1. Chapter 2: Comparing levels of development
Beyond Economic Growth: An Introduction to Sustainable Development
By Tatyana P. Soubbotina

2. Overview of Chapter 2: Comparing levels of development?
How do we measure wealth?
Physical, human, and natural capital
Gross Domestic Product (GDP)
Value of goods and services
Calculating GDP: real v. nominal, PPP v. market rates
Is GDP a good measure of development?
Grouping countries by level of development
“High income” v. “low income”
“Developed” v. “developing”

3. How do we measure wealth or income?
Capital is the stock of wealth used to produce goods and services
Physical capital: factories, buildings, machines, roads, etc.
Natural capital: fertile land, clean water, minerals, coal, oil, etc.
Human capital: people’s knowledge, skills, abilities, education
Income is the value of produced goods and services
Income (GDP) is easier to measure than wealth
Income can come from natural capital (e.g., Saudi Arabia) or physical capital (e.g., Japan or Korea) or from all three (e.g., United States)

4. Gross Domestic Product (GDP)
GDP is the value of all final goods and services produced in a country in one year (GNP is similar)
Two equivalent ways of calculating GDP
Add up all income: wages, interest, profits, and rents
Add up all expenditures: consumption, investment,
Equivalent since all expenditure are someone’s income
GDP per capita (income per person) is a better measure of development

5. How does GDP measure “value”?
Value is measured in dollars/rubles/pesos/euros
Values of currencies change over time (inflation)
Exchange rates of currencies change
Real indicators adjust for inflation
Purchasing Power Parity (PPP) adjusts for value across currencies (purchasing equivalent to $1 in US)
Nominal GDP is not adjusted for inflation and uses market exchange rates
Real GDP is adjusted for inflation and uses PPP
We will use “real GDP”

6. Is GDP a good measure of development?
GDP measures one key component of development
GDP doesn’t account for:
an equitable distribution of income
pollution, environmental degradation, or resource depletion
unpaid work in informal economy or within the family
a difference between goods (medicine) and bads (cigarettes)
the value of leisure, health, freedom, safety, etc.
Other indicators measure the distribution of income, health and longevity, access to education, environmental quality, etc.

7. Grouping countries by their level of development is difficult
World Bank divides countries into low-, middle-, and high-income based on GDP per capita (Annex 1 of text)
Grouping by “developed” v. “developing” is common
No clear line between developed and developing
Some high-income countries are classified as developing
Many developing countries have increased incomes dramatically recently (especially China)
Some countries have high income but low “development” (e.g., Saudi Arabia, Kuwait)
Some transition economies (formerly communist countries) may have high “development” (universities, roads, health) but low income