NATIONAL INCOME, WELL-BEING

AND SUSTAINABLE DEVELOPMENT

Dr Robin Nunkoo
Associate Professor
University of Mauritius
r.nunkoo@uom.ac.mu
Introduction
 Macro-economics is concerned with the workings of
the whole economy
 An economy is a complex structure
 Disagreements among economists about whole the
economy works
 Nevertheless, there is an accepted general model
of economic behaviour
 The circular flow of income
The Circular Flow of Income (The
Simple Model)
The Circular Flow of Income (The
Simple Model)
 Household: Own wealth of the nation: land, labour,
capital used to produce goods and services
 They supply these factors to firms in return for
wages, rent, interests, and profits (Rewards)
 Firms produce goods and services
 They hire the factors of production from household
and use these to produce goods and services
 Household uses the money to purchase goods and
services
The Circular Flow of Income (The
Simple Model)
 This is a very simple representation of the workings
of an economy
 It assumes that household spends all their money on
goods and services
 Firms spend all their revenues on factors of
production owned by the firms
 There is no government- hence no government
spending (G) and taxes (T)
 The economy is closed
The Circular Flow of Income (The
Simple Model)
 The amount of money flowing in the economy gives
value to the level of economic activity
 This can be measured in three different ways
 Expenditure (E): spending by households on the
goods and services produced by firms
 Output (O): the output of the firm (i.e. the value of
what they produce)
 Income (Y): the income paid by firms to household
The Circular Flow of Income (The
Simple Model)
 In national income accounts, the three are identical
because they are defined in such a way as to be
identical.
 Thus, we derive the following equation:

O=Y=E
The Circular Flow of Income (The
Complex Model)
The Circular Flow of Income (The
Complex Model)
The Circular Flow of Income (The
Complex Model)
 In the simple model, it was assumed that households
spend all their incomes
 However, this is unlikely to be the case
 A proportion of the income constitutes savings (S)
 Savings is a withdrawal because money leaks out from
the circular flow
 More so, firms do not spend all their money on existing
factors of production
 They spend money on investment goods such as
machines, equipments, factors, etc.
 These are known as injections in the national economy
The Circular Flow of Income (The
Complex Model)
 In the real world, savings and investment are linked
through the financial system.
 Households save their money in banks who in turn
lend this money to forms to finance investment
The Circular Flow of Income (The
Complex Model)
 Government exists in all economies
 Government raises money through taxes to finance
public spending on defence, health, education,
social security, infrastructural developments, etc.
 Taxes represent a withdrawal of money from the
circular flow of income
 Government spending on the other hand, constitutes
an injection in the circular flow
The Circular Flow of Income (The
Complex Model)
 It is unrealistic to assume that an economy is self-
sufficient
 Nations engage in international trade in goods and
services
 Consumers spend money on imported good
 Imports (M) are therefore a withdrawal from the
circular flow of income
 Exports constitute an injection in the circular flow of
income
The Circular Flow of Income (The
Complex Model)
 In the circular flow of income, injections must be
equal to withdrawals
 To understand this, it is important to introduce two
identities
 An identity in economics is something which is true
by definition
 For e.g. quadrupeds have four legs because by
definition, quadruped means four legged animals
by definition
The Circular Flow of Income (The
Complex Model)
 Households either spend their income on
consumption expenditure (C) or savings (S), then
Y=C+S
 We also assumed that there were two components
of total spending on goods and services
 Households spend on goods and services while firms
spend on investment, then
E=C+I
The Circular Flow of Income (The
Complex Model)
 Income (Y) and expenditure (E) are two ways of
measuring national income, then:
C+S=C+I
 It must therefore be true that
S=I
 Government spend money collected in the form of
taxes, then:
 I + G = S + T

 With an open economy,

I+G+X=S+T+M
Measures of National Income
 Three ways of measuring national income: income,
output, and expenditure
 All three must be equal because they provide a
snapshot of the economy at different stages
 National income is usually expressed as GDP or
GNP
 Gross Domestic Product is the most common measure
of national income
 It measures income generated within the DOMESTIC
economy
Measures of National Income
 Gross National Product (GNP) add income received
from abroad minus income paid abroad (e.g.
interests paid on loans). So
 GNP = GDP + Income received from abroad –
income paid abroad (Net property income)
 A third measure of national income is called
“national income”
 The difference between GNP and national income is
that national income includes an allowance for
depreciation for capital stocks of a country.
Measures of National Income
 Transfer payments are not included in national
income
 Some income received have no corresponding
outputs
 Social security benefits to individuals who in turn
produce nothing
 Students grants
National Income, Well-being, and
Sustainable Development
 National income has traditionally been used as a
reflection of a population’s well-being
 Higher national income (economic growth) was
usually seen as an improvement in well-being of a
nation
 Therefore, economic development was equated with
development
 Changed since the diffusion of the sustainable
development concept
National Income, Well-being, and
Sustainable Development
 Sustainable development originated from the
publication of the WCED document ‘Our Common
Future’ during the late 1980’s
 Also known as the Bruntland Report
 Since then a growing proportion of the literature
has focused on the practice and principles of
sustainable development
National Income, Well-being, and
Sustainable Development
 Sustainable development has two components: The
meaning of development and the conditions
necessary for sustainability
 Development implies a process that makes an
effort to improve the living conditions of people
 Development is not just about increasing wealth
 It means changes in behavior, aspirations and in
the way which one understands the world around
one
National Income, Well-being, and
Sustainable Development
 Economic development does not by itself
constitute development
 Development includes human and institutional

change as well as economic growth

 It involves broader concerns of quality of life

such as life expectancy, infant mortality,

educational attainment, access to basic
freedom, nutritional status and spiritual status
National Income, Well-being, and
Sustainable Development
 The emphasis of sustainable development is
also to carry developmental achievements into
the future in such a way that future generations
are not left worse off
 In the above context SD is ‘development which
meets the need to the present without
compromising the ability of the future
generations to meet their own needs’ (WCED
1987: 42).
National Income, Well-being, and
Sustainable Development
 Sustainable development is a development strategy
that manages all assets, natural and human
resources, as well as financial and physical assets
for increasing long term wealth and well-being
 Sustainable development rejects policies and
practices that support current living standards by
depleting the productive base, compromising future
generations
National Income, Well-being, and
Sustainable Development
 GDP can’t distinguish between economic activities
that increase a nation’s wealth and ones that eat
into its natural endowments (cutting redwoods),
result in sickness and future cleanup costs (pollution),
or merely ameliorate disasters whose costs are
never accounted for (ambulances)
(https://hbr.org/2012/01/the-economics-of-well-
being)
GDP and Well-Being
 Statistical inaccuracies
 Compiling GDP involves making a lot of choices, and
even reasonable choices can lead to skewed results
 Statisticians understandably favor goods and services
that are bought and sold—and thus easily valued by
market price—over economic activities whose value
must be estimated
 Such things as unpaid household work, although clearly
of great economic importance, are left out of the
calculations.
GDP and Well-Being
 The value of government programs, including health
care provision, is generally underrepresented, as is
the value of leisure
 The black economy
 Defence and related expenditure
 Externalities
 Income distribution
GDP and Well-Being

“Many things of value in life cannot be captured by

GDP, but they can be measured by metrics of health,
education, and freedom.”
https://hbr.org/2012/01/the-economics-of-well-
being