MACROECONOMICS

MEASURING ECONOMIC DEVELOPMENT.Economics – A Course CompanionBlink & Dorton, 2007, p158-168

Economic Growth vs Economic Development

• Economic growth is not equivalent to economic development.

• Economic development is a far more complex and multidimensional concept.

What is meant by economic development?

Development has many meanings:• Development is about increasing people’s

freedoms.• It is about reducing poverty so that people can be

adequately fed and sheltered.• It is about the public provision of education,

health care and the maintenance of law and order. • It about the guarantee of civil liberties and the

opportunity for civic participation.

HUMAN DEVELOPMENT INDEX (HDI)

• The HDI is a composite index that brings together 3 variables.

There are 3 basic goals of development that canbe measured:• Long & Healthy Life• Improved Education• Decent Standard of Living

HUMAN DEVELOPMENT INDEX (HDI)Long & Healthy Life

• A long and healthy life is measured by life expectancy at birth on the assumption that people who live longer have benefited from good health.

HUMAN DEVELOPMENT INDEX (HDI)Education

• Education is measured by the adult literacy rate combined with a measure of primary, secondary and tertiary school enrolment.

HUMAN DEVELOPMENT INDEX (HDI)Standard of Living

• Standard of living or the ability to meet basic needs is measured by GDP per capita, converted at PPP $US.

HUMAN DEVELOPMENT INDEX (HDI)What the numbers mean?

• The three indicators of the HDI are combined to give an index value between O and 1, with higher values representing a higher level of development.

• The UNDP classifies countries into three categories according to their HDI.

Category HDI Value

High Human Development 0.800 and aboveMedium Human Development .500-.799Low Human Development Less than .055

HUMAN DEVELOPMENT INDEX (HDI)How can the HDI information be used?

• Prior to the establishment of the HDI in 1990,, GDP per capita had been the yardstick for measuring development , under the assumption that higher national income translated directly into a higher level of development

• If we compare a country’s ranking in terms of its HDI with its ranking in terms of GDP per capita, we can make some useful conclusions about the country’s success in translating the benefits of national income into achieving economic development.

Major Differences between GDP per capita and HDI rankings

• For several years the US has ranked about 10 on the HDI index, but its GDP per capita ranking has been much higher.

Key Question• Why would the US rank lower on the HDI,

than its GDP per capita?

HDI Figures 2009 (Insert)

The Ultimate Criteria for assessing theDevelopment of a Country

• The UNDP observes that one of the uses of the HDI is to re-emphasize that people and capabilities should be the ultimate criteria for assessing the development of a country, not economic growth.

OTHER INDICATORS OF DEVELOPMENTIs the HDI sufficient?

• The HDI is certainly not the only indicator to effectively assess development.

• It should also be noted that the country’s HDI is still an average figure that can mask inequalities within a country.

• Inequalities may occur between rural and urban citizens, between men and women and between different ethnic groups.

Gender-Related Development Index (GDI)

• Along with the country’s national HDI, the UNDP attempts to break down the figures to present HDI values for different groups.

The GDI• This examines the same indicators as the HDI, but takes

into account the inequalities of these indicators for men and women.

• Inequality figures between men & women will result in a GDI figure that is lower than its HDI.

• The GDI is essentially the HDI adjusted for inequality between men and woman

The Gender Empowerment Measure (GEM)

• Given that one aspect of development involves developing self esteem and creating opportunities and freedom for all people, it is valuable to measure whether development in a country is helping to create such freedoms and opportunities for woman.

The GEM• The UNDP calculates the gender empowerment

measure (GEM) which measures the extent to which woman are able to actively participate in economic and political life.

The Gender Empowerment Measure (GEM)

• The GEM looks at the number and percentage of woman in leadership, managerial and parliamentary positions and in technical and professional jobs.

• It examines their participation in the labour force and their share of national income.

• A high value (index values range from 0 t 1) indicates a higher level of empowerment for woman.

• If a country has a low GEM value in relation to its GDI value, this would imply that access to basic needs, education and health is not being translated into greater opportunities and participation for women.

HUMAN POVERTY INDEX (HPI)

• The UNDP attempts to measure the level of deprivation and poverty experienced in a country.

• While the HDI measures the achievements of a country in three variables, the HPI looks a the proportion of people who are deprived of the opportunity to reach a basic level in each area.

• It is also a composite index and looks at indicators that are comparable with the indicators in the HDI.

Development Goal HDI Measure HPI Measure illustrating deprivation in meeting the development goal

A Long and Healthy Life

Life expectancy

% of people who do not reach the age of 40

Education Literacy + schoolEnrolment

% of adults who are illiterate

Standard of Living Ability to meet basic needs

GDP per capita(PPP$US)

% of population without access to safe water +% of children who are underweight for their age.

HDI in comparison to HPI

• Where the HDI represents development achievements for an average citizen, the HPI is useful for observing how evenly the benefits of development are spread with a country.

• The HPI value is expressed as percentage, with a higher percentage indicating a greater level of deprivation and thus a higher level of poverty.

• Two countries may have similar HDI values, but very different HPI values.

Bangladesh & Congo2005

• Bangladesh based on 2005 had a slightly higher HDI than the Congo, but in Bangladesh, the HPI was 44.1% and in Congo it was 30.1%.

