Chapter 7

Welfare Economics

(Growth and Development)

Lesson 1: Welfare Issues and Concerns

  • Positive Economics – economic phenomena
  • Normative Economics – attempts to evaluate the economic phenomena
  • Welfare Economics – deals with topics on justice, equity, freedom, and other topics that concerns economic growth and progress. Welfare Economics assumes that individuals are the best judges of their own welfare.

Lesson 2: Economic Growth Vis-à-vis Economic Development

Growth in Economics connotes a positive change or movement toward optimum, if not better standards of living for the members of society.

  • Pareto Optimality or Paretian Optimum
  • Economic Growth
  • Economic Development
  • Balanced Growth Thesis
  • Unbalanced Growth Thesis

Two Major Strands to the Study of Development

  1. Stages of Economic Growth Theories of the 1950s and early 1960s (Linear Stage Model)

  2. Structural – Internationalist Theories of the late 1960s and 1970s
  • Neo – Colonical (or Neo – Marxist) Dependence Model
  • False Paradigm Model

Modernization School

- an American Economist Historian who popularized the idea of a “take – off” into a self – sustaining economic growth. His popular work, the Stages of Economic Growth, is a non – communist manifest (1960) which lists the following key characteristics:

Walt Whitman Rostow

  1. It is evolutionist
  2. It is unilinear
  3. It is internalist
  4. It is recapitulationalist

Dependency School

Andre Gunder Frank

- is an American Economist who coined the phrase “the development of underdevelopment.” The view takes society in a Global Capitalist System. It is characterized by whole chain of metropolis - satellite relations. This chain links the entire system. The key characteristics are:

  1. It is externalist
  2. It is bilinear
  3. It is stagnationist
  4. It is discontinuist


- physicological
- behavioral


5 Priorities

- literacy,education and skills
- health
- income and economic welfare
- choice,democracy and participation
- technology


- production function
- saving function
- labor supply function

(saving rate)s/AY(capital-output ratio)


- commonly used by developing countries in economic planning.
- With a target growth rate, the required saving rate is known.


- emphasize on the role of technological change.
- the saving rate will only determine the level of income but not the rate of growth.


- It is a model taking the peculiar economic situation in developing countries into account:

> unemployment
> underemployment of resources


-sustained, concerted actions of policy makers and communities that promote the standard of living and economic health of a specific area.

Lesson 3: Sustainable Development

Sustainable Development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Gross National Product (GNP) – the market value of an economy’s final goods and services produced over a period of one year.

Final goods – goods that are ultimately consumed rather than used in the production of another good.

National Income – flow of income and expenditure measures of the country.

Nominal GNP – market value of a nation’s aggregate production of final output based on current prices for the goods and services produced during the year.

Real GNP – measure of the value of a nation’s aggregate output of final products obtained by using market prices prevailing for products during a certain base or reference year.

Aggregate Real Income – the nominal (money) income of a nation, adjusted for inflation, expectations of Equivalent to real GNP.

Net Exports – any excess of expenditures on exports over imports.

Aggregate Expenditures – the nominal income of a nation, adjusted for inflation.


 - counts all the output of the residents of a country.

 - is precise if prices and value of peso is constant

Causes of GNP deformation:

Inflation - increase in price level

Deflation - decrease in price level  

Aggregate Demand - demand for total output of the economy

Consumption - represents the household expenditures/spending

consumption = disposable income

Keynesian Theory

"Current real income is the most important determinant of consumption in the short run."

States Affecting Consumption:

  • Price
  • Tax
  • Savings
  • Consumer Confidence

The Methods of Computing/Measuring National Income

- there are three methods of measuring national income: 

  1. The Product Method
  2. The Expenditure Method
  3. The Income Method

The Product Method or Value Added Method

defines a nation's gross product as the market value of goods and services currently produced within a nation during a one year period of time.

the product approach involves adding:

  • Agriculture
  • Manufacturing
  • Construction
  • Transport and Communication
  • banking
  • Administration and Defense
  • Distribution of Income

Precautions for Product Method or Value Added Method

  1. Problem of Double Counting
  2. Value Addition in Particular Year
  3. Stock Appreciation
  4. Production for Self Consumption

Expenditure Method

as total spending on final goods and services produced within nation during a year.

Broad Categories of Expenditures

  • Consumption Expenditure
  • Investment Expenditure
  • Government Expenditure
  • Net Export Expenditure

Precautions for Expenditure Method

  1. The expenditure on second hand goods should not be included
  2. Expenditure on purchase of old shares and bonds is not included
  3. Expenditure on transfer payments by government

Income Approach

This method seeks to measure national income at the phase of distribution.

Four categories of payments are briefly described below

  1. Transfer payments such as gifts , donations , scholarships, indirect taxes
  2. Illegal money earned through smuggling and gambling
  3. Windfall gains such as prizes won , lotteries , etc.
  4. Receipts from the sale of financial assets such as shares , bonds
  • Wages
  • Rents
  • Interests
  • Profits

Precautions for Income Approach

why the three methods of computing/measuring national income are equal?


By Geoff Diaz


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