1. Measuring Economic Growth and Development
based on Cypher and Dietz
The Process of Economic Development
Ch. 2
Last lecture we said: The major question that development economics attempts to answer is why some countries are more developed than others?
But before we start trying to provide answers for this question, first we need to know what we mean by “being developed”? What do we mean by “development”? How do we measure development?

2. Is Development synonymous simply with Economic Growth
Is Development synonymous simply with Economic Growth? Different Development Goals of Society
Equality of opportunity
Rising income and standard of living
Equity in the distribution of income and wealth
Political democracy and wide-spread participation
Expanded role for women, minorities and all social classes in public life
Increased opportunities for education and self-improvement
Expanded availability of and improvements in health care
Public and private safety nets to protect the vulnerable
A clean and healthy environment
Efficient, competent and fairly administered public sector
A reasonable degree of competition in the private sector
Each one these goals stated up here can be important targets – although maybe with different weights – for the process of development of a country.
Yet if we wanted to compare countries with one another in terms of all these criteria, imagine how complex and difficult the comparison would turn out to be.

3. High-quality growth
Over the 1990s, the IMF seemed slowly to be learning from the criticisms of its policies
Now, the IMF sees itself as promoting so-called `high-quality growth’,
“defined as growth that is sustainable, brings lasting gains in employment and living standards and reduces poverty. High-quality growth should promote greater equity and equality of opportunity. It should respect human freedom and protect the environment. Obviously, growth cannot be high quality ... if it does not benefit fully, tangibly, and equitably a group that constitutes more than one half the population of the world and still bears the primary responsibility for the care, nutrition, and education of the world’s children. Achieving high-quality growth depends, therefore, not only on pursuing sound economic policies, but also on implementing a broad range of social policies.”
IMF(1995)

4. Measuring Economic Growth and Development
What is the criterion for development?
1. The economic growth / income criterion:
GNP, GDP, rate of growth
Simple and easy to use
Yet does it really capture development?
2. The indicators criterion:
e.g. Human Development Index (HDI), PI, GDI, GPI
More comprehensive and realisitc
Yet difficult to measure and use for international comparisons
The most common criterion used as an indicator of development: income per capita – as a substitute or proxy for evaluating the overall level of national development and welfare.
The rate of growth of income (or per capita income) is then be used to judge the progress a nation makes over time.
While using this criterion, actually economists/researchers/policy makers are quite aware that the development of a nation actually incorporates much more than average income per person and the growth rate of that income. Development incorporates the diverse and broad aspirations of what might be called “good life” in all its economic, social and political dimensions.
Yet the common criterion of income per capita is continued to be used as a substitute or proxy for evaluating the overall level of national development and welfare BECAUSE it is so SIMPLE and therefore CONVENIENT.
Yet it is also often – and increasingly more so in the recent decades – criticized for not capturing the overall state of development; for being a too superficial and hence misleading criterion for development.
Therefore another criterion used is the so-called “indicators” criterion, that tends to be more comprehensive and realistic yet complicated and difficult to measure.

5. The economic growth or economic income criterion
Gross National Product (GNP) is the total value of all income (= value of final output) accruing to residents of a country, regardless of the sources of that income.
Gross Domestic Product (GDP) is the total value of all income (= value of final output) created within the borders of a country, regardless of whether the ultimate recipient of that income resides within or outside the country.
The two most common measures used for international comparisons of income is GDP and GNP.

6. Difference between GNP vs. GDP
If an economy were closed, GNP = GDP.
with capital & labor flows across borders, GNP & GDP diverge from one another.
profits
dividends
interest payments
worker remittances
net income from the rest of the world=
income flows into the country from the ROW – income leakages from the country to the ROW
If inflows > outflows, then GNP > GDP
If inflows < outflows, then GDP > GNP

7. Table 2.1 GDP and GNI comparisons, selected nations, 1990 & 2006
a billions of US dollars
b GDP/GNI gap = GDP – GNI, in billions of US dollars. A positive value means that GDP > GNI; a negative value indicates that GNI > GDP
Source: World Bank, World Development Indicators Online.

8. Using GNP or GDP for Ranking Nations: Five Necessary Adjustments
1. Adjusting for Population Size
GNP per capita = GNP total population
GDP per capita = GDP total population
% change GNI per capita = % (total GNI/total population)
= % total GNI – %  population
Caution: this an identity, no causal relation
not correct to infer from this equation that slow population growth causes a faster rate of growth of income per person or that rapid population growth causes slower growth in income per person.
More on that in chapter 12…

9. Using GNP or GDP for Ranking Nations: Five Necessary Adjustments
2. Adjusting for Nominal Income
Total nominal GDP = i=1n PiQi
n :the no. goods and services produced;
P the price of each good
Q the quantity of each good
Real GDP at base year’s prices
2008 GDP at 1992 prices = i=1n Pi,1992 Qi,2008
Alternatively:
Real GDP = nominal GDP / GDP deflator
total nominal GDP in 2008 = US$3,337 million,
the price index for 2008 (deflator)= 331.7
1992, the base year deflator = 100
Then 2008 total GDP x 100 = US$3,337 million x 100
2008 Price Index
= US$1,006 million

10. hypothetical income distribution for a country:
Using GNP or GDP for Ranking Nations: Five Necessary Adjustments Accounting for Income Distribution: Gini Coefficient
hypothetical income distribution for a country:

