Download Chapter 1

Chapter 2
Measuring
Economic
Growth and
Development
GNP versus GDP
GNP
– Produced by nationals
GDP
– Produced by residents
– Easier to track
– GDP, GDP per capita
– Real GDP, Real GDP per capita
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Value Added
Agriculture
Johnson Farms sells wheat for $0.50.
Milling Co. sells flour for $1.20.
Bakery makes bread, packages it, and
sells it for $2.00.
Publix puts packaged bread on its
shelves and sells it for $2.50
Contribution to GDP = $2.50
$0.50
Manufacturing
$0.70 + $0.80
= $1.50
Services
$0.50
$2.50
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The Three Faces of GDP
Production
Market
value of
final
goods
and
services
Expenditure
Income
Consumption
Labor Income
=
=
Investment
Government
purchases
Capital
Income
Net exports
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What is left out of the calculation?
Unpaid family workers (child care, farm
work)
– Reported increases in GDP might just reflect
more people working for money, not more
work or more production.
Pollution, crime, congestion, etc.
But these lacunae are hard to pin down.
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Exchange-rate conversion
problems
A dollar goes further in a developing
country.
– Distorted exchange rate systems
– Non-traded goods and services
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2007
PPP of the dollar: if burgers cost the same everywhere (after
exchanging the currency),
11.0 Yuan
Should be the
11.0 Yuan
1 burger

 3.42Yuan / $ exchange rate.
$3.22
$3.22
1 burger
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Purchasing Power Parity
Low
income
Lower middle
income
Upper middle
income
High
income
GNI per capita, Atlas method
(current US$)
584.2
1778.0
5053.3
34962.0
GNI per capita, PPP (current
international $)
2463.2
6274.1
9978.0
32839.8
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Purchasing Power Parity
United States
India
Qty
Price
Value
Qty
Price
in Rs
Value
in Rs
Value
in $
(Rs / e)
Steel
(m tn)
100
x
$200/tn
= $ 20
bn
8 x
Rs
9000/tn
= Rs 72
bn
=$1.6bn
Retail
Sales
personnel
(m)
2 x
$5000
/person
/year
= $ 10
bn
4 x
Rs
60,000
/person
/yr
= Rs 240
bn
=$5.33bn
Rs 312 bn
= US$6.9
Total GDP
$ 30 bn
(local
currency)
official exchange rate = Rs 45/US$1
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Purchasing Power Parity
Steel
– US$ 200/tn
– or US$ 200/tn = (Rs 9000/tn) / (Rs 45/US$1)
Internationally traded: law of one price
Retail Sales Personnel
– US$ 5,000/person/yr
– or US$ 1,333/person/yr
=(Rs 60,000/person/yr) / (Rs 45/US$1)
Non-traded: different prices
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Purchasing Power Parity
United States
Steel (m tn)
Retail Sales
personnel (m)
Total GDP
India
Qty
Price
Value
100 x
$200/tn
= $ 20 bn
2 x
$5000
/person
/year
= $ 10 bn
$ 30 bn
Qty
Price
in US$
Value
8 x
$200/tn
= $ 1.6 bn
4 x
$5000
/person
/year
= $ 240 bn
$21.6 bn
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Traded / Non-Traded
Steel
Retail
Sales
Personnel
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Penn World Tables
http://pwt.econ.upenn.edu/
Population
Exchange Rate
Purchasing Power Parity over GDP
Real Gross Domestic Product per Capita
Consumption Share of CGPD
Government Share of CGDP
Investment Share of CGDP
Price Level of Gross Domestic Product
Price Level of Consumption
Price Level of Government
Price Level of Investment
Openness in Current Prices
Ratio of GNP to GDP
CGDP Relative to the United States
Real GDP per capita (Constant Prices: Laspeyres)
Real GDP per capita (Constant Prices: Chain series)
Real GDP Chain per equivalent adult
Real GDP Chain per worker
Real Gross Domestic Income (RGDPL adjusted for Terms of Trade changes)
Openness in Constant Prices
Consumption Share of RGDPL
Government Share of RGDPL
Investment Share of RGDPL
growth rate of Real GDP per capita (Constant Prices: Chain series)
in PWT, "real" means "PPP converted“ instead of "in constant price".
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What is Economic Development?
Economic growth (more GDP)
– Necessary but not sufficient
– GDP can be misspent; invested and not
consumed; distributed unequally
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What is Economic Development?
Income is one of the factors that expands
people’s capabilities, depending on
– Personal heterogeneities (age, illness,
disabilities)
– Environment (climate, natural disasters)
– Social climate (crime, civil unrest)
– Relative deprivation
ability to take part in life of community
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The World Economy: A Millennial
Perspective
http://www.theworldeconomy.org/publications/worldeconomy/#2
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The World Economy: A Millennial Perspective
http://www.theworldeconomy.org/publications/worldeconomy/#2
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Human Development Index
Focus on people’s capabilities and
choices:
– Income and resources
– Education
– Health and life
http://hdr.undp.org/en/statistics/
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The Human Development Index
Income Index (for HDI)
– Diminishing marginal utility of income: log.
– PPP income of $100 a year is the least
income imaginable a generation back.
– PPP income of $40,000 a year is the most
income imaginable a generation ahead.
[log( PPP per capita GNP)  log($ 100)]
income index 
[log($ 40,000)  log($ 100)]
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The Human Development Index
Life Expectancy Index (for HDI)
– Life expectancy of 25 is the least imaginable a
generation back.
– Life expectancy of 85 is the most imaginable
a generation ahead.
[life expectancy at birth  25]
life expectancy index 
[85  25]
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The Human Development Index
Adult Literacy Index (for HDI)
– At least 0, at most 100.
[adult literacy  0]
adult literacy index 
[100  0]
Gross Enrolment Index (for HDI)
– At least 0, at most 100. % of school-age
people in school
[gross enrolment  0]
gross enrolment index 
[100  0]
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The Human Development Index
Education Index (for HDI)
– Two-thirds literacy, one-third enrolment.
2
1
education index  (adult literacy index )  (enrollment index )
3
Human Development
Index 3
1
1
1
HDI  (income index )  (life index )  (educ index )
3
3
3
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The Human Development Index
Life Expectancy
70.7
Adult Literacy
91
Gross Enrolment
72
GDP per capita
Ecuador
2006
HDI
3580
life expectancy index 
[70.7  25]
[85  25]
0.762
adult literacy index

