Foriegn Direct Investment - National Income and Changes in Living Standards

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Various definitions are used to describe the "shadow economy" but the definition usually embraces a range of illegal activities such as drug production and distribution, prostitution, theft, fraud and concealed legal activities such as tax evasion on otherwise-legitimate business activities such as unreported self-employment income. The scale of the “shadow economy” varies widely across countries at different stages of development. According to the IMF, in developing countries it may be as high as 40% of GDP; in transition countries of central and Eastern Europe it may be up to 30% of GDP and in the leading industrialised countries of the OECD, the shadow economy may be in the region of 15% of GDP.

GDP and living standards – problems of interpretation

Here are reasons why GDP data may give a distorted picture of living standards in a country:

- Regional Variations in income and spending: National GDP data can hide regional variations in output, employment and income per head of the population. The table below provides some evidence for this with household disposable income per head in Inner London over seventy-five per cent higher than the national average and several of our major cities having disposable incomes per head at only three quarters of the average (or less). The Office for National Statistics provides a useful regional snapshot which offers economic and social information on each of the UK’s major regions.

Household disposable income per head, in 2003

Index (UK=100)

Inner London - West

177.6

Leicester

78.8

Surrey

139.3

Kingston Upon Hull, City of

78.3

Buckinghamshire

133.1

Nottingham

77.4

Hertfordshire

128.0

Stoke-on-Trent

76.9

Outer London - West and North West

120.9

West and South West of Northern Ireland

75.3

Outer London - South

119.4

North of Northern Ireland

73.9

Berkshire

116.7

Blackburn With Darwen

73.3

Source: ONS Regional Trends

- Inequalities of income and wealth: The Lorenz Curve and the Gini-coefficient are two ways of measuring inequality and relative poverty– an outward shift in the Lorenz Curve would indicate a widening of income and wealth inequality. Since 1979, there has been a rise in inequality as the gap between the rich and poorer sections of society has widened. The distribution of wealth is even more unequal than that for income in the UK.

Distribution of real disposable household income in 2004

£ per week at 2003/04 prices

10th

90th

Ratio of 90th to 10th percentile

percentile

Median

percentile

1971

103.4

188.0

328.0

3.2

1979

124.7

217.2

372.8

3.0

1989

130.7

268.9

526.9

4.0

1999

147.1

292.5

604.6

4.1

2004

171.1

335.7

673.9

3.9

Source: ONS, Low income households

- Leisure and working hours: An increase in real GDP might have been achieved at the expense of leisure time if workers are working longer hours. Several reports have highlighted the fact that British workers have the longest working week in Europe which can cause stress and damage family life – two social indicators that potentially create some negative externalities for society as a whole.

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- Imbalances between consumption and investment: If an economy devotes too many scarce resources to satisfying the short run needs & wants of consumers, there may be insufficient resources for capital investment and over-consumption can lead to an over-exploitation of scarce finite resources thereby limiting future growth prospects.

- Changes in life expectancy: Improvements in life expectancy have a huge impact on people’s living standards but don’t always show through in the GDP accounts. Reductions in infant mortality have been accompanied by the prevention or cure of diseases that might have led to the premature death of even the richest of our ancestors at any time. Putting a monetary value on the benefits of increased longevity is difficult, but surely it must be factored into any overall assessment of living