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

2. 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 Fall 2014

3. 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
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Econ Fall 2014

4. Readings Todaro and Smith (2012), Economic Development, 11th edition
Other material will be provided on CULearn
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Econ Fall 2014

5. Have you ever been in a developing country?
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Econ Fall 2014

6. Inequality in developing countries
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Econ Fall 2014

7. Inequality in developing countries
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Econ Fall 2014

8. Poverty
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Econ Fall 2014

9. 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
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Econ Fall 2014

10. 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)
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Econ Fall 2014

11. 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 Fall 2014

12. 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
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Econ Fall 2014

13. 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 Fall 2014

14. 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, $3,975
Upper Middle Income: $3,976 - $12,275
High Income: > $12,276
Developing countries
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Econ Fall 2014

15. Defining the Developing World : World Bank
Two main alternative approaches to expressing GNI per capita in US$
1. Exchange rate conversion
Example:
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Econ Fall 2014

16. Defining the Developing World : World Bank
2. PPP = purchasing power parity
Example: The Economist’s Big Mac
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Econ Fall 2014

17. 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:
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Econ Fall 2014

18. Defining the Developing World : World Bank
Examples:
Problems?
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Econ Fall 2014

19. Table 2.2 A Comparison of Per Capita GNI, 2008
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Econ Fall 2014

20. Defining the Developing World
2) The UNDP Human Development Index: New Measure (NHDI)
Example: using data for China ( New HDI)
See 2010 new HDI
HDI vs. GDP per capita (Table 2.6, pp 57, textbook)
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Econ Fall 2014

21. 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 Fall 2014

22. 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 Fall 2014

23. 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
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Econ Fall 2014

24. 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).
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Econ Fall 2014

25. 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).
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Econ Fall 2014

26. Defining the Developing World : NHDI
These components are combined as:
Education index =
Where the maximum combined education index: (New Zealand, 2010).
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Econ Fall 2014

27. 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.
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Econ Fall 2014

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Econ Fall 2014

29. 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 Fall 2014