Download 4.1 Economic development 4.2 Measuring development

4.1 ECONOMIC DEVELOPMENT
4.2 MEASURING DEVELOPMENT
1. Distinguish between economic
growth and economic development.
Economic growth is the increase of per capita gross
domestic product (GDP) or other measure of aggregate
income, typically reported as the annual rate of change
in real GDP.
Economic growth is primarily driven by improvements in
productivity, which involves producing more goods and
services with the same inputs of labor, capital, energy
and materials.
Economic growth implies only an increase in
quantitative output; it may or may not involve
development.
1. Distinguish between economic
growth and economic development.
Economic development is the increase in the standard of
living in a nation's population with sustained growth from a
simple, low-income economy to a modern, high-income
economy. Also, if the local quality of life could be improved,
economic development would be enhanced. Its scope includes
the process and policies by which a nation improves the
economic, political, and social well-being of its people.
Economic development typically involves improvements in a
variety of indicators such as literacy rates, life expectancy,
and poverty rates. It is a qualitative measurement.
2. Explain the multidimensional nature of economic development in
terms of reducing widespread poverty, raising living standards, reducing
income inequalities and increasing employment opportunities.
Economic development generally refers to the sustained,
concerted actions of policymakers and communities that promote
the standard of living and economic health of a specific area.
Economic development can also be referred to as the
quantitative and qualitative changes in the economy. Such
actions can involve multiple areas including development of
human capital, critical infrastructure, regional
competitiveness, environmental sustainability, social
inclusion, health, safety, literacy, and other initiatives.
Economic development differs from economic growth. Whereas
economic development is a policy intervention endeavor with
aims of economic and social well-being of people, economic
growth is a phenomenon of market productivity and rise in GDP.
3. Explain that the most important sources of economic growth in economically less developed
countries include increases in quantities of physical capital and human capital, the development and use
of new technologies that are appropriate to the conditions of the economically less developed countries,
and institutional changes.
Sources of economic growth in economically less
developed countries
 Natural factors (Natural Recourses)
 Improving the quality of human capital through education
and training
 Improving the quantity physical capital
 the development and use of new technologies that are
appropriate to the conditions of the economically less
developed countries
 Improving the Institutional factors such as banking system,
legal system, education system, political stability etc.
Institutional factors
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banking system – stable banking system, which can provide
funds to small businesses, thus enabling investment
educational system – investment in human capital, which
increases the quality of labor
health care – improvement in the health of the population
increases both the quantity and quality of the labor resources
available
infrastructure – investment in infrastructure, especially in rural
areas, will enable goods to be brought to markets
political stability – necessary if domestic businesses and foreign
investors are to feel comfortable investing in the economy
legal system – investors need to know their rights are protected.
4. Explain the relationship between economic growth and economic development, noting that some limited
economic development is possible in the absence of economic growth, but that over the long term economic growth
is usually necessary for economic development (however, it should be understood that under certain circumstances
economic growth may not lead to economic development).
Growth without Development:
Most LDC’s gain the majority of income and export revenue
from recourse extraction and the production of agricultural
commodities, which has less and less market demand from
the rest of the world.
Pressure on resources in LDC’s leads producers to seek everlower cost with regard to production, which can result in;
deforestation, land degradation, water pollution, overfishing, air-pollution and climate change.
Income inequality: Development, for a country may be
harder to achieve because of structural barriers that don’t
allow income to be distributed to the masses and is
concentrated in a few.
4. Explain the relationship between economic growth and economic development, noting that some limited
economic development is possible in the absence of economic growth, but that over the long term economic growth
is usually necessary for economic development (however, it should be understood that under certain circumstances
economic growth may not lead to economic development).
Growth with Development:
There is a high correlation between high income and high
levels of development. For example, high growth
provides increase tax revenue, which can be used to
improve schools and basic healthcare services.
Development without Growth:
Some countries may be able to create development
without much growth from investing in institutional factors
like education and health care systems that raise the
standard of living without much growth.
4. Explain the relationship between economic growth and economic development, noting that some limited
economic development is possible in the absence of economic growth, but that over the long term economic growth
is usually necessary for economic development (however, it should be understood that under certain circumstances
economic growth may not lead to economic development).
