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Tutorial 2 ans

Economics Of Developing Countries (La Trobe University)

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ECO2EDC
TUTORIAL 2
ANSWERS

1. Compute the Human Development Index (HDI) of Argentina following the instructions
below. Fill up table as you proceed.

Example: Argentina
Dimension Indicator Argentina Dimension index
Health Life expectancy (years) 76.3 0.8662
Education Expected years of schooling 16.4
0.7822
Mean years of schooling 9.8
Standard of living GNI per capita (PPP 2011 $) 17,297 0.7784
HDI: 0.808
Source: UNDP (2014)

Instructions:

1- Using the corresponding country indicators, one index must be produced for each
dimension. To do this use the following maximum and minimum references for each
indicator.

Minimum and maximu values

Dimension Indicator Minimum Maximum

Health Life expectancy (years) 20 85
Education Expected years of schooling 0 18
Mean years of schooling 0 15
Standard of living GNI per capita (PPP 2011 $) 100 75,000

Source: UNDP (2014), Technical Note 1. p.2

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2- Compute the dimension indices using the following equation:

(1)

a) For health, equation 1 is applied using the actual value (the value observed in the
country) and the minimum and maximum values presented in the table.

b) For education, equation 1 is applied to each of the two sub-components, then the
arithmetic mean of the two sub-indices is created.

c) For income, equation 1 is modified to incorporate the natural logarithm (ln) of all
entries as shown below:

3- Compute the HDI by aggregating the three dimension indices using the following geometric
mean equation:

Answer for Argentina:

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2. Suppose that for 20 years starting in 2009 the U.S. GDP per capita (PPP) grows at 1.1
percent per year while India’s GDP per capita (PPP) grows at 3.3 percent.
What would they be in each country in 2029? What would they be in 2100? (Hint: use the
2009 PPP per capita GDP data in Table 2.2 of Perkins as a starting point)

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 US $45,989(1.011)20 = $57,237.03 in 2029

 India $3,296(1.033)20 = $6,309.48 in 2029
 US $45,989(1.011)91 = $124,454 in 2100
 India $3,296(1.033)91 = $63,258 in 2100

3. Explain why purchasing power parity (PPP) measures of income levels tend to show a
smaller difference between poor and rich countries compared to measures that adjust by
market exchange rates.

 The adjustment of income levels using market exchange rates simply converts the
value of a country’s production, measured in domestic currency, to US dollars.
 To compare standard of living across countries this methodology assumes that the
purchasing power of US$ 1 in the US is exactly the same as in other countries, which
is not the case.
 PPP takes into account this difference by measuring domestic production in all
countries at US prices. This naturally derives in a higher measurement of the value
of production in developing countries, and as a consequence, a higher income level.

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