Will a Global “Happiness” Index Ever Beat Out GDP?

By Roya Wolverson | @royaclare | May 24, 2011 |

For several decades, economists have been dancing around the idea that economic growth doesn’t equal happiness. And yet, politicians and the media are constantly using growth rates as the way to assess whether a country is really getting ahead. Why? Because GDP is one of the few economic indicators that everybody measures and understands. The OECD is trying to change that with a new measure of well-being called the “Better Life Index.” So what’s the purpose, and will it work?

GDP, which only measures economic output, passes over a lot of stuff that people really care about, like air and water quality, health, education, and leisure. So even if the economy is growing like gangbusters (say, China), which implies more jobs and more wealth, there may be a lot of other things going on that aren’t so rosy, like pollution, deforestation, and corruption (again, China). And even if economic growth is creating more wealth, GDP also doesn’t tell you who in society is getting the lion’s share. Because GDP measures an average of per capita output, it doesn’t reflect changes in specific segments of a population. So poorer populations within a single economy can be getting poorer, even though GDP is going up.

The folks at the OECD have been thinking about this for a while. In fact, the concept of “happiness economics” dates back to the 1970s, when an economist named Richard Easterlin did research concluding that, on the whole, rich countries don’t get happier as they get richer. If that’s true, then using GDP to set policies on things like jobs and public spending can easily lead countries astray. So why has it taken so long to come up with a new measure?

First, because economists like to keep it simple. Steve Landefeld, Director of the Bureau of Economic Research, has said his agency is loathe to create a new economic measure that is “hard to define and quantify” and that political issues like well-being and happiness should be “left to those responsible for guiding social movements and legislative policy. Economists’ contributions must continue to focus on what economists can uniquely provide; the objective impacts of such programs.”

That’s why the OECD came up with this interactive gauge. With the “Your Better Life Index,” people can hop online and determine the weighting of various economic indicators — including housing, income, education, environment, governance, life satisfaction, and work-life balance — according to what’s most important to them. The information gathered from the index may help the OECD figure out how to come up with one indicator that can be compared across countries, while avoiding the political minefield of telling other cultures what makes them happy.

If the OECD manages to clear that hurdle, the next step would be getting countries around the world to sign up for using its indicator, just like they signed up for using GDP. And that’s the hard part, because countries all manage their data differently. Even GDP, which economist chalk up to a universal indicator, is measured differently around the world. Imagine trying to unify how, say, Japan and Greece rank the importance of factors such as “work-life balance” or “life satisfaction.” Adding more indicators to the long list of measures governments already crank out also requires more time and money. And that’s something very few countries have on tap.

Hats off to the OECD for trying, but it’s going to be a while before “happiness” comes anywhere close to challenging the global supremacy of GDP.

Source: Time.com

Read more: http://business.time.com/2011/05/24/is-a-global-happiness-index-on-the-horizon/#ixzz1l0zjOOWD


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US Government Debt

The US government debt has been a major concern recently, with the raising of the government debt limit in order for the US government to meet its financial obligations. How did the government end up in such a state, whereby it would be unable to pay its bills without having to borrow more money?

The chart below shows how the US public debt has soared over the years, since after World War II.

The chart below shows the American Presidents under whose office the public debt as % of GDP actually rose steeply.

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China FX reserves soar past $3 trillion, add to inflation

By Kevin Yao and Langi Chiang Kevin Yao And Langi Chiang Thu Apr 14, 7:15 am ET

BEIJING (Reuters) – China’s foreign exchange reserves soared to a record of more than $3 trillion by end-March, while its money supply growth blew past forecasts, threatening to aggravate the nation’s inflation woes and trigger more policy tightening.

Chinese banks extended 679.4 billion yuan ($104 billion) in new local currency loans in March, while the broad M2 measure of money supply rose 16.6 percent from a year earlier, both above market expectations.

Tapping the brakes on money and lending growth has been a crucial part of Beijing’s campaign to rein in inflation, which probably hit a 32-month high of 5.4 percent in the year to March, according to local media reports.

After making progress at the start of the year in mopping up excess cash, the People’s Bank of China appeared to lose some ground in March.

“The latest numbers show that it is still too early for China to ease monetary tightening. China still needs to keep tightening policy at the current pace in coming months,” said Qu Hongbin, chief China economist with HSBC.


Looking at the first quarter as a whole, the central bank has had some success in controlling loan issuance, said Liu Hongke, economist with CCB International Securities in Beijing.

She noted that the 2.24 trillion yuan in new loans in the first three months of the year was about 30 percent of the government’s full-year target, exactly in line with where it wanted to be at this stage.

“It shows the central bank is doing a good job,” Liu said. But she added that China would need to raise banks’ required reserves again very soon to absorb excess liquidity.

