Adam Smith Father of Economics

John Maynard Keynes Father of Macro Economics

Rex Gatchalian Department of Social Welfare and Development
Arsenio Balisacan National Economic and Development Authority
Benjamin Abalos Jr.Department of the Interior and Local
Government
Benjamin E. Diokno Department of Finance

INDICATORS OF DEVELOPMENT
1. per capita income
2. life expectancy
3. Education
4. extent of poverty

Concept and Measurement of Development

The Meaning and Measurement of Economic Development

Growth and Development

A major goal of poor countries is economic development or
economic growth. The two terms are not identical. Growth may
be necessary but not sufficient for development.

Economic growth refers to increases in a country's production

One of the most compelling definitions of development is that
or income per capita.
proposed by Amartya Sen.
According to Sen, development is about creating freedom for
Production is usually measured by gross national product
people and removing obstacles to greater freedom. Greater
(GNP) or gross national income (GNI), used interchangeably,
freedom enables people to choose their own destiny. Obstacles
an economy's total output of goods and services.
to freedom, and hence to development, include poverty, lack of
economic opportunities, corruption, poor governance, lack of
Economic development refers to economic growth
education and lack of health.
accompanied by changes in output distribution and economic
structure.
Metrics determined by national income accounting.
- Gross Domestic Product (GDP)
Economic development is a broader concept than economic
- Net National Product (NNP)
growth. Development reflects social and economic progress and
- Gross National Product (GNP)
requires economic growth. Growth is a vital and necessary
- Personal income
condition for development, but it is not a sufficient condition as
- Disposable income
it cannot guarantee development.
National income accounting refers to the government
bookkeeping system that measures the health of an economy,
projected growth, economic activity, and development during a
certain period of time.

GROSS DOMESTIC PRODUCT (GDP)

= Most commonly used measure of the economy is GDP.
= It is the cumulative value of products and services generated
in an economy over a given period of time.
= Only the goods produced in the home country are included in
the GDP, regardless of the nationality status of the company
owners.
= The GDP figure may not represent the correct value, as some
goods may not even make it to the market, which makes it
difficult to determine the true value of the market.
= GDP reasonably represents the national output. The other
economic measures can be derived from GDP.

GROSS NATIONAL PRODUCT (GNP)

Growth is a vital and necessary condition for development, but
it is not a sufficient condition as it cannot guarantee
development.
= GNP measures the total monetary value of the output
produced by a country's residents.
= Therefore, any output produced by foreign residents within
the country's borders must be excluded in calculations of GNP,
while any output produced by the country's residents outside of
its borders must be counted.

NET NATIONAL INCOME (NNI)

= Net national income (NNI) is defined as gross national income
minus the depreciation of fixed capital assets (dwellings,
buildings, machinery, transport equipment and physical
infrastructure) through wear and tear and obsolescence.

