployment and inflation have a direct impact on some households, and both also have
a wider impact on confidence and behaviour. Unless there is hyperinflation, the impact of
unemployment is likely to be the greater of the two. This impact can also spread beyond 53
material goods to have a major effect on the quality of life. For example, some of the 900,000+
people under 25 who are unemployed in the UK have never had a job since leaving school. At
present, they have relatively little to look forward to in life. This supports the view that
unemployment causes more misery than inflation, so perhaps it should have greater weighting
in the misery index. However, there is no simple system for deciding weights, judgements will
differ. There is also the issue that this is a simple index which is easy to understand. Even with
greater complexity from weighting, it will still only cover two of the things which can make
people miserable and so give only limited insight.
5. Many of the things you can count, dont count. Many of the things you cant count, really
count Albert Einstein. To what extent can happiness and sustainability be counted?
(15 marks)
Many definitions of happiness centre on well -being and contentment. These are subjective and
normative concepts which cannot be measured objectively. There are physical effects of
pleasure on the brain that can be measured, but these are often short -term a nd there are
variations between individual reactions which scientists dont yet understand. Most attempts
to measure happiness depend on collecting subjective views, either with a simple single question
or with more complex questionnaires attempting to del ve into peoples states of mind. Do
people know how happy they are? Will they answer questions on happiness honestly or hide
their true feelings?
Positive economists might object to such subjectivity. Some, from a strongly classical
perspective, might claim that scarcity and choice mean material standards of living are more
important than personal feelings. Such people might regard a higher well -bei ng rating for Costa
Rica (6.9, Evidence D) than the USA (6.7) as impossible. However, there are quantifiable
indicators on which developed nations such as the USA fare badly, such as the amount of
personal debt and the extent of inequality. Such problems w ill have an impact on happiness.
Most people see happiness as involving more than high consumption.
Classical economics uses simplifying assumptions which should not be confused with reality.
Someone who is subjectively happy clearly has an advantage over people who feel unhappy.
Bhutans concept of Gross National Happiness goes further than many peopl e are comfortable
with, but there is useful meaning in even simple measures of happiness such as Gallups ladder
of life poll.
Whilst both The World Wildlife Fund and The Global Footprint Network (Evidence D) are
reputable organisations, they see the world from the perspective of concern about human
impact on our planets resources and ecological systems. There is widespread agree ment that
some resources (such as oil) are being used at unsustainable rates and that human activity is
responsible for global warming. It is possible that vested interests are responsible for some 54
opposition to recognising this. Both the approach to sustainability and the conclusions reached
are likely to be influenced by the perspectives of researchers.
As shown in Question 2, GDP calculations might not accurately reflect the standard of living.
When this is true of measuring production, the complex calculations to underpin measurement
of sustainability are unlikely to be more reliable. Even the most obje ctive of scientists will have
to make major assumptions and generalisations before arriving at a measure of footprint or
sustainability.
There is an additional problem that changes in technology can change the efficiency of
production and so rates of resource use. In his Essay on Population, Thomas Malthus in 1798
suggested that population growth could outstrip food supplies; he predicted f amine, misery and
catastrophe. In the event, trade and technology, plus slowing of population growth in many
countries, have averted a global catastrophe of Malthusian scale. Sustainability calculations are
based on current technology so the situation coul d change. However, attempts to replace fossil
fuels have so far had limited success and the planet is already damaged to an extent.
To make informed decisions we want the best available data. To simply ignore the impact of
human activity on the planet could lead to irreparable harm. We therefore need to collect the
best available information, even though it is imperfect. To ignore the evidence and neglect
sustainability leaves us living in the dark, possibly ultimately in more than one sense.
Source: Economics Today Vol 21 Issue 3 55
# 7.4. APPENDIX D - BALANCE OF TRADE
Inflows & Outflows
Transactions which lead to receipts of money from abroad for export of goods and services
are regarded as inflows.
Transactions which give rise to payments of money from the country for imports of goods
and services are regarded as outflows.
Structure of the Balance of Trade
The balance of trade is known as the sum of the goods and services balances (a + b).
a) Goods Balance (Visible trade balance)
This records the value of imports and exports of physical goods / merchandise. Exports
result in an inflow of money and imports result in an outflow of money.
There is a surplus on the goods balance when total value of exports exceeds total value of
imports and a deficit when total value of import exceeds total value of exports.
b) Services Balance (Invisible trade balance)
This records imports and exports of services such as civil aviation, banking, transportation,
tourism and insurance. The purchase of a foreign holiday represents an outflow of money
whereas the purchase of a Singapore insurance policy by a foreigner is an inflow.
Table 4 shows the goods and services balances in the balance of payments.
(We will study more about the balance of payments later on.)
If the country has a trade deficit, it is not earning enough from exports to pay for its imports.
As such, part of the import spending will have to be financed either from the use of foreign
currency reserves, borrowing from overseas or selling of assets t o foreigners. In the future,
the country will be poorer as it will have less foreign currency reserves, pay interest to
overseas creditors or repatriate profits and rentals from the assets owned by foreigners. The
country is therefore sacrificing its futur e living standards to finance current living standards.
Definition: The balance of trade refers to the difference between a
countrys total international receipt from its exports and the total
international payment for its imports.
.
.56
Table 4: A Summary of Singapores Balance of Payments, selected years
So urce: Yearbook of Statistics Singapore
Balance of Trade as a Key Indicator
1) The main purpose of the balance of trade is to inform the government of the
international position of the country vis -a-vis the rest of the world. This is useful as a
basis for policy consideration.
2) There is a direct relationship between the balance of trade and exchange rates.
Knowledge of how the exchange rates respond to balance of trade disequilibrium enables
firms to plan and act accordingly.
In million S$
2023 2022 2021
A Current Account Balance 133,105.4 123,668.4 115,723.9
Goods Balance (Visible trade balance) 207,835.9 207,508.1 163,556.6
Services Balance (Invisible trade
balance) 43,708.8 57,300.3 47,780.1
Primary Income Balance -108,431.7 -131,700.5 -87,232.2
Current Transfers (Secondary Income
Balance) -10,007.6 -9,439.5 -8,380.6
B Capital & Financial Account Balance 47,563.5 278,874 26,974.2
Direct Investment -150,717.8 -133,087.4 -101,972.1
Portfolio Investment 128,765.8 83,058 99,429.1
Financial Derivatives 1,302.3 3,544.3 -1,015.6
Other Investment 68,213.2 325,359.1 30,532.8
C Net Errors & Omissions -3,704.3 -2,225.9 157.5
D Overall Balance (A -B+C) 81,837.6 -157,431.5 88,907.2
E Reserve Assets -81,837.6 157,431.5 -88,907.2
THINK ABOUT IT
How does a change in BOT affect standard of living?
A change in BOT position could affect national income if for example, a rise in
import expenditure exceeds fall in export revenue. Ceteris paribus, this might
cause a fall in national income, which would then affect material SOL.