11. Accounting for Income Distribution:Gini Coefficient
The Gini coefficient = area A/ area(A+B)
percentage of income
X % of families receive exactly X % of income
10% of the population receive 10% of the income
dispersion of actual income distribution what would be a perfectly equal distribution
percentage of population

12. Table 2.3 Income distribution, selected economies
a Share of total income (or, for some economies, consumption) received by the richest 20 percent of the population divided by
the share of total income (or consumption) received by the poorest 20 percent of the population.
Source:  World Bank, World Development Indicators 2007: Table 2.7, pp

13. Using GNP or GDP for Ranking Nations: Necessary Adjustments
Accounting for value of home or non-market production
Non-market activities left out:
Home-baked cake vs. market bought cake
Kindergarten care vs. home care
Cleaning lady vs. self-cleaning
Mostly women’s work –invisible work
Yet very important
Women’s unpaid activities estimated around 50% of global GDP
they account for an important share of a population’s consumption contributing to higher life standards.
After all isn’t this what development is all about? Higher life standards.
Satellite GDP accounts

14. Using GNP or GDP for Ranking Nations: Necessary Adjustments
Accounting for environmental destruction:
A number of productive activities that detract from quality of life,
production of military weapons
operations that cause environmental destruction of forests,
production processes that
spew toxic wastes into the air and water and then force society to pay for their clean-up or
which create health problems requiring remediation
These are still counted as positive contributions to the measured level of GNP and GDP.
Rather than adding to welfare, actually these are negative externalities of the production process.
economists have developed some alternative measures of economic welfare

15. International Comparisons of Income: Purchasing Power Parity
Qi,m = output vector of all newly produced final goods or services i, in country M
Pi,us = price vector for goods and services i in US prices
As such PPP measure provides the estimated value of Mozambique’s physical output and income weighted by the prices for such goods and services prevailing in the U.S.

16. Table 2.4 The purchasing power parity (PPP) measure of GNI per capita
Source:  World Bank, World Development Indicators 2007: Table 1.1, pp

17. Measuring Economic Growth and Development
What is the criterion for development?
1. The economic growth / income criterion
Simple and easy to use
Yet does it really capture development?
2. The indicators criterion
More comprehensive and realisitc
Yet difficult to measure and use for international comparisons

18. The Indicators Criterion of Development
Measure of Economic Welfare (MEW)
Genuine Progress Indicator (GPI)
Human Development Index (HDI)
“longevity, knowledge, and a decent standard of living”
Gender-related Development Index (GDI)
Human Poverty Index

19. Human Development Index
HDI = 1/3 L + 1/3 E + 1/3 Y
E = Educational attainment
L = Life Expectancy
Y = Income
xi = E, L, Y
xi = actual value of xi – minimum value of xi
maximum value of xi – minimum value of xi
E = 2/3 adult literacy rate (A) + 1/3 combined enrollment ratio (C)
max E = 100%; min E = 0%
min L= 25 yrs; max L = 85 yrs
Y = log (PPP measure of GDP per capita) – log (100)
log (40,000) – log (100)

20. Calculation of the HDI Example: Albania 2001
85 – 25
A = 85.3 – 0 = 0.853
100 – 0
C = 69 – 0 = 0.690
100-0
E = 2/3(0.853) + 1/3 (0.690) = 0.798
Y = log(3680) – log(100) = 0.602
log(40,000) – log (100)
HDI = 1/3 L + 1/3 E + 1/3 Y
= 1/3 (0.807) + 1/3 (0.798) + 1/3 (0.602)
= 0.735

21. Adjustments to the HDI The gender-related development index: GDI
takes into account the differences between women and men on the values of the indicators that enter the HDI.
All countries do worse as reflected in the deterioration of their HDI as converted into GDI.
The human poverty index: HPI
corrects for another weakness of HDI in that it does not show what’s happening to the poorest members of society.
slightly different variables in the index – e.g. % of people not using improved water sources; % of children under five who are underweight, etc.

22. Table 2.5 Human development index (HDI) and GDI, selected countries, 1990 & 2004
High Income Economies 0.942
Middle Income Economies 0.768
Low Income Economies 0.556
Source:  UNDP (2006: Tables 1 and 2, pp ; Table 21, ).
a The highest, or best, ranking was 1 (Norway) in 2004; the lowest, or worst, ranking, was 177 (Niger).
b If positive, the ranking for the country on the HDI is better than the country’s ranking on per capita PPP GDP (PPP GDP rank – HDI rank > 0); if negative, the HDI ranking for the country is worse than the per capita PPP GDP ranking (PPP GDP rank – HDI rank < 0).
d Gender-related Development Index; adjusts HDI for differences in achievement on the HDI variables between males and females.

24. Economic Growth and Equity: Are they at odds or are they complimentary?
If a country places emphasis on factors such as education, equity, health, will this adversely affect growth?
Or, if a country places emphasis on growth, how will that affect equity?
Kuznets, 1955:
explores historical relation between per capita income and income distribution for a number of countries.
Finds an inverted U-shape; an empirically derived statistical relationship.
at low income levels economic growth and rising average income tended to create more income inequality
After a threshold level of income further economic growth and even higher average income tended to reduce a nation’s overall income inequality

25. Economic Growth and Equity: Are they at odds or are they complimentary?
Kuznets‘ Curve
Treshold income