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

2. 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

3. 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
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4. 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

5. 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

6. 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
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7. 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.
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9. 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

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

11. 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

12. 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 = 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
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13. 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 detailed commodities & services.
Researchers calculate cost of making appropriate quality adjustments to substitute item that is directly available.
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14. Summers & Heston (cont.)
A potato is a potato, regardless when or where purchased.
Estimating equation to compute PPP in 57 nonbenchmark countries.
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15. Purchasing-Power Parity (PPP)
Food exchange rate (Deaton)
Rs. 442 = $10 (actual)
Rs. 442 = $44 (food exchange rate)
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16. 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 % (34 nations)
C- + or - 24%
D+ + or – 27% (11 nations)
D + or – 30% (38 nations)
China + or – 50% (also see pp )
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17. Physical Quality of Life Index
Combines 3 indicators:
infant mortality rate
life expectancy (age 1)
adult literacy
CHAPTER 2 ©E.Wayne Nafziger Development Economics

18. 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)
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19. 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
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21. "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