2019 Nov (GNI) Paper 1 HL

2019 Nov (GNI) Paper 1 HL

(3) (b) Discuss whether the real gross national income (GNI) per capita of a country is a good indicator of its standard of living.

 

Definition

 

GNI - GNI is the total amount of money earned by a nation's people and businesses. It is used to measure and track a nation's wealth from year to year. The number includes the nation's gross domestic product plus the income it receives from overseas sources.

(RGNI = GNI – Inflation)

 

GNI = GDP + Net Income from Abroad

RGNI Per Capita – RGNI/# of citizens in the country

Nominal vs Real = Nominal is not adjusted for inflation and is measured with current prices, which are the prevailing prices at the time of measurement. However prices change over time. If there was a 10% increase in NGNI, we cannot comprehend whether the increase in nominal GNI is brought upon by an increase in output or price level. To allow meaningful comparisons over time, GNI has to be measured in real terms as RGNI, where GNI is adjusted for inflation so the price level of goods and services are held constant.

RGNI per capita is a good indicator of a standard of living such as higher average incomes leading to higher consumption, greater tax revenue for public services, less poverty.

There are limitations of using RGNI per capita to measure the standard of living such as the lack of information about the distribution of income and the composition of output, measurement problems and non-income factors (leisure time, quality of environment) affecting the well-being of the population; considerations of alternative measures such as HDI and the “green GDP” per capita; considerations of the meaning of “a standard of living”.

The Lorenz curve is a way of showing the distribution of income (or wealth) within an economy. Max O. Lorenz developed it in 1905 for representing wealth distribution. The Lorenz curve shows the cumulative share of income from different sections of the population. The 45 degree line is an economy that has zero income inequality. The further the line is away from the 45 degree the more income inequality. Recognize that the Country Z is more unequal in income that Country X.

The Gini coefficient can then be thought of as the ratio of the area that lies between the line of equality and the Lorenz curve (marked A in the diagram over the total area under the line of equality