[91  0]
[100  0]
0.910
education index
income index 
HDI
[72  0]
[100  0]
0.720
2
1
0.91  0.72
3
3
0.847

gross enrolment index

[log($ 3,580)  log($ 100)]
[log($ 40,000)  log($ 100)]
1
1
1
 0.762  0.847  0.597
3
3
3
0.597
0.735
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The Human Development Index
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The Human Development Index
Is the HDI a good measure of development?
– “Being able to live the life that you have reasons to
value.”
What is excluded?
Are these good measures of a good life?
–
–
–
–
Life Expectancy
Adult Literacy
Gross Enrollment
GDP per capita
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http://hdrstats.undp.org/buildtables/##
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Millennium Development Goals
Eradicate extreme poverty and hunger
–
–
–
Halve, between 1990 and 2015, the proportion of
people whose income is less than one dollar a day
Achieve full and productive employment and decent
work for all, including women and young people
Halve, between 1990 and 2015, the proportion of
people who suffer from hunger
Achieve universal primary education
–
Ensure that, by 2015, children everywhere, boys
and girls alike, will be able to complete a full course
of primary schooling.
http://mdgs.un.org/unsd/mdg/Default.aspx
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Millennium Development Goals
Promote gender equality and empower
women
–
Eliminate gender disparity in primary and secondary
education preferably by 2005, and at all levels by
2015.
Reduce child mortality
–
Reduce by two-thirds, between 1990 and 2015, the
under-five mortality rate.
Improve maternal health
–
–
Reduce by three quarters, between 1990 and 2015,
the maternal mortality ratio.
Achieve, by 2015, universal access to reproductive
health
http://mdgs.un.org/unsd/mdg/Default.aspx
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Millennium Development Goals
Combat HIV/AIDS, malaria, and other
diseases
– Have halted by 2015 and begun to reverse
the spread of HIV/AIDS.
– Achieve, by 2010, universal access to
treatment for HIV/AIDS for all those who
need it.
– Have halted by 2015 and begun to reverse
the incidence of malaria and other major
diseases.
http://mdgs.un.org/unsd/mdg/Default.aspx
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Millennium Development Goals
Ensure environmental sustainability
–
–
–
–
Integrate the principles of sustainable development
into country policies and programs; reverse loss of
environmental resources.
Reduce biodiversity loss, achieving, by 2010, a
significant reduction in the rate of loss
Halve, by 2015, the proportion of people without
sustainable access to safe drinking water and basic
sanitation (for more information see the entry on
water supply).
By 2020, to have achieved a significant
improvement in the lives of at least 100 million
slum-dwellers
http://mdgs.un.org/unsd/mdg/Default.aspx
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Millennium Development Goals
Develop a global partnership for
development
–
–
Develop further an open trading and financial
system that is rule-based, predictable and nondiscriminatory. Includes a commitment to good
governance, development and poverty reduction—
nationally and internationally.
Address the special needs of the least developed
countries. This includes tariff and quota free access
for their exports; enhanced program of debt relief for
heavily indebted poor countries; and cancellation of
official bilateral debt; and more generous official
development assistance for countries committed to
poverty reduction.
http://mdgs.un.org/unsd/mdg/Default.aspx
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Millennium Development Goals
Develop a global partnership for
development (cont.)
–
–
–
–
Address the special needs of landlocked and small
island developing States.
Deal comprehensively with the debt problems of
developing countries through national and
international measures in order to make debt
sustainable in the long term.
In cooperation with pharmaceutical companies,
provide access to affordable essential drugs in
developing countries.
In cooperation with the private sector, make
available the benefits of new technologies,
especially information and communications
http://mdgs.un.org/unsd/mdg/Default.aspx
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