It is possible to have economic growth with no or little
development. This can be demonstrated using the
production possibility curve in the diagram below.
Benefits of growth which impact on development
in a positive way may include:
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increased levels of income could translate to higher
levels of consumption of goods and services by
society. This could lead to more choice, more food
consumed and better shelter opportunities
increased levels of employment
government investment in better health facilities will
improve the longevity of the population
government investment in more educational
opportunities will improve the literacy of the
population and have positive externalities for society.
Consequences of growth which impact on
development in a negative way may include:
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negative externalities – environmental damage such as
soil erosion and desertification can occur as areas are
cleared for farming. Depletion of the ozone layer can be
caused by industrialization.
income distribution – economic growth can result in
uneven distributions of income if the growth requires
changes in production (in terms of the goods produced,
the techniques used and the skills required) and some
people find their skills are no longer needed
sustainability – if economic growth involves using a
greater amount of resources then there will be depletion
of non-renewable resources
5. Explain, using examples, that economically less developed countries share certain common
characteristics (noting that it is dangerous to generalize as there are many exceptions in each
case), including low levels of GDP per capita, high levels of poverty, relatively large agricultural
sectors, large urban informal sectors and high birth rates.
Common characteristics of economically less developed countries
 Low standards of living,
 low GDP per capita,
 low incomes, inequality,
 poor health,
 inadequate education
 Low level of productivity
 High rates of population growth, High birth rates and dependency
burden
 High and rising levels of unemployment and underemployment
 Substantial dependence on agricultural production/primary sector
 Prevalence of imperfect markets i.e. Lack of banking, legal system,
adequate infrastructure, imperfect information.
 Dominance by developed nations and dependence in terms of
international relations.
6. Explain that in some countries there may be communities caught in poverty trap (poverty cycle)
where poor communities are unable to invest in physical, human and natural capital due to low or no
savings; poverty is therefore transmitted from generation to generation, and there is a need for
intervention to break out of the cycle.
The World Bank's criteria for poverty of $370 firmly
establish low levels of income as being a central
feature of absolute poverty.
Low income earners have a high marginal propensity to
consume. Most of their income will be spent on consumption of
necessities such as food. Thus the marginal propensity to save is
low. As overall incomes are low the average propensity to save
will also be low. Savings ratios will consequently be low. It is
saving that provides funds that can be lent out to firms for
investment purposes. The availability of fund for investment is
thus limited. Labor productivity measured in terms of output per
worker is consequently low, as capital cannot be purchased.
Wages are invariably linked to productivity levels and so
incomes are low. The cycle is complete.
6. Explain that in some countries there may be communities caught in poverty trap (poverty cycle) where
poor communities are unable to invest in physical, human and natural capital due to low or no savings;
poverty is therefore transmitted from generation to generation, and there is a need for intervention to break
out of the cycle.
However there are often other cycles operating. People
on low incomes often have limited access to schooling and
health provision. It is either too expensive to have or,
particularly with schooling, the opportunity cost in terms of
children's labor on the farms is considerable. Poor health
and low level of education will also contribute to low
levels of productivity and the resulting low levels of
income.
Both these cycles will feed into each other and once in the
trap it is very difficult to lift oneself free of absolute
poverty.
6. Explain that in some countries there may be communities caught in poverty trap (poverty cycle)
where poor communities are unable to invest in physical, human and natural capital due to low or no
savings; poverty is therefore transmitted from generation to generation, and there is a need for
intervention to break out of the cycle.
Harrod-Domar Model
6. Explain that in some countries there may be communities caught in poverty trap (poverty cycle)
where poor communities are unable to invest in physical, human and natural capital due to low or
no savings; poverty is therefore transmitted from generation to generation, and there is a need for
intervention to break out of the cycle.
In order to escape the poverty trap, it is argued that
individuals in poverty must be given sufficient aid so that
they can acquire the critical mass of capital necessary to
raise themselves out of poverty.
This theory of poverty helps to explain why certain aid
programs which do not provide a high enough level of
support may be ineffective at raising individuals from
poverty.
