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Lecture 4 Measuring Economic Growth and Development

Lecture 4 Measuring Economic Growth and Development. The Process of Economic Development. Is Development synon y mo u s simply with Economic Growth? Different Development Goals of Society. Equality of opportunity Rising income and standard of living

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Lecture 4 Measuring Economic Growth and Development

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  1. Lecture 4Measuring Economic Growth and Development The Process of Economic Development

  2. 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 • Aclean and healthy environment • Efficient, competent and fairly administered public sector • A reasonable degree of competition in the private sector

  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

  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.

  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.

  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 331.7 = US$1,006 million

  10. Using GNP or GDP for Ranking Nations:Five Necessary AdjustmentsAccounting 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. 66-68.

  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.

  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 militaryweapons • 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 Thesearestillcounted 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. 14-16..

  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 realistic • 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 L = 73.4 – 25 = 0.807 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. 283-91; Table 21, 210-13). 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.

  23. 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

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

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