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•Rise in national per capital
income
•No sustained economic
development can occur without
economic growth.
Economic
Growth
Economic
Development
•Improvements in health,
education and other aspects of
human welfare
•Distribution of wealth within a
country
•Structural change
Economic
Growth
Lucas (1988)
“By the problem of development I mean simply
the problem of accounting for the observed
pattern, across countries and across time, in
levels and rates of growth of per capita income.
This may seem too narrow a definition, and
perhaps it is, but thinking about income
patterns will necessarily involve us in thinking
about many other aspects of societies too, so I
would suggest that we withhold judgment on
the scope of this definition until we have a
clearer idea of where it leads us.”
Streeten (1994)
“[W]e should never lose sight of the ultimate
purpose of the exercise, to treat men and
women as ends, to improve the human
condition, to enlarge people’s choices…[A]
unity of interests would exist if there were rigid
links between economic production (as
measured by income per head) and human
development (reflected by human indicators
such as life expectancy or literacy, or
achievements such as self-respect, not easily
measured). But these two sets of indicators are
not very closely related.”
Streeten – there may not be a
correlation between economic growth
and human development
Economic growth
Human development:
life expectancy,
literacy, self respect
Lucas – it is the power of aggregate
forces of economic growth that lead to
human development.
Economic growth
Human development
indicators: health,
life expectancy,
literacy

Per-capita Gross National Product (Gross National
Income) the per-head value of final goods and
services produced by the people of a country over a
given year
◦ GNP excludes intermediate goods
◦ GNP includes output produced by citizens who live outside
its borders

Per-capita Gross Domestic Product the per-head
value of final goods and services produced within a
nation’s boarders over a given year
◦ GDP includes intermediate goods
◦ GDP excludes output produced by citizens who live outside
its borders

Comparing GNP (GNI) vs GDP
◦ Ex: Angola's national income is derived from oil, drilled by
multinational companies.
 Profits count toward Angola’s GDP, but not GNP
 In 2009 Angola’s GDP was 12% higher than GNP.
◦ In most countries the differences are small.
◦ GDP is most widely used measure

What is left out of both measures?
◦ The informal sector and subsistence agriculture is typically
not included or poorly estimated.
◦ Not all household production is accounted for.


Problem: 164 official national currencies
A shortcut: use the market exchange rate between
2 countries
◦ The Exchange Rate Method: Each country’s currency is
converted into a common currency (usually US$) and
divided by the country’s population.
 Ex: India’s GDP per capita in 2009 was about 57,000 rupees.
Converted into USD is about US$1,160
 Problem: 1 USD goes much further in India than in the US.
 You can buy 40 haircuts in Mumbai for 1 haircut in the US.
 India’s true per capita income must be higher.

The Exchange Rate Method
◦ In World Bank Data: Data are converted from national
currency to current U.S.$ using the World Bank Atlas
method.
◦ This involves using a 3-year average of exchange rates to
smooth the effects of transitory exchange rate fluctuations.

Problems:
◦ A significant part of national income comes from non-traded goods
(haircut, taxi ride, ect.).
◦ Exchange rates are determined by the flow of traded goods/services.
◦ GDP converted into USD by market exchange rates gives a misleading
comparison on income levels if
𝑃𝑛𝑜𝑛𝑡𝑟𝑎𝑑𝑒𝑑 𝑔𝑜𝑜𝑑𝑠
𝑃𝑡𝑟𝑎𝑑𝑒𝑑 𝑔𝑜𝑜𝑑𝑠
differs between countries.

Purchasing Power Parity (PPP):
◦ Pick a set of prices for all goods/services in one country and use that
same set of prices to value goods/services of all countries being
compared.
 Ex: haircut and taxi ride are assigned the same value in NY and Mexico City.
◦ Idea: How much money is needed to purchase the same basket of goods
in 2 countries?
 It is the Purchasing Power of a country’s currency required to purchase the same
basket of goods/services that a USD will buy in the US.
◦ International Comparison Program (ICP): International prices are
constructed for large baskets of goods & services (400-700 goods) by
averaging prices (expressed, say in US$ - Phome/PUS) for each good over
all countries.
For high income
countries ratio is close to
1: at similar levels of
income, Pnon-traded is
similar across countries
As average income levels
fall, the exchange rate
method understates GDP.
Economics of Development, 7th Edition
Copyright © 2013, W.W. Norton & Company
WDI, 2017
Economic growth
Human development:
life expectancy,
literacy, self respect
Economic growth
Human
development
indicators: health,
life expectancy,
literacy
If economic growth and economic development are not the same
thing, how to define development?
Amartya Sen: goal of development is to expand capabilities of
people to live the lives they choose to lead.
What determines capabilities?