If those in poverty do not acquire the critical mass of
capital, then they will simply remain dependent on aid
indefinitely and regress if aid is ended.
7. Explain, using examples, that economically less developed countries differ enormously from
each other in terms of a variety of factors, including resource endowments, climate, history
(colonial or otherwise), political systems and degree of political stability.
Economically less developed countries differ enormously from
each other in terms of:
• Resource endowment may differ.
• Historical background: Most have been colonized.
• Geographic and demographic factors
• Ethnic and religious breakdown
• Structure of industry: some may heavily depend on primary
sector while other may not.
• Per capita income levels may differ in these countries.
• Political structure: These countries might be having different
political structure, Some may be having democracies,
monarchies, military rule, single party states and so on.
8. Outline the current status of international development
goals, including the Millennium Development Goals.
8. Outline the current status of international development
goals, including the Millennium Development Goals.
The Millennium Development Goals (MDGs) are
eight international development goals that were
officially established following the Millennium
Summit of the United Nations in 2000, following
the adoption of the United Nations Millennium
Declaration. All 193 United Nations member states
and at least 23 international organizations have
agreed to achieve these goals by the year 2015.
8. Outline the current status of international development
goals, including the Millennium Development Goals.
The goals are:
• eradicating extreme poverty and hunger,
• achieving universal primary education,
• promoting gender equality and empowering women
• reducing child mortality rates,
• improving maternal health,
• combating HIV/AIDS, malaria, and other diseases,
• ensuring environmental sustainability, and
• developing a global partnership for development
 source: http://www.un.org/millenniumgoals/bkgd.shtml
Sustainable development
"Sustainable development is development that meets
the needs of the present without compromising the
ability of future generations to meet their own needs.“
Sustainable development suggest that meeting the
needs of the future depends on how well we balance
social, economic, and environmental objectives--or
needs--when making decisions today.
4.2 Measuring development
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Single indicators cover a specific area.
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Composite indicators gather a group of indicators and
put them together in an attempt to get a broader picture
of a countries level of development.
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National income data are usually the starting point for
understanding development levels.
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Recall that GNI = GDP – net income flows.
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Furthermore, to get a better understanding of the
average level of production or income, per capita
measures are used.
9. Distinguish between GDP per capita figures and GNI
per capita figures.
GNI per capita - Gross national income (GNI) is the sum of
value added by all resident producers plus any product
taxes (less subsidies) not included in the valuation of output
plus net receipts of primary income (compensation of
employees and property income) from abroad. GNI per
capita is gross national income divided by mid-year
population.
GDP per capita - Gross domestic product (GDP) is the sum
of value added by all resident producers plus any product
taxes (less subsidies) not included in the valuation of output.
GDP per capita is gross domestic product divided by midyear population.
10. Compare and contrast the GDP per capita figures and the GNI per capita
figures for economically more developed countries and economically less
developed countries.
In the case of richer countries, GNI may be higher than
GDP because firms in those countries have spread
overseas and now generate significant profits that are
sent back to their corporate homes.
For LDC’s the differences between GDP and GNI may
be for different reasons. For example, China has a high
level of FDI so they would send out a large part of their
profits. Poorer LDC’s may have a high GNI because they
have a high percentage of residence abroad who
repatriate their income back home.
10. Compare and contrast the GDP per capita figures and the GNI per capita
figures for economically more developed countries and economically less
developed countries.
Compare and contrast GDP per capita figures and
GDP per capita figures at purchasing power parity
(PPP) exchange rates for economically more
developed countries and economically less
developed countries.
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World Factbook Dashboard
Igemoe Map World
The World Bank
11. Distinguish between GDP per capita figures and GDP per
capita figures at purchasing power parity (PPP) exchange rates.
Gross Domestic Product (GDP) or value of all final goods and services
produced within a nation in a given year. GDP per capita is gross
domestic product divided by midyear population.
A nation's GDP at purchasing power parity (PPP) exchange rates is the
sum value of all goods and services produced in the country valued at
prices prevailing in the United States. This is the measure most economists
prefer when looking at per-capita welfare and when comparing living
conditions or use of resources across countries.
