Economics Assignment: GDP as a Measure of National Welfare

Running Head: 7902 AFE: ECONOMICS. 1
Economics (7902AFE)
Problem Solving Assignment
Amogh Reddy Thota
S5127991

7902 AFE: ECONOMICS. 2
Economics Assignment.
QUESTION 1.
a. Why GDP is not a good measure (Victor, 2018).
i. GDP is only concerned with estimation of market transactions. It tends to ignore
the non-market transactions and consequently disregards social costs,
environmental impacts and income inequality.
ii. The GDP fails to account for underground economy, this include illegal activities
and businesses that usually generate a lot of income in a country and are
unaccounted for. The illegal businesses include prostitution, drug trafficking,
gambling among other illegal businesses.
iii. It is a desperately defective measure of national welfare, this is because GDP tend
to assume activities such as leisure, voluntary work and the chores performed by
women at home. This great chore performed at home include housework, children
care and most of the time other unpaid duties.
iv. Consumption and production of national productivity may result to environmental
damages which require residents to pay some external cost for environmental
conservation which GDP does not include such costs. The GDP fails to account
for the external cost which is caused by negative externality or spill over effect.
v. GDP tends to assume distribution of resources and happiness. The level of
inequality increased steadily in richest countries like United States. The level of
happiness in a country is not accounted for during the GDP estimation, it only
accounts for market worth of all services and finished products within a country
in a given period of time.
b. Analyse one reason above.
An Environmental damage occurs when the activities of one person causes
another person worse off or well off, however, the former economic representative
neither abides by the costs nor gets the benefits of his activities. Negative externality
happens when the consumption or production of a product results to a detrimental
consequence to a third party. For instance, when one tenant arrives late at night drunk and
decide to put a loud music and start dancing and enjoying the other tenant might not sleep
that night due to disturbances caused by their neighbour’s loud music.

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A negative externality is a price incurred by a minor party resulting from
economic contract. This contract involves manufacturer and customer as the main parties
and minor party comprise a separate company or person secondarily affected by the
action of the main parties. They are also called spill over effects or external costs.
Externalities such as waste may originate from consumption while externalities such as
carbon released by industries originate from manufactures (Glaeser & Gyourko, 2018).
Externalities usually happen in circumstances wherever property privileges over
resources have not been assigned or they are not reliable. For instance, oceans are not
owned by anyone so ships may contaminate the oceans without distress of being indicted.
NEGATIVE EXTERNALITY.
Figure 1: Negative externality.
c. National welfare alternative measures (Hadley & Hatch, 2018).
i. Genuine progress indicator, which recognises expenditure of the gross domestic
product and making other positive and negative transactions which includes
divorce, crime, volunteer ship job and pollution cost.
ii. Green GDP which is the estimate of economic expansion with the environmental
concern of that growth considered into a nation’s gross domestic product.
iii. Gross national happiness index its commonly used in Bhutan and it was based on
survey in nine areas.
iv. World Value Survey which measures how satisfied people are with their lives.
v. Happy planet index which is an estimate environmental or social happenings,
happiness or ups and downs in environmental, social, or human capital.

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d. Strengths of Happy planet index.
Several estimates of economic growth are in reality just estimates of national
progression of how much is the production or consumption. Indicators like GDP will only
estimate and measure economic success it does not take care of producing happy lives for
individuals today and in the future (Mukherjee, 2019). The Happy planet index places
present and future welfare at the center of its calculation and estimation. It structures the
progression of every nation in the perspective of real environmental restrictions.
e. Gross domestic product per capita is a suitable estimate pointer of living standards of a
nation, this is because it estimates the worth of a market including all final products and
services manufactured during a certain period of time in a country. It is a way of
estimating standard of living and it is essential method for its quantitative estimation
which can be applied to qualitative approaches to understand factors that contribute to
greater standard of living which include welfare and happiness. Usually, improved
economic conditions have a robust relationship to greater living standards. In GDP,
productivity is estimated at the market cost. GDP only accounts for the value of the
finished products and not transitional products. GDP comprises of tangible commodities
such as food, clothing and car and intangible services like haircut, medical services
among others.
Reference.
Glaeser, E., & Gyourko, J. (2018). The economic implications of housing supply. Journal of
Economic Perspectives, 32(1), 3-30.
Hadley, R., & Hatch, S. (2018). Social welfare and the failure of the state: centralised social
services and participatory alternatives. Routledge.
Mukherjee, S. P. (2019). Quality of life. In Quality (pp. 269-287). Springer, Singapore.
Victor, P. A. (2018). Managing without growth: slower by design, not disaster. Edward Elgar
Publishing.

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QUESTION 2.
China was the main manufacturer of steel in the world in the year 2011, manufacturing
approximately 45 percent of the entire universe steel at 683 million tons, a rise of 9 percent from
the previous year. 60 percent of main steel manufacturing companies in the entire world are
in China. The drop terminated its 10 years old in steel export progression.
a. The economic effect of Tariff
Figure 2: The economic effect of Tariff.
Tariff /import /duty levy
A duty is a form of tax that is imposed on imported products (He, Li, & Lin, 2019). The
tariff will increase the cost of imported products over and above the prices charged at world
market by that amount of tax or rather the tariff. At world prices without tariff for steel, the
volume of imports into united states is very big represented by the portion Q1
S andQ1
D
above.
Again United States surplus is very big and is represented by portions A, B, C, D, E and F, China
on the other hand, has a little surplus of steel represented by portion G owing to the fact that they
export most of their production to United States. When tariff is imposed for the Chinese steel, the

7902 AFE: ECONOMICS. 6
volume of imports into United States declines as represented the portion between Q2
S andQ2
D
above and the United States surplus of steel also declines to portion A and B only. While the
Chinese surplus of steel increases and is represented by portion C and G. The Chinese
government will generate little income revenue as a result of tariff imposition and this is
represented by portion E on the graph above. There is allocative inefficiency represented by
portion D and F which is as a result of loss in economic efficiency and occurred when the free
market stability for steel had not been attained. Both the countries, will suffer because US
requires a lot of steel to manufacture most of their products while the Chinese will also suffer
huge financial loss as US is the major importer of the steel.
b. China retaliated with imposition of duty on 110bn dollars of US products,
condemning the United States of initiating largest trade rivalry in their long existence
economic trading history. China has targets goods such as chemical
substances, petroleum and health and medical products with duties ranging from 5
percent to 25 percent. It has also targets goods manufactured in United States
territory with greater backing of the Republicans and products that can be acquired in
other places which includes soybeans.
c. Justification of tariff imposition.
i. Development of infant industry.
Some companies have a potential relative advantage although they have not
exploited their possible economies of scale. Short-term safeguard permits the
fledging companies to establish their relative advantage to a point where there will be
no need of protection and in turn leave the companies to trade freely on the global
market (Leeds, Von Allmen, & Matheson, 2018).
ii. National Security
The argument is frequently used that industries need protection for national security.
Industries use the argument due to fear of competing with international companies
(McGovern, 2018). In general cases of money printing and manufacture of weapons
should not be tendered to foreign companies due to security reasons although, this
argument cannot be applied to some specific goods and services because at some
point different countries may not have relative advantage in producing some goods