Need to understand how different factors prevent
people from converting income into “the capability
to live a minimally acceptable life”
◦ Personal heterogeneities: age, proneness to illness,
disabilities
◦ Environmental diversities: shelter, clothing, fuel
◦ Variations in social climate: crime, civil unrest, violence
◦ Differences in relative deprivation: extent to which poverty
reduces capabilities to take part in the community
◦ Point: fundamental shift in thinking from production of
goods to a focus on human lives.

Start with Income Distribution
Per Capita GDP
(PPP, current intl $)*
15,839
14,450
15,595
16,340
Botswana
China
Costa Rica
Thailand
Share of poorest 20%
Share of richest 20%
3**
5^
4^^
7’
65
48
54
45
Source: World Development Indicators
Notes: *2015, **2009,^2012, ^^2014, ‘2013
1990
Botswana
China
Costa Rica
Thailand
2014
Botswana
China
Costa Rica
Thailand
Life Expectancy
at birth (years)
Expected
years of
schooling
Mean years
of schooling
GNI per
capita (2011
PPP $)
62.7
69
75.6
70.3
9.8
8.8
9.8
8.4
5.5
4.8
6.9
4.6
7845
1519
7079
6263
64.5
75.8
79.4
74.4
12.5
13.1
13.9
13.5
8.9
7.5
8.4
7.3
16646
12,547
13,413
13,323
Source: UN Human Development Report, 2015

Human Development Index (HDI)
◦ Developed by the United Nations Development Program
(UNDP)
 HDI ranks all countries on a scale of 0 (lowest
human development) to 1 (highest development)
 (1/3) longevity (living a long and healthy life). Proxy is:
life expectancy at birth
 (1/3) acquiring knowledge. two proxies are: expected
years of schooling and mean years of schooling
 (1/3) standard of living. Proxy is real per capita income
adjusted for the differing PPP of each country’s
currency
Per Capita GDP
(PPP, current intl $)*
15,839
14,450
15,595
16,340
Botswana
China
Costa Rica
Thailand
Share of poorest 20%
Share of richest 20%
3**
5^
4^^
7’
65
48
54
45
Source: World Development Indicators
Notes: *2015, **2009,^2012, ^^2014, ‘2013
1990
Botswana
China
Costa Rica
Thailand
2014
Botswana
China
Costa Rica
Thailand
Life Expectancy
at birth (years)
Expected
years of
schooling
Mean years
of schooling
GNI per
capita (2011
PPP $)
HDI Value
62.7
69
75.6
70.3
9.8
8.8
9.8
8.4
5.5
4.8
6.9
4.6
7845
1519
7079
6263
.584
.501
.652
.572
64.5
75.8
79.4
74.4
12.5
13.1
13.9
13.5
8.9
7.5
8.4
7.3
16646
12,547
13,413
13,323
.698
.727
.766
.726
Source: UN Human Development Report, 2015
HDI Rank of
188
countries
106
90
69
93
Source: UN Human Development Report, Country Profiles2015
Indicator
Agriculture as a % of GDP
Rural Population as a % of total
Raw Agricultural Materials as a % of Total Exports
Low Income
Countries
31%
70%
9%
Middle Income
Countries
9%
49%
1.33
High Income
Countries
1.5%
18%
1.5
36
9
54
19
7.5
30
11
8
4.5
56.5
84
98
Birth Rates (per 1000)
Death Rates (per 1000)
Infant Mortality Rate (per 1000 live births)
Adult Literacy Rates
Source: World Development Indicators, 2017

The Sustainable Development Goals