ADJUSTED NATIONAL INCOME

= Adjusted national income (NNI adjusted for natural resource
depletion – also called as NNI at factor cost)
= Adjusted net national income is GNI minus consumption of
fixed capital and natural resources depletion.
Measures of national income and output
A variety of measures of national income and output are used
in economics to estimate total economic activity in a country or
region, including gross domestic product (GDP), gross national
product (GNP), net national income (NNI), and adjusted
national income.
All are especially concerned with counting the total amount of
goods and services produced within the economy and by various
sectors. The boundary is usually defined by geography or
citizenship, and it is also defined as the total income of the
nation and also restrict the goods and services that are counted.
For instance, some measures count only goods & services that
are exchanged for money, excluding bartered goods, while other
measures may attempt to include bartered goods by imputing
monetary values to them.
Market value
The value that the measures of national income and output
assign to a good or service is its market value – the price it
fetches when bought or sold. The actual usefulness of a product
(its use-value) is not measured – assuming the use-value to be
any different from its market value.
Three strategies have been used to obtain the market values
of all the goods and services produced:
- The product method looks at the economy on an industry-by-
industry basis.
- The expenditure method is based on the idea that all products
are bought by somebody or some organization.
- The income method works by summing the incomes of all
producers within the boundary.
product method The total output of the economy is the sum of
the outputs of every industry. However, since an output of one
industry may be used by another industry and become part of
the output of that second industry, to avoid counting the item
twice we use not the value output by each industry, but the
value-added; that is, the difference between the value of what it
puts out and what it takes in. The total value produced by the
economy is the sum of the values-added by every industry.
expenditure method Therefore, we sum up the total amount of
money people and organizations spend in buying things. This
amount must equal the value of everything produced. Usually,
expenditures by private individuals, expenditures by businesses,
and expenditures by government are calculated separately and
then summed to give the total expenditure. Also, a correction
term must be introduced to account for imports and exports
outside the boundary.
income method Since what they are paid is just the market
value of their product, their total income must be the total value
of the product. Wages, proprietor's incomes, and corporate
profits are the major subdivisions of income.
Methods of measuring national income
Output
The output approach focuses on finding the total output of a
nation by directly finding the total value of all goods and
services a nation produces.
Because of the complication of the multiple stages in the
production of a good or service, only the final value of a good or
service is included in the total output. This avoids an issue often
called 'double counting', wherein the total value of a good is
included several times in national output, by counting it
repeatedly in several stages of production.
Key formulas are:
GDP (gross domestic product) at market price = value of
output in an economy in the particular year minus intermediate
consumption
GDP at factor cost = GDP at market price minus depreciation
plus NFIA (net factor income from abroad) minus net indirect
taxes (GNP)
NDP at factor cost = Compensation of employees plus net
interest plus rental & royalty income plus profit of incorporated
and unincorporated NDP at factor cost
The world population
- By 2017, the world population had grown to 7,500 million
(7.5bn) (Source: world meters.
- According to the Population Reference Bureau it took just
12 years for the global population to increase from 6 to 7bn. Of
this number, only 15% will achieve a standard of living of at
least 50% of that achieved in the USA
- According to the World Bank over 20% of the world’s
population live on less than $1 a day.
In fact, the majority subsist at a standard of living similar to, or
lower than, that typically achieved 10,000 years ago.
During the next 50 years the world population is predicted to
grow to 9,000 million, and at this rate, the proportion of those
impoverished is likely to increase.
- The current population of World in 2023 is 8,045,311,447, a
0.88% increase from 2022.
- The population of World in 2022 was 7,975,105,156, a 0.83%
increase from 2021.
- The population of World in 2021 was 7,909,295,151, a 0.87%
increase from 2020.
- The population of World in 2020 was 7,840,952,880, a 0.98%
increase from 2019.
GDP per capita
- GDP per capita is the commonest indicator of material
standards of living, and hence is included in the index of
development.
- GDP per capita It is found by measuring Gross Domestic
Product in a year, and dividing it by the population.
Life expectancy
A variety of factors may contribute to differences in life
expectancy, including:
1.The stability of food supplies
2.War
3.The incidence of disease and natural disasters
According to World Bank figures, life expectancy at birth in
developing countries over the past 40 years has increased by 20
years. However, these increases were not evenly distributed.
Indeed, in many countries in sub-Saharan Africa, life
expectancy is falling due to the AIDS epidemic.
Adult literacy
- The percentage of those aged 15 and above who are able to
read and write a simple statement on their everyday life.
- More extensive definitions of literacy include those based on
the International Adult Literacy Survey.
- This survey tests the ability to understand
text, interpret documents and perform basic arithmetic.
The Human Development Index (HDI)
- The HDI was introduced in 1990 as part of the United Nations
Development Programme (UNDP) to provide a means of
measuring economic development in three broad areas – per
capita income, health and education.
- The HDI tracks changes in the level of development of
countries over time.
- The HDI was created to emphasize that people and their
capabilities should be the ultimate criteria for assessing the
development of a country, not economic growth alone.

The HDI has two main features:

A scale from 0 (no development) to 1 (complete development).
An index, which is based on three equally weighted
components:
1.Longevity, measured by life expectancy at birth
2.Knowledge, measured by adult literacy and number of years
children are enrolled at school
3.Standard of living, measured by real GDP per capita at
purchasing power parity

What the figures mean:

- An index of 0 – 0.49 means low development – for example,
Nigeria was 0.42 in 2010
- An index of 0.5 – 0.69 means medium development – for
example, Indonesia was 0.6. 3.
- An index of 0.7 to 0.79 means high development – for
example, Romania was 0.76. 4.
- Above 0.8 means very high development – Finland was 0.87 in
2010.

The HDI is a very useful means of comparing the level of

development of countries. GDP per capita alone is clearly too
narrow an indicator of economic development and fails to
indicate other aspects of development, such as enrolment in
school and longevity. Hence, the HDI is a broader and more
encompassing indicator of development than GDP, though GDP
still provides one third of the index

GDP per capita

GDP per capita is the commonest indicator of material standards
of living, and hence is included in the index of development.
GDP per capita It is found by measuring Gross Domestic
Product in a year, and dividing it by the population.

Evaluation of the HDI

Despite the widespread use of the HDI there are a number of
criticisms that can be made, including:

1. The HDI index is for a single country, and as such does not
distinguish between different rates of development within a
country, such as between urban and traditional rural
communities.
2. Critics argue that the equal weighting between the three main
components is rather arbitrary.
3. Development is largely about freedom, but the index does not
directly measures this. For example, access to the internet might
be regarded by many as a freedom which improves the quality
of people's lives.
4.As with the narrow measure of living standards, GDP per
capita, there is no indication of the distribution of income.
5.In addition, the HDI excludes many aspects of economic and
social life that could be regarded as contributing to or
constraining development, such as crime, corruption, poverty,
deprivation, and negative externalities.
6.GDP is calculated in terms of purchasing power parity, and
the value can change.