Income & Poverty: In-Class WorksheetECNS 317 - INSTRUCTOR

1 Measuring Income

Here are four ways to measure national income:

1. Nominal GDP at market prices: Add up the value of all final goods and services produced inone country then sold.

2. Nominal GDP at factor cost: Add up the cost of all factor inputs (i.e. capital, land & labor),also known as the “value-added”.

3. GDP with Green Accounting - subtract environmental factor costs from Nominal GDP.

4. Per capital GDP (PCY) - Nominal GDP divided by national population.

5. Real GDP - GDPreal = GDPnom.

1+r Where r is the inflation rate since the year of comparison (baseyear).

1.1 Practice: Income Measurement

Instructions:

1. Calculate GDP at factor cost and at market prices (without Green Accounting)

2. Calculate GDP at factor cost and at factor cost with Green Accounting

3. Calculate per capita income (use GDP without Green Accounting), Assume population=100

4. Calculate real GDP assuming an inflation rate of 15% (r=0.15).

How to use this table: Columns are each industry’s costs. Rows are each industry’s revenues.Total revenues minus intermediate good revenue is the value of all final goods. Factor costs areindustry costs not associated with revenue from another industry.

Income Account Agriculture Industry Services Final Goods TOTAL REV.

Production SectorsAgriculture 115 15 5 750

Industry 35 100 35 500Services 10 30 10 250

Factors Factor Tot.Land 165 50 35

Labor 200 100 40Capital† 50 90 60 Imports

Imports 175 115 65TOTAL COST 750 500 250

Environment∗ -75∗ -100∗ -10∗

Per Capita Final Goods Factor CostsGDP (PCY) GDP

Real GDP GDP(Grn Acct.)

†A.K.A. profits∗Environmental factor costs not captured in market value

Economic Development, INSTRUCTOR

2 Measuring Poverty

The most widely used measure of poverty in economics: Foster-Greer-Thorbecke (FGT). It rangesbetween 0 (no poverty) to 1 (everyone’s poor with zero income). It may be used to calculate threeseparate measures of poverty.

1. Headcount (α = 0)

2. Poverty Gap (α = 1)

3. Poverty Severity (α = 2)

2.1 Practice: Poverty Measurement

Let the poverty line be z = 10. Solve for each of the following FGT indices:

1. Headcount

2. Poverty Gap

3. Poverty Severity

Person Income In Poverty? Poverty Gap (Poverty Gap)2

(z − yi)0 (z − yi)

1 (z − yi)2

1 1

2 4

3 7

4 8

5 9

6 14

7 15

8 27

9 30

10 45

Sum

Economic Development, INSTRUCTOR