The measure is difficult to compute, as a US dollar value has to be
assigned to all goods and services in the country regardless of whether
these goods and services have a direct equivalent in the United States (for
example, the value of an ox-cart or non-US military equipment); as a
result, PPP estimates for some countries are based on a small and
sometimes different set of goods and services.
12. Compare and contrast GDP per capita figures and GDP per capita figures at
purchasing power parity (PPP) exchange rates for economically more
developed countries and economically less developed countries.
GDP per capita (current US$)
GDP per capita is gross domestic product divided by midyear population. GDP is the
sum of gross value added by all resident producers in the economy plus any product
taxes and minus any subsidies not included in the value of the products. It is calculated
without making deductions for depreciation of fabricated assets or for depletion and
degradation of natural resources.
GDP per capita, PPP (current international $)
GDP per capita based on purchasing power parity (PPP). PPP GDP is gross domestic
product converted to international dollars using purchasing power parity rates. An
international dollar has the same purchasing power over GDP as the U.S. dollar has in
the United States. GDP at purchaser's prices is the sum of gross value added by all
resident producers in the economy plus any product taxes and minus any subsidies not
included in the value of the products. It is calculated without making deductions for
depreciation of fabricated assets or for depletion and degradation of natural
resources
12. Compare and contrast GDP per capita figures and GDP per capita figures at
purchasing power parity (PPP) exchange rates for economically more developed
countries and economically less developed countries.
To more accurately reflect the buying power of any
amount of income, and so to better assess the standard
of living in a country, economists use purchasing power
parity (PPP).
When PPP is factored into national income measures, it
produces a refined view of the GDP data that gives a
better understanding of the attainable quality of life.
When PPP-adjusted per capita GDP is greater than
nominal GDP, it suggests that the potential standard of
living is understated.
Limitation of using GDP as a measure to compare
welfare between countries
The major disadvantage of using GDP as an indicator of
stand of living is that it is not, strictly specking, a measure of
standard of living, which can be generally defined as “the
quantity of goods and services available to people, and
the way these goods and services are distributed within a
population.”
GDP does not distinguish between consumer and capital
goods; it does not take income distribution into account; it
does not take account of differences in the economic goods
and services that are not measured in GDP at all; it is
subject to the vagaries of translating income measures into a
common currency and it fails to take into account differences
of taste among nations.
Single indicators
Income, health and education are three of the most
important areas to be focused on when looking at
development indicators.
13. Compare and contrast two health indicators for economically more
developed countries and economically less developed countries.
Improving health is central to the Millennium
Development Goals, and the public sector is the main
provider of health care in developing countries. To
reduce inequities, many countries have emphasized
primary health care, including immunization, sanitation,
access to safe drinking water, and safe motherhood
initiatives.
Health, Nutrition and Population Data and Statistics
Adolescent fertility rate is the number of births per
1,000 women ages 15-19.
Life expectancy at birth, female (years)
14. Compare and contrast two education indicators for economically more
developed countries and economically less developed countries.
Education is one of the most powerful instruments for
reducing poverty and inequality and lays a
foundation for sustained economic growth.
School enrollment, secondary (% gross)
Ratio of female to male tertiary enrollment (%)
15. Explain that composite indicators include more than one measure and
so are considered to be better indicators of economic development.
A composite indicator is formed when individual indicators are
compiles into a single index, on the basis of an underlying model
of the multi-dimensional concept that is being measured.
A composite indicator measures multi-dimensional concepts (e.g.
competitiveness, e-trade or environmental quality) which cannot
be captured by a single indicator. Ideally, a composite indicator
should be based on a theoretical framework / definition, which
allows individual indicators / variables to be selected, combined
and weighted in a manner which reflects the dimensions or
structure of the phenomena being measured.
16. Explain the measures that make up the Human
Development Index (HDI).
The Human Development Index (HDI) is a summary measure of
human development. It measures the average achievements in a
country in three basic dimensions of human development: a long
and healthy life (health), access to knowledge (education) and
a decent standard of living (income). Data availability
determines HDI country coverage. To enable cross-country
comparisons, the HDI is, to the extent possible, calculated based
on data from leading international data agencies and other
credible data sources available at the time of writing.