China’s inflation accelerated to as fast as 5.4 percent in March from a year earlier, Hong Kong media said on Thursday, reinforcing the government’s vow to rein in price rises.

Economists polled by Reuters had expected annual inflation in March to be 5.2 percent, up from February’s 4.9 percent.

The website of Hong Kong’s Phoenix TV, citing an unidentified source, said annual inflation in March was likely to be 5.3-5.4 percent, a 32-month high. Official data will be released on Friday morning.

China has raised benchmark interest rates four times since last October and has required the country’s big banks to lock up a record high of 20.0 percent of their deposits as reserves.

Economists polled by Reuters last week said that China was heading for a pause in its half-year cycle of monetary tightening, forecasting that it would raise interest rates just once more this year.


A measure of the difficulties faced by China in taming inflation came in the first quarter’s nearly $200 billion increase in its foreign exchange reserves, already the world’s biggest, to $3.05 trillion.

The rapid reserve build-up could indicate hefty capital inflows given that China had a $1.02 billion trade deficit in the first quarter– the first quarterly deficit since 2004 — which could complicate the government’s fight against inflation.

“It could be a sign of strong capital inflows, which implies that there will be room for more reserve requirement ratio hikes and stricter credit control measures,” said Connie Tse, economist at Forecast Pte in Singapore.

Also, the dollar’s broad weakening against major currencies in recent months meant that the value of China’s existing reserves, which is expressed in dollars, was bound to increase.

The dollar hit a fresh 16-month low against a basket of currencies on Thursday as expectations grew that the Federal Reserve would keep monetary policy loose for some time.

China’s vast forex reserves are often seen as a sign of the strength of its economy, stemming in large part from its vast trade surplus, but the rapid growth translates into money creation and additional inflationary pressures at home.

“There have been stronger expectations of yuan appreciation and faster hot money inflows in the first quarter,” said Li Jie, head of China forex reserves research center at the Central Universify of Finance and Economics in Beijing.


This looks like the Mundell-Fleming Policy Trilemma at work. China has been trying to control rising inflation using restrictive monetary policy (raising bank reserve requirement ratio to curb lending). However, with its trade surplus and strong capital inflows, there is upward pressure on its exchange rate. To keep the yuan from appreciating, the Chinese government has to sell yuan in exchange for foreign currencies, hence resulting in its growing foreign exchange reserves. The increased supply of yuan filters back into the financial system as increased liquidity. This makes the restrictive monetary policy less effective, as the central bank once again has to tighten credit to mop up excess liquidity. If China wants to continue controlling its exchange rate and have control over its monetary policy, it will have to tighten restriction on capital flows ie it cannot have independent monetary policy, exchange rate control and capital mobility at the same time.

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Singapore’s inflation up 5% on-year in February

By Chris Howells | Posted: 23 March 2011 1329 hrs

SINGAPORE: Singapore’s February consumer price index (CPI) rose by five per cent, versus market expectations for a rise of 5.4 per cent.

This was due to slower rise in costs of transport, housing and food, according to the Department of Statistics (DOS).

The number was also lower than January’s 5.5 per cent on-year rise.

Compared with February 2010, the cost of transport advanced by 15.2 per cent, as a result of higher prices for cars and petrol.

Housing costs increased by 5.8 per cent, arising from higher accommodation and electricity tariffs.

Food prices rose 2.6 per cent.

Excluding accommodation costs, CPI rose 4.5 per cent on year.

DOS said on a month-on-month basis, CPI fell marginally by 0.1 per cent, as a result of the lower cost of transport compared to last month, which more than offset higher housing, food, and recreational costs.

Transport costs fell 2.3 per cent, mainly attributed to lower car prices.

“It reflects the reduction in COE prices in the month of February. COE prices were at their high in December, at $75,000 in open category, that receded to about $62,000 in February. So correspondingly we see it as a reduction in the drag from transport inflation,” said Mr Leong Wai Ho, senior regional economist for Barclays Capital.

In contrast, housing costs rose 0.5 per cent.

More expensive prepared meals drove food prices up by 0.4 per cent.

Higher foreign maid salaries and more expensive holiday travel led to a 0.6 per cent increase in the “recreation & others” category.

Excluding accommodation, CPI fell 0.3 per cent on month.

Core inflation measure, which excludes the costs of accommodation and private road transport and is tracked by the Monetary Authority of Singapore, rose 1.8 per cent on year, versus 2.0 per cent in January.

However, other pressures could be emerging that could push prices higher.

Economists point to food, which accounts for 22 per cent of the CPI basket. Food prices have been steadily rising over the last 12 months.

Energy prices, which also accounts for around 20 per cent of the index, are also expected to remain elevated in the near-term because of the crisis in the Middle East.