• This would suggest that the benefits of development are being shared less equally in Bangladesh, even though the HDI suggests a slightly higher level of development.

LORENZ CURVE & GINI INDEX

• Income inequality in an economy can be measured.

• The most common representation of inequality comes in the form of a Lorenz Curve.

• This takes data about household income gathered in national surveys and presents them graphically.

INCOME DISTRIBUTION FOR SELECTED COUNTRIES

Households are ranked in ascending order of income levels and the share of total income going to groups of households is calculated. Based on the data Brazil and Sierra Leone would have the highest level of income inequality and Hungary the lowest.

INCOME INEQUALITY

The x-axis show the cumulative percentage of the total population divided up in the quintiles shown in the previous table. The y-axis show the cumulative percentage of total income earned by the quintiles. The line of absolute equality indicates a perfectly equal distribution of income where, for example, 10% of the population earns 10% of the income and 90% of the population earns 90% of the income.

Lorenz Curve

• Each country has its own Lorenz Curve based on the income data.

• The further away a country’s curve is from the line of absolute equality, the more unequal is the distribution of income.

Gini Index

• An indicator that neatly summarizes the information presented in previous table and on the Lorenz Curve is the Gini Index.

• The Gini Index is derived from the Lorenz Curve and is a ratio of the area between the line of equality and a country’s Lorenz Curve (a) to the total area under the line of equality (a) + (b).

• The higher the Gini index, the more unequal is the distribution of income.

Activity – Lorenz Curves

• Using graph paper and data from the previous table, draw Lorenz Curves for Croatia, Australia and Sierra Leone.

• Remember that points are drawn by adding up the cumulative values of total share of income and the total share of the population

• How does the shape of the curves confirm the relationship between a country’s Lorenz Curve and its Gini index?

The Gini Index & Economic Development

• Although a reduction income equality may be an important objective of development, one must be very careful in using Gini Index numbers as a basis for evaluating a country’s development progress.

• While low income countries tend to have higher level of inequality than high-income countries, there is no hard and fast correlation between the level of development of a country measured by the HDI and its Gini Index.

The Gini Index & Economic Development

• There are countries with a high level of human development such as the US, that have a relatively high Gini Index (40.8) and countries with a low level of human development, such as the Central African Republic, with a much lower Gini value (30.0)

The Gini Index & Living Standards

• It would not be correct to assume that it is necessary to have more equality in order to raise living standards.

• Assume that the poorest 20% of the population earns 2.4% of the national as in Brazil.

• If the national income rises and the income distribution pattern remains the same, then the poorest will receive a larger amount, even if their share remains the same.

• The get the same proportion of a larger amount.

OTHER INDICATORS OF DEVELOPMENT

Indicators – Long & Healthy Life• Infant Mortality Rate• Under-five Mortality Rate• Maternal Mortality Rate• Children Underweight for age• Population with sustainable access to improved water

source.• Population undernourished• Number of one-year-olds fully immunised against

Tuberculosis (TB)

OTHER INDICATORS OF DEVELOPMENT

Indicators – Ability to acquire Knowledge• Enrolment in each level of education • Literacy• Internet uses per 1000 people.• Telephone mainlines per 1000 people.

Activity – The UN Development Goals

• In 2000, the UN established eight Millennium Development Goals (MDGs), along with 18 targets for reaching these goals.

1. What are the eight MDGs?2. What are the corresponding targets?3. Select one country that is in the low HDI category

and one in the middle HDI category.Using development indicators, assess the progress made by each of these countries in reaching the first seven targets.

Genuine Progress Indicator (GPI)

• There is one alternative measure of progress that has been established in more developed countries.

• This is known as the Genuine Progress Indicator (GPI)

• This indicator attempts to measure whether a a country’s growth has actually led to an improvement in the welfare of the people.

Genuine Progress Indicator (GPI)

• To the GDP figures, it adds a measure of non-monetary benefits such as the benefits of household work, parenting, and volunteer work.

• Given than economic growth generates many costs, an indicator of genuine progress needs to deduct such costs, rather than add them to GDP.

Genuine Progress Indicator (GPI)

The GPI attempts to make estimates of:Environmental Costs• Air, water and noise pollution• Loss of farmland, wetlands and forests• Resource Depletion• Ozone Deletion • Pollution abatement.

Genuine Progress Indicator (GPI)

Social Costs • Family breakdown • Crime• Personal security (eg: home security systems)• Loss of Leisure Time• Commuting Costs• Costs of auto accidents.

Genuine Progress Indicator (GPI)

• While the variables used with the GPI are difficult to measure, the realization that rising GDP does not equate with rising welfare, means that welfare economists and environmental economists are constantly looking for ways to measure the consequences of growth, so that developed and developing countries can aim for growth that is equitable and sustainable.

EXAMINATION QUESTIONSShort Response Questions (10 marks each)

1. Distinguish between economic growth & economic development.

2. Explain why PPP exchange rates are used when comparing national income among countries.

EXAMINATION QUESTIONSShort Response Questions (10 marks)

HIGHER LEVEL QUESTION

3. What is the relationship between a country’s Lorenz Curve and its Gini Index.

EXAMINATION QUESTIONS

Essay Question

1. Explain the concept of economic development (10 marks)

2. Evaluate the view that economic development is best measured using the HDI (15 marks)