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Long and healthy life ; life expectancy
Improved education; adult literary
Decent standard of living; GDP per capita
17. Compare and contrast the HDI figures for economically more
developed countries and economically less developed countries.
2013 Human Development Report
Category
HDI Value
High Human development
.800 and above
Medium human development
.500 -0.799
Low human development
Less than .500
the Human Development Index (HDI)
The Gender Inequality Index (GII)
The Gender Inequality Index (GII) reflects women’s
disadvantage in three dimensions—reproductive health,
empowerment and the labor market—for as many countries as
data of reasonable quality allow. The index shows the loss in
human development due to inequality between female and male
achievements in these dimensions. It ranges from 0, which
indicates that women and men fare equally, to 1, which
indicates that women fare as poorly as possible in all
measured dimensions. The health dimension is measured by two
indicators: maternal mortality ratio and the adolescent fertility
rate. The empowerment dimension is also measured by two
indicators: the share of parliamentary seats held by each sex and
by secondary and higher education attainment levels. The labor
dimension is measured by women’s participation in the work force.
The Multidimensional Poverty Index (MPI)
The Multidimensional Poverty Index (MPI) identifies
multiple deprivations at the individual level in health,
education and standard of living. It uses micro data
from household surveys, and—unlike the Inequalityadjusted Human Development Index—all the indicators
needed to construct the measure must come from the
same survey. Each person in a given household is
classified as poor or non-poor depending on the number
of deprivations his or her household experiences. These
data are then aggregated into the national measure of
poverty.
Index of Economic Freedom
The Index of Economic Freedom is a measure of ten components of
economic freedom, assigning a grade in each using a scale from 0 to
100, where 100 represents the maximum freedom. The 10 economic
freedoms are grouped into four broad categories or pillars of
economic freedom:
1. Rule of Law (property rights, freedom from corruption);
2. Limited Government (fiscal freedom, government spending);
3. Regulatory Efficiency (business freedom, labor freedom, monetary
freedom); and
4. Open Markets (trade freedom, investment freedom, financial
freedom).
Each of the freedoms within these four broad categories is individually
scored on a scale of 0 to 100. A country's overall economic freedom
score is a simple average of its scores on the 10 individual freedoms.
Detailed information about the methodology used to score each
component is contained in the appendix.
18. Explain why a country’s GDP/ GNI per capita global ranking may
be lower, or higher, than its HDI global ranking.
The HDI was created to emphasize that people and
their capabilities should be the ultimate criteria for
assessing the development of a country, not economic
growth alone. The HDI can also be used to question
national policy choices, asking how two countries with
the same level of GNI per capita can end up with
such different human development outcomes.
National HDI compared to income (GNI per capita)
18. Explain why a country’s GDP/ GNI per capita global ranking
may be lower, or higher, than its HDI global ranking.
GDP per capita alone is an unreliable predictor of the
level of human development one should expect from a
country.
Some countries clearly under-perform in development
terms compared to their relatively high incomes levels.
These countries have the resources to improve on health
and education standard, and should revisit their policies
in this regard.
Some countries clearly over-perform in development
terms compared to their relatively low income levels.
The weaknesses and strengths of the Human Development Index
(HDI) as an indicator of progress in comparison to GDP/GNP per
capita
HDI
 Embraces social development, not just economic
development
 Can be constructed for particular groups (e.g. different
ethnic groups)
 Can address the question of the distribution of the benefits
of growth
 Recognizes that the development of a society can be seen
in human terms rather than in products or consumables
 Recognizes that human well-being is valued as an end in
itself
 Ignores human freedom
The weaknesses and strengths of the Human Development Index
(HDI) as an indicator of progress in comparison to GDP/GNP per
capita
GDP/GNP
 Is easily calculated
 The hidden economy is not counted
 Problems of distribution are ignored
 Externalities are ignored
 All output are deemed to be of equal social value
 Places no value on leisure
 Unpaid work is not counted
 Ignores human freedom