Today’s agenda Presentation Syllabus Schedule and Important Dates Topic Week 1 : Basic Concepts: What is Economic Development? Development Classifications 9/5/2014 Econ 3508 - Fall 2014

Course objectives To develop an intuitive and analytical understanding of the 'economist's toolbox' and its uses To be able to apply these tools on familiar and new development issues. 9/5/2014 Econ 3508 - Fall 2014

Topics Part 1: The nature and meaning of development Development defined, Comparing development, Economic growth Part 2: Problems and policies: domestic Poverty and inequality, Migration, Urbanization, Human capital Part 3: Problems and policies: international International trade, Macroeconomic stability, Inflow of financial resources 9/5/2014 Econ 3508 - Fall 2014

Readings Todaro and Smith (2012), Economic Development, 11th edition Other material will be provided on CULearn 9/5/2014 Econ 3508 - Fall 2014

Have you ever been in a developing country? 9/5/2014 Econ 3508 - Fall 2014

Inequality in developing countries 9/5/2014 Econ 3508 - Fall 2014

Inequality in developing countries 9/5/2014 Econ 3508 - Fall 2014

Poverty 9/5/2014 Econ 3508 - Fall 2014

Week 1: Objectives Describe how economic development is measured Distinguish two major approaches to the measurement of economic development: income vs other factors that define a country’s level of development 9/5/2014 Econ 3508 - Fall 2014

Development Economics Study of how economies are transformed from stagnation to growth, from low income to high income and overcome absolute poverty. In developing countries: Commodity and resource markets are highly imperfect Consumers and producers have limited information Multiple equilibria rather than a single equilibrium are common Disequilibrium situations often prevail (prices do not equate supply and demand) 9/5/2014 Econ 3508 - Fall 2014

What is development? Changing views Traditional economic measures Gross National Income (GNI) of Gross Domestic Product (GDP) Income per capita => focus on industrialization New economic view of development Development as a multidimensional process => focus on redistribution from economic growth Capabilities approach (Amartya Sen) Development is the expansion of people’s capabilities (i.e. the freedoms to do the things they have reason to value) 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : Some Concepts Gross Domestic Product (GDP) is the total value of all final goods and services produced by an economy, both by residents and nonresidents. Gross National Income (GNI) = GDP + income earned by residents from investments abroad, less the corresponding income sent home by foreigners who are living in the country. Examples 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : World Bank I. World Bank: Developing Economies Classified by GNI per capita as expressed in US Dollars (2010) Low Income : < $1,005 Lower Middle Income: $1,006 - $3,975 Upper Middle Income: $3,976 - $12,275 High Income: > $12,276 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : World Bank I. World Bank: Developing Economies Classified by GNI per capita as expressed in US Dollars (2010) Low Income : < $1,005 Lower Middle Income: $1,006 - $3,975 Upper Middle Income: $3,976 - $12,275 High Income: > $12,276 http://data.worldbank.org/about/country-classifications Developing countries 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : World Bank Two main alternative approaches to expressing GNI per capita in US$ 1. Exchange rate conversion Example: http://www.bankofcanada.ca/rates/exchange/ 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : World Bank 2. PPP = purchasing power parity Example: The Economist’s Big Mac http://www.economist.com/node/13055650?story_id=E1_TPDVVGVD 9/5/2014 Econ 3508 - Fall 2014

You would expect one US dollar to buy the same goods in the US as 3 You would expect one US dollar to buy the same goods in the US as 3.25 pesos (11.5/3.54) in Argentina Source: http://www.economist.com/node/13055650?story_id=E1_TPDVVGVD 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : World Bank Examples: http://data.worldbank.org/about/country-classifications/country-and-lending-groups#Low_income Problems? 9/5/2014 Econ 3508 - Fall 2014

Table 2.2 A Comparison of Per Capita GNI, 2008 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World 2) The UNDP Human Development Index: New Measure (NHDI) Example: using data for China ( New HDI) See 2010 new HDI http://hdr.undp.org/en/statistics/ HDI vs. GDP per capita (Table 2.6, pp 57, textbook) 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : NHDI Composite indicator – one score based on 3 goals or end-products of development Living standard – real GNI per capita Longevity – life expectancy at birth Knowledge – mean years of education & expected years of schooling 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : NHDI Ranking of relative development ‘scores’ on a scale from 0 to 1 Relative development – current status in comparison to what a country can reasonably aspire Each country gets a score Compare scores 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : NHDI I. Life expectancy index = current age – minimum age maximum age – minimum age minimum age: 20 years maximum age: 83.4 years (Japan, 2011) Why minimum & maximum? To ensure a score between 0 and 1 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : NHDI II. Income index = ln(current income) – ln(minimum income) ln(maximum income) – ln(minimum income) Income is measured as real per capita GNI in PPP’s. Why logarithms? minimum income: $100 (subsistence level) maximum income: $107,721 (Qatar, 2011). 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : NHDI III. Education index: Mean years of schooling index (MYSI) = current MYS – 0 maximum MYS – 0 maximum MYS: 13.1 years (Czech Rep., 2005). Expected years of schooling index (EYSI) = current EYS – 0 maximum EYS – 0 maximum EYS: 18.0 (capped at). 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : NHDI These components are combined as: Education index = Where the maximum combined education index: 0.978 (New Zealand, 2010). 9/5/2014 Econ 3508 - Fall 2014

Defining the Developing World : NHDI HDI= (Life expectancy index x Income index x Education index)1/3 Geometric mean: ensures that poor performance in any dimension directly affects the overall index. Previously, HDI used an arithmetic mean which allowed for perfectly substitutability. For example, a higher value of income index could compensate for a lower value of the education index. 9/5/2014 Econ 3508 - Fall 2014

9/5/2014 Econ 3508 - Fall 2014

Summary We organized countries based on the income classification structure of the WB Purchasing Power Parity (PPP) was explained as a tool to make more accurate comparisons between countries based on income level. As an alternative to the World Bank’s classification based on income, we also looked at other key development factors such as education and health, mainly through an introduction to the Human Development Index and how it is calculated. 9/5/2014 Econ 3508 - Fall 2014