Development Review - Short Answer / Long Essay (Please circle one) Number _16_
2005
Copy the Question here:
Question:
Discuss the main problems involved in measuring the national income of a country.
Why do many economists prefer to use composite indexes, such as the Human Development Index, as well as national income
figures, to indicate living standards?
What are the 2-3 key words in the question to pay attention to? You should underline these in a real test situation.
List Verb(s) and Nouns (concepts):
Discuss
National income
Human Development Index
What are the concepts to provide definitions for?
Define them precisely here:
National income: the total money income received by householders in return for supplying factors of production to business
over a period of time, measured by GDP or GNP.
Human Development Index: Get the definition from UN or the dictionary! Know the factors that go into the index!
Structure of your answer
What graph should you
draw for this point?
What example can you
provide to illustrate your
point?
(Use numbered lists or bullet points: develop and explain your argument so that others can understand – no need to write
them out here as this is only for your review. Please insert more rows as necessary).
Remember to EVALUATE for Part B of Long Essays:
A) Problems in measuring national income
1. Real data need to be used (i.e. adjust for inflation)
2. Omissions of activities creating income
 illegal, unreported or non-marketed activities
 black market , housewives activities, underground activity
living style also markef the difference of GNP
like subsistence farming in LDCs
3. Uncounted factors affecting quality of life
 economic bads as pollution, crime
 no-renewable resources
 leisure increases living standard, but not included in GNP
4. Problems to international comparisons
 exchange rates
 Cost of living
 Purchasing Power Parity
4． Lack of reliable data
5.military vs investment both included in GNP
Millitary spending and investment are both included in DNP,
but both investment and military spending have a high
opportunity cost of consumption.
6. High levels of DNP doesn’t necessarily mean high levels of
standard of living.
e.g most of Spanish women
are housevises
e.g Brazil rainforest
China revising DNP by
more than 13%
PPF Curve with bigger
military spending than civil e.g. Russia
commodity spending
Saudi Arabia with high
GNP, but high inequality,
and problems of access to
drinkable water
Benefits of GNP
1. Measure the domestic economic activities, reflects economic
performances
Lorenz curve for income
distribution and reduction
of gap b/w rich and poor
2. data more accessible because it is numerical
Composite indices include HDI(Human development index), PQLI
(physical quality of life index), Human suffering index, Genderrelated Index
Benefits of composite indices:
1. comprise more aspects of standard of living, like gender equality,
health, education and access to food.
Is China’s development
sustainable?
2. Sustainable development: the ability of present generations to use
resources to meet their needs without jeopardizing the needs of the
future generations.
Summary Conclusion (one sentence)
Together with GNP, composite indices give a complete picture of both economic performance and standard of living of
domestic residents. However, the composite indices are subjective, more qualitative and thus less reliable – this weakness also
needs to be considered when we do international comparisons.