Question

In macroeconomics there are two key questions: first, how to measure (real) output growth? and second, how is growth connected to wellbeing?

As for the first question, there are three ways to measure real GDP growth. It starts with the definition of a percentage difference between two numbers, say x1 compared to x0. When there is only one good (e.g. apples) there are no prices to worry about for the calculation. But for the economy as a whole, we need prices to be able to add up quantities (of apples, bananas, and everything else) in dollar terms. So for real GDP growth, which holds prices constant on a given base year to control for inflation, then the trick is to apply those prices before, during, and after that base year in order to calculate the total dollar value of all goods and services produced and track growth that is not affected by inflation.

In this exercise you will work out the connection between the three ways to measure GDP growth: A) As a percentage change holding prices constant. B) Expressing growth in terms of a common item (converting everything into a particular good (e.g. apples). And C) as the weighted average of the growth in each of the goods weighted by their corresponding expenditure shares.

The second question in macroeconomics refers to a mapping from goods and services to subjective well-being. That is, why do we care about economic growth, after all?

Answer 1

There have been a lot of talkls about growth and well-bieng. Before we see how they are related to each other, it is important to define what well-bieng is.

According to nobel laureatte Amartya Sen, well-bieng is a very subjective concept based in each and every individual's personal perception. But broadly, it is defined as the freedom that an individual has in order to be able to achieve the kind of life that he/she has a reason to value. In other words, well-being is analogous to the amount of resouces at your disposal to be able to function in the way you would want to. This includes everything right from the freedom of expression to the freedom to be able to choose a certain way of life. According to Sen, economic growth that gives the power to people to be able to afford all the things thy would want to is one important aspect of well-being, but not the whole of it. This is because a rich person having to confine his actions to what the society expects from him in is no better position than a middle income person who has the freedom to be what he pleases, even within his limited resources.

That said, considering the state of the world, it is safe to say that a huge part of well-bieng is determined by the resources that you can command at your disposal, which in turn requires money in today's world. The tribal groups surviving in dire poverty in the starving nations of Africa are not concerned about how much freedom they have to live the life of their choice, they are worried about how they are going to put food on their children's tables the next day. Meaning to say, only once the basic necessities of food, shelter and clothing are fulfilled can a perosn think about higher forms of freedom of expression. Hence, the basic need for well-being is money in any state. It doesn't just fulfill the basic needs, it also gives the power to command more resources and live the life a person has the reason to value.

One of the most basic measures of well-being of a country thus as to be its economic growth, and only when growth is achieved can the nation think about the other aspects of human develpment that they would like to pursue. Hence, economic development is always been a talk of the more developed nations while the developing nations are still strugling to achieve the rate of growth that will enable all f its people to have sustainable income.