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Unformatted text preview: Chapter 1. The Welfare of Society and Economic Growth When I have pluck&d the rose, I cannot give it vital growth again. Othello In the history of mankind, attempts to improve living conditions have only very recently superseded the struggle for survival. In all civilizations, progress has been exceedingly slow, with abrupt, unexpected downfalls. These were concomitant to natural disasters, epidemics and wars. Today, we can esti- mate that only one &fth of the world population enjoys a standard of life that can be considered acceptable. The yardstick commonly used to measure standards of living is income per person. We &rst show how income reects the result of economic activity (section 1) 1 . We then discuss whether income per person constitutes a proper gauge for the measurement of societys welfare (sections 2 and 3). 1 Income as a measure of economic activity Fundamentally, nations can bene&t, in the long run, only from what they have been able to produce. In turn, the amount produced within a given time span (for instance one year) can be measured from at least three perspectives. First, we can consider the types of produced goods and services; these can broadly be distributed between consumption goods or services on the one hand, and investment goods on the other. Consumption goods and services are produced for the direct use of consumers. Investment goods (machines, factories, transportation infrastructure, etc.) are produced in order to pro- vide ultimately, at some later date, consumption goods or services. Adding consumption to investment would measure a nations total activity if the nation had no relations with the outside world. If this is not so, two major 1 This &rst section is intended for the reader who has had no introduction to national accounts. 1 corrections should be introduced: &rst, one must add to consumption and investment all exports of goods and services; second, all imports should be deducted: indeed, consumption, investment and even exports include imports of goods and services, and imports are no part of a nations activity. From a second perspective, we may consider the output generated by the nations various sectors of activity. We then want to determine how much agriculture or industry, or services have contributed to the nations global activity. This can be measured by the net production of each sector. Net production is the sectors total production net of all purchases from other sectors. Indeed we want to avoid counting twice, or a multiple number of times, the same output. Consider two sectors: the automobile and the aluminium industries. The automobile industry uses, among many other things, aluminium. Simply adding up the production of each sector would amount to count twice the value of the aluminium. The net production or net output is appropriately called the value added of the sector....
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- Fall '08