1. Measuring Development Development Economics 4.2a

2. Review... What is the difference between economic growth and economic development? Is it possible to have one without the other? –Growth: increase in economies real level of output over time. Quantitative – GDP ect. –Development: The process to improve the lives of all people in a country. This include increase living standards (goods and services), improved dignity, respect and self-esteem, freedom etc. Qualitative. –YES! Growth is possible w/o development.

3. Production Possibility Frontiers Production Possibility Frontiers Weak Agricultural Sector Land and agriculture are key to studying development Supply of land is fixed and with growing populations this leads to law of diminishing returns. Here manufacturing is growing, but food output is growing at smaller and smaller increments as population grows Food Manufactures A B C D

4. Production Possibility Frontier Improved land quality Main development goal is to improve productivity of land. –Irrigation –Drainage –Use of fertilizers –Pest control So here improving the quality of land allows the food supply to increase. food manufactures A B C D

5. Consequences of Growth Consequences of Growth 1. Externalities 2. Income Distribution 3. Poverty Cycle

6. Consequence of Growth # 1: Externalities LDC’s Pollution and Environmental Degradation –Increased population puts pressure on land –Soil erosion as people more likely to farm marginal land –Forests cut down for fuel –Desertification stemming from overgrazing –Over-fishing

7. Externalities continued: Externalities continued: Industrialized countries and CO 2 emissions. –Positive correlation between CO 2 and national income –80% of all fuel is burnt by 20% of the richest people –In 1997 China had 500 bikes for every car... Today???

8. Consequence of Growth #2: Income Distribution Income distribution is a key concern for development economics. Goal: development plan that promotes evenly distributed income.

9. Consequence of Growth 2: Income Distribution and Saving Rates Some assume that development will follow growth –To encourage growth encourage technology and investment, BUT –Increased investment means increased saving is necessary. For saving to increase income more likely to be unevenly distributed. Rich = higher propensity to save Poor = high propensity to consume

10. Income Distribution- Lorenz Curve Income Distribution- Lorenz Curve Lorenz Curve A way to measure income distribution and the degree of inequality The more unequal the income distribution the more bowed the curve. The more unequal the income distribution the more bowed the curve. Line of Equality Lorenz Curve Percentage of income Recipients (population) Percentage of income

11. Income Distribution- Gini Coefficient Income Distribution- Gini Coefficient Lorenz Curve The GINI coefficient converts the Lorenz curve into a single statistic Equation: Shaded area A area BCD Smaller coefficient is better Line of Equality Lorenz Curve Percentage of income Recipients (population) Percentage of income A BC D

12. Income Inequality in America Income Inequality in America

13. 2. Income Distribution- Purchasing Power Parity, PPP A more realistic measurement of living standard than GDP Accounts for local buying power of a currency to determine GDP Calculated by the IMF and used by the World Bank in attempt to mitigate the impact of exchange rates. A GDP adjusted for PPP is generally higher than just GDP

14. 3. Poverty Cycle ** Low Standard Of Living Low Standard Of Living Poor health Poor Education Low Productivity Low Savings Low Investment

15. Now some practice... Measuring Development 4.2 practice worksheet.