Analysts say this could contribute to higher transportation costs here.

Analysts have said crude oil prices could rise to US$120 a barrel if tensions in the Middle East don’t get resolved soon.

“This has strong implications for monetary policy, because we have to recognise that back in October, during the last policy review, the MAS expected inflation to hover around 4%, but it has now exceeded even the 5% mark and it is likely to stay above the 5% level for the next couple of months,” said Mr Irvin Seah, economist for DBS Group Research.

Analysts say this means the Sing dollar could go as high as 1.20 against the US dollar by the end of this year, as the authorities look to tame imported inflation and prevent higher costs from feeding into a wage-inflation spiral.

Comment: Can you identify the “demand-pull” and “cost-push” factors that are driving up the inflation rate?


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Obama and Keynesian Economics

The Obama administration has adopted a traditional Keynesian approach to economic management for restoring full-employment and sustained growth, an approach that is premised on government spending and loose monetary policy, a policy that was touted at Group of 20 (G-20) summits.

Although several G-20 member countries dissented from Obama’s Keynesian fervor, the Obama administration pushed ahead, raising government expenditures from an average of 19%-20% during the Bush era to an average of 25% in 2009-2010, and the federal deficit from an average 2%-3% to 10%-13%.

The US application of Keynesian economics is popular with academics and policymakers. Classroom models assume a frictionless world where government spending could be used in a most flexible way as a counter-cyclical policy instrument.  However, as the Greek debt crisis and the California and Illinois fiscal deficits plainly illustrate, it is one thing to increase spending and another to roll it back. In the same vein, it is very difficult to increase taxes significantly to finance a large deficit.

Hence, President Obama’s US$1.5 trillion deficit is caught between two powerful forces: there are forces that would oppose big cuts in government spending; it is unrealistic to think of reducing government expenditures from 25% to 20% of GDP. Moreover, as the tax compromise of December 2010 illustrates, it would also be similarly unrealistic to think about raising taxes from 18% to 25% of GDP in order to close the fiscal deficit.

There is little disagreement among economists about the necessity of government spending. There is, however, significant disagreement as to the size and composition of public expenditures.

In the late 18th century, Adam Smith classified public spending into productive and non-productive expenditures. Expenditures on social infrastructure, police, judges, courts, hospitals, and universities could be classified as productive expenditures; however, expenditure expansion beyond levels deemed efficient in areas such as more civil servants, large pay increases for civil servants relative to private sector compensation, or large peace-time increases in military spending could be seen as un-productive spending.

There is also disagreement about the wisdom of running large fiscal deficits to remedy what Keynes called effective demand failure. Keynesians have created what is coined the paradox of savings and the notion of under-consumption – namely, the economy has hoarded too much output; only the government can force a dis-hoarding by hiking up demand. In 2011, it is difficult to believe that lots of crude oil, sugar, wheat, corn, and cotton are being hoarded and that only government can create demand for such hoarded goods.

US fiscal and monetary policies have resulted in considerable uncertainties. Commodities prices are drifting upward with no bound; considerable distortions are being created by negative real interest rates; significant wealth redistribution is under way; speculation in financial markets has intensified; exchange rates have become increasingly volatile, with depreciation amounting to an equivalent tariff on trade.

Although core inflation may be stable, commodity and food prices are at historic levels. Increasing US government debt raises future uncertainties. How would the US government service a public debt that could approach 100% of GDP? There are three options: massive tax increases, default, or what is equivalent to a Ponzi scheme, namely resorting to inflation. All of these options have brought economic growth to a screeching halt in countries that have tried them.

Establishing sustainable growth and full-employment in such an unstable environment would be a novelty indeed; namely, if this were the case, then an economy suffering from high unemployment could simply print money and increase government deficits. Famous economists, prior to Keynes’s General Theory (1936), demonstrated that the scale and durability of the 1929 depression was in part due to considerable government intervention through easy money, large fiscal deficits, and distortive labor laws that prevented a return to sustainable growth.

Extracted from: “Obama Comes First” by Hossein Askari and Noureddine Krichene, Asia Times Online, Feb 4, 2011

Comment: Can increased government spending really pull an economy out of a recession? In theory, it seems logical that increasing aggregate demand will help to generate output, employment and income.  The question is where does the government gets the money to spend? High fiscal deficits will have to be financed by borrowing internally and/or externally resulting in a growing public debt that could threaten the stability of the financial system and/or crowd out private investment. Monetising the debt (by printing money) will result in high inflation that could also destabilise the economy. The debate continues….

