Chapter 2 Meaning and Measurement of Economic Development CHAPTER 2 ©E.Wayne Nafziger Development Economics

The Meaning & Measurement of Economic Development Growth & Development Millennium Development Goals Selected Indicators of Development Imprecision in Comparing GNP per Capita in DCs & LDCs Purchasing Power Parity (PPP) & Human Development Index (HDI) Basic Needs Development as Freedom Is Economic Development Worthwhile? CHAPTER 2 ©E.Wayne Nafziger Development Economics

What is economic growth? What is economic development? Economic growth – growth in GNI or GNP per capita Economic development – economic growth accompanied by changes in output distribution & economic structure CHAPTER 2 ©E.Wayne Nafziger Development Economics

U.N. Millennium Development Goals 1. Reduce poverty & hunger from 17% to 8% of world’s population 2. All children complete primary school 3. Gender equality in education & literacy 4. Reduce 5-year mortality (now 88 p 1000 LDCs) 5. Reduce maternal death rate (now 1/48) 6. Reduce HIV/AIDS (1.44% globe, 8.44% SSA) 7. Progress in environmental sustainability 8. Global partnership for development CHAPTER 2 ©E.Wayne Nafziger Development Economics

U.S. (2005) Wants Changes in U.N. Draft Strike mention of MDGs Too much focus on poverty Scrap call to halt climate change Eliminate nuclear powers dismantling nuclear arms & signing test ban treaty More emphasis on free market reforms, government accountability (when aid & debt relief), actions against terrorism, promoting human rights & democracy, & halting spread of world’s deadliest weapons, no reference to International Criminal Court or 0.7% aid/GNP, streamline UN bureaucracy Source: C. Lynch, Wash Post & others CHAPTER 2 ©E.Wayne Nafziger Development Economics

Selected Indicators of Development Data for Low-Income, Middle-Income, & High-Income Economies (front inside cover and left back inside cover) World Bank Country Classification – click United Nations Conference on Trade and Development (UNCTAD) Third World Economies in transition OPEC Least developed countries Newly industrializing countries (NICs). World Trade Organization CHAPTER 2 ©E.Wayne Nafziger Development Economics

PROBLEMS WITH USING GNP TO MAKE COMPARISONS OVER TIME Economists use national-income data to compare a given country's GNP or GNI over time. Laspeyres price index. Paasche price index. CHAPTER 2 ©E.Wayne Nafziger Development Economics

CHAPTER 2 ©E.Wayne Nafziger Development Economics

Imprecision in Comparing GNP per Capita in DCs & LDCs India - $530 India more own production by home or village India more household economies of scale India cheap labor-intensive goods no impact on exchange rate India more likely not market clearing exchange rate CHAPTER 2 ©E.Wayne Nafziger Development Economics

Imprecision in Comparing GNP per capita in DCs & LDCs US - $37,610 US more intermediate goods CHAPTER 2 ©E.Wayne Nafziger Development Economics

Purchasing-Power Parity (PPP) (P) price level of GNP – ratio of the purchasing power exchange rate to actual exchange rate – both measures as domestic currency price of US$. CHAPTER 2 ©E.Wayne Nafziger Development Economics

Purchasing-Power Parity (PPP) Big Mac Exchange Rate Real 4.55 & $2.71 for Big Mac in 2003 Thus, Real 1.68 = $1 Big Mac exchange rate Real 3.07 = $1 actual exchange rate P = 0.55 in Brazil Big Mac $2,710 p.c./0.55 = $4927 Big Mac PPP P = 0.36 in Brazil actual PPP $2,710/0.36 = $7,480 GNP p.c. PPP CHAPTER 2 ©E.Wayne Nafziger Development Economics

How do Penn economists (Summers & Heston) calculate PPP Use series of simultaneous equations to solve PPP for 81 benchmark & quasi-benchmark countries & world average prices for 400-700 detailed commodities & services. Researchers calculate cost of making appropriate quality adjustments to substitute item that is directly available. CHAPTER 2 ©E.Wayne Nafziger Development Economics

Summers & Heston (cont.) A potato is a potato, regardless when or where purchased. Estimating equation to compute PPP in 57 nonbenchmark countries. CHAPTER 2 ©E.Wayne Nafziger Development Economics

Purchasing-Power Parity (PPP) Food exchange rate (Deaton) Rs. 442 = $10 (actual) Rs. 442 = $44 (food exchange rate) CHAPTER 2 ©E.Wayne Nafziger Development Economics

Measurement Errors for GNP Adjusted for Purchasing Power What are the confidence intervals for gross products PPPs? (Firebaugh) A + or - 9% (18 nations) B + or - 15% (7 nations) C+ + or - 18% (1 nation) C + or - 21% (34 nations) C- + or - 24% D+ + or – 27% (11 nations) D + or – 30% (38 nations) China + or – 50% (also see pp. 25-26) CHAPTER 2 ©E.Wayne Nafziger Development Economics

Physical Quality of Life Index Combines 3 indicators: infant mortality rate life expectancy (age 1) adult literacy CHAPTER 2 ©E.Wayne Nafziger Development Economics

Human Development Index (HDI) Longevity (average life expectancy – years) Education (2/3 adult literacy); 1/3 combined school enrollment rate GDP per capita (PPP US$) logarithm Notice the variability in data sheet from Mozambique (0.354) to Norway (0.956) CHAPTER 2 ©E.Wayne Nafziger Development Economics

Development as Freedom – Amartya Sen Freedom is ultimate goal of ec life Overcoming deprivation Unfreedoms include hunger, famine, ignorance, unsustainable economic life, unemployment, premature death, violation of political freedom, environmental threats, little access to health, sanitation or clean water CHAPTER 2 ©E.Wayne Nafziger Development Economics

CHAPTER 2 ©E.Wayne Nafziger Development Economics

"BASIC‑NEEDS"ATTAINMENT Many economists are frustrated at the limited impact economic growth has had in reducing third-world poverty. These economists think that programs to raise productivity in developing countries are not adequate unless they focus directly on meeting the basic needs of the poorest 40‑50 percent of the population‑‑the basic‑needs approach. CHAPTER 2 ©E.Wayne Nafziger Development Economics