Measuring a Country’s Well Being

1. Measuring a Country’s Well Being

2. How to gauge the “health” of a country’s economy • A country’s Gross Domestic Product (GDP) is an imperfect standard by which to measure a country’s well being. • GDP measures the value of the all the final goods and services produced in a country in one year. • However, GDP does not measure the quality of human life in a country. • Another standard of well being is personal income below what is known as a poverty line.  • We know, for example, that half the world's population, nearly three billion people, live on less than $2 US a day.

3. Human Development Index • The Human Development Index (HDI) has been used since its inception in 1990 as a summary measure of human development. • The Index is published by the United Nations Development Programme (UNDP). • The HDI is a composite index in that it combines a number of indicators into a single figure. • It is based on life expectancy at birth, educational attainment (adult literacy and school enrolment rates) and income per capita. • The index is not a full measure of human development. • It does not, for example, include important indicators such as gender or income inequality and more difficult to measure indicators like respect for human rights and political freedoms. • http://bcove.me/542fswmo From the UNHD report

4. How are we doing? • An HDI below 0.5 is considered to represent "low development". All 22 countries in this category are located in Africa. • An HDI of 0.8 or more is considered to represent "high development". Canada has been the highest ranked country ten times.

5. Comparison of countries

6. International Trade

7. International trade • International trade brings many economic gains to both the consumer and the country as a whole. • One of the main benefits to the consumer is the variety in products and services to consume. • In addition it encourages creativity and competition both nationally and internationally. • In other words trade brings about more availability and choice of products, freer trade, increased competitiveness, higher productivity, higher consumer satisfaction and a better standard of living for all

8. Comparative and Absolute Advantage in Trade • David Ricardo, a master economist, put forward the theory of Comparative and Absolute Advantage.  • This theory has served as justification for Free trade and liberalization of markets for years.  

9. The Basics – Absolute Advantage • If two countries produce different products, for example country A produces automobile parts with great efficiency and country B produces computer parts with great efficiency, both countries will obviously benefit from trading to each other (or get an absolute advantage from trading). • So when a country is most efficient at producing a good, it is said to have absolute advantage in producing such a good.    

10. The Basics – Comparative Advantage • Ricardo noticed that even if both countries could produce computer parts and automobile parts, they get an advantage from trading together the product they produce most efficiently.  • For example, your country can try to produce both products but if your country has limited labour, for example, it is much more profitable to produce computer parts than auto parts because of its expertise. • Thus, it has comparative advantage to get another country to produce what it is less efficient at doing and a comparative advantage to produce what it can. • The theory of comparative advantages states that countries who find it mutually advantageous to trade usually have comparative costs that differ • In other words, they get more production/products as a result of the trade, therefore benefiting the economy as a whole. Thus, nations benefit greatly from the specialization of trade.

11. Assumptions of the Theory of Comparative Advantage • Assumption 1:There are no transport costs.These always exist and can reduce any comparative advantage gained from trading with another country. • Assumption 2:Costs are constant and there is no economy of scale.In reality, costs fluctuate and increased efficiency can lower the costs of production and increase profitability. • Assumption 3:There are two economies producing the goods in question.The reality is there are several countries producing similar goods.  This complex situation makes trade and its specialization a topic worthy of study and exploration for interested parties.

12. Fair Exchange of Goods • This fair exchange depends on the terms of trade based on products they exchange.  • Two countries will only trade items if trade is advantageous to each of them.   • For example, the labour theory of value states that the value of a good could be measured in terms of the man hours invested in the creation of a given product.  • Thus differences in comparative costs are reflected differences in the productivity of labour.

13. Fair Exchange of Goods • This suggests that high productivity labour countries would have a comparative advantage of trading sophisticated technology to countries with low productivity labour who would be advantaged by producing low technology goods.  • Developing countries usually produce basic goods such as cocoa beans, coffee or fruit while advanced economies produce more complex goods like computers or automobiles.

14. Trade Restrictions • What are the benefits of restricting trade? • What are the concerns with free trade?

15. Concerns with Free Trade • Dumping of Surpluses - In order to protect prices in their markets certain countries dump surplus goods in other countries.  Dumping will cause the price of goods in the other country’s economy to fall.  Thus, dumping makes it very hard for producers in the affected nation to compete.   • Example: Dumping Canadian surplus of milk production into another country may cause the industry for the production of milk in the affected country to suffer or even collapse. • Obviously this is something we want to consider carefully especially if it affects our livelihood and overall competitiveness, or if it makes life so difficult for a trading partner that treaties are jeopardized.

16. Retaliation by market • Several years ago to protect their industry American interests banned the importation of lumber from Canada into the US.  • This allowed the US market to thrive by reducing unemployment, artificially inflating prices, and seriously disadvantaging Canadian interests.  Over-reliance on free trade can create these types of situations where one country tries to get back at another country.

17. To protect Jobs • When one country import cars from a foreign nation, it essentially creates jobs in the other country while taking jobs away from the importing side. • Lower demand and production for domestic goods can cause a slow down in the economy.  A positive trade balance is critical to maintain a strong economy. 

18. Diversity • An economy with few products will be advantaged by having trade restrictions and tariffs because it will allow domestic companies to survive and thrive.  Without barriers these domestic companies would have little chance of success. 

19. Protecting of developing industry • Industries that are just beginning must be protected from large foreign multinational companies who already have all it takes to take over the smaller companies.  • By protecting these developing industries, they are allowed to compete. 

20. Safety and Environmental standards • Standards that increase costs by imposing strict environmental standards usually reduce the profitability of a firm. • Thus, when allowing for trade varying levels of standards should be considered. • For example, in Canada and in much of the world, there is a push to use much more environmentally friendly policy such as applying the Kyoto agreement to reduce greenhouse emissions as we produce our much-needed resources. • If this is the case, other countries we trade with should also participate in this agreement because otherwise their production costs will be lower thus making them more competitive.

21. Protection from foreign influences • Domestic intrusion of foreign ownership of key services and goods can undermine the economy of a nation.  • In Canada, therefore, restrictions on the ownership of certain companies and industries are usually considered important to protect Canadian interests.