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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 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: 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: 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 Single indicators cover a specific area. 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. National income data are usually the starting point for understanding development levels. Recall that GNI = GDP – net income flows. 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. 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. 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