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Egyptians’, Tunisians’ Wellbeing Plummets Despite GDP Gains

by Jon Clifton and Lymari Morales

Feb 2, 2011

WASHINGTON, D.C. — Wellbeing in Egypt and Tunisia decreased significantly over the past few years, even as GDP increased. In Egypt, where demonstrations have prompted President Hosni Mubarak to give up power after elections this fall, the percentage of people “thriving” fell by 18 percentage points since 2005. In Tunisia, where mass protests toppled the country’s government last month, the percentage of people Gallup classifies as thriving fell 10 points since 2008.


Gallup classifies respondents worldwide as “thriving,” “suffering,” or “struggling” based on how they rate their current and future lives on the Cantril Self-Anchoring Striving ladder scale, with steps numbered from 0 to 10. The declining percentage of those in Egypt and Tunisia who rate their lives well enough to be considered thriving reveals that these populations, as a whole, have become increasingly negative about their lives over the past few years.

In Egypt, all income groups have seen wellbeing decline significantly since 2005, with only the richest 20% of the population trending positively since 2009. In Tunisia, wellbeing for all groups has declined since 2008 at similar rates.

As a result of these declines, wellbeing in these countries now ranks among the worst in the Middle East and North Africa region, on par with Libya, Palestinian Territories, Iraq, Yemen, and Morocco. When more people were thriving in Egypt and Tunisia in past years, their wellbeing ranked toward the higher end for the region. Thus, it is important to consider the current state of wellbeing in each country as well as the trend and trajectory.


The data underscore how traditional economic metrics can paint an incomplete picture of life in a given country. Over the same period that wellbeing decreased in Egypt and Tunisia, GDP increased. This is particularly noteworthy because previous Gallup research, by Angus Deaton, Betsey Stevenson and Justin Wolfers, and Gallup researchers, has found wellbeing to be highly correlated with GDP per capita.



Gallup’s global wellbeing metrics make clear that leaders cannot assume that the lives of those in their countries would improve in tandem with rising GDP. The traditional GDP gains seen in Tunisia and Egypt alongside declines in wellbeing and subsequent political instability are evidence of this. Together, the data strongly suggest leaders need to follow much more than GDP to effectively track and lead the progress of their nation.

Source: Gallup http://www.gallup.com/poll/145883/Egyptians-Tunisians-Wellbeing-Plummets-Despite-GDP-Gains.aspx 

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Impact of Oil Price Changes on Consumers & Producers

Some students have asked what determines whether the cost of oil price changes will be more likely borne by consumers or producers. (One of the 2009 GCE ‘A’ Level essay questions).

First, we should note that the demand for oil is a derived demand. Oil is demanded not for itself, but is derived from the demand for energy and other final products which use oil as a raw material. Oil is used as a fuel for energy production (eg. in cars, aeroplanes electricity generation, etc.) and manufacture of petroleum related products such as plastics, paints, solvents, lubricants, etc. Changes in price of oil therefore can impact a wide range of goods and services (eg. bus transport). In general, the price of oil has been rising over the years due to demand and supply conditions.

The impact on consumers and producers therefore depends on the type of goods and services which are impacted by the oil price hike. An increase in price of oil represents an increase in the cost of production for the final goods and services — hence a leftward shift of the SS curve.

1. The more inelastic the demand for the good, the more likely consumers will bear the cost of the oil price increase. This can be shown using a DD-SS diagram. (Try drawing). Eg. bus transport. If demand is price inelastic, producers are able to pass on more of the cost increase to consumers. The more inelastic the demand, the greater will be the increase in price of the good, and hence consumers will bear more of the cost of oil price increase.

Conversely, the more elastic demand, the smaller will be the increase in price of the good (with a shift in SS curve), hence producers will bear more of the cost increase.

2. The more elastic the SS of the good, the more likely that consumers will bear the cost of the price increase. An increase in cost (due to oil price increase) is shown by a leftward (vertical) shift of the SS curve. The vertical distance between the new and old supply curves represent in the increase in per unit cost (and hence price at each quantity). A more elastic SS curve will result in a greater increase in price and hence more of the cost increase is borne by the consumers. With a more inelastic SS curve, the same vertical shift in the SS curve will cause a smaller increase in price, so that more of the cost increase will be borne by the producer. (Try drawing the DD-SS diagram).

The conclusion is that whether the cost of an oil price increase is borne more by consumers or producers would depend on the relative elasticities of demand and supply of the good or service. It could also depend to some extent on the type of market structure. If it is a monopoly, it is more likely to pass the cost increase to consumers since it is the sole supplier. If the industry is monopolistically competitive, producers are less able to pass on their cost increase to consumers since there are many substitutes available. Producers may have to bear more of the cost increase. For oligopolies, the high mutual interdependence among firms could limit their ability to pass on cost increases to consumers. However, if there is high degree of collusion among them, consumers may end up bearing more of the cost increase.

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