Chapter 2 “Comparative Economic Development”

Ever wondered why some countries are rich while others struggle? This report dives into the world of
comparative economic development, trying to figure out why there are such big differences. Despite our
modern, connected world, hindi lahat ay nasa parehong antas.in this chapter,We'll start by looking at
how we measure development and find out it's not just about money. anu ba may mas significant
contribution sa economiya ng isang bansa?

2.1 Defining the Developing World

most common way to define the developing world is by per capita income
-Per capita income is used to determine the average per-person income for an area and to evaluate the
standard of living and quality of life of the population.

just as any two people can compare their incomes to see who's financially better off. Two countries can
Do the same to see the wealth instability of an economy. if a region has a low income per capita it
can mean the local economy does not adequately support its residents, but income per capita
can be misleading,

ex. If a small town, has 50 people earning 1million/yr=50m

and 1000 people earning 100,000/ yr. =100m
= 142,857.14

so,per capita income can sometimes be misleading because wealth is unequally distributed. Thus, per
capita income may not reflect the actual living conditions of the people.

International agencies like Organization for Economic Cooperation and Development and the
United Nations offer classifications of countries by their economic status. The best-known
system is that of the International Bank for Reconstruction and Development, more commonly
known as the World Bank. So, what does the World Bank do? The World Bank predominantly
acts as an organization that attempts to fight poverty by offering developmental assistance to
middle and low-income countries. In the World Bank's classification system, 213 economies with
a population of at least 30,000 are ranked by their levels of gross national income per
capita.

World Bank An organization known as an “international financial institution” that provides development
funds to developing countries in the form of interest-bearing loans, grants, and technical assistance.

The World Bank assigns the world’s economies to four income groups—low, lower-middle, upper-
middle, and high income.

these are the classifications of economies together with the respective gross national income per
capita. These are calculated using the world map Atlas method

Low-income countries (LICs) In the World Bank classification, countries with a gross national income per
capita of less than $976 in 2008.

Middle-income countries In the World Bank classification, countries with a GNI per capita between $976
and $11,906 in 2008.

some high-income countries may still be considered developing if significant parts of their
population face educational or health challenges despite a high overall income level. Examples
include oil-exporting nations like Saudi Arabia and the United Arab Emirates. These countries
bring in a lot of income. However, despite this wealth, many people in those countries might still
face challenges like lack of education or health problems. Example; china. unemployment rate,
un-even development.

sometimes a special distinction is made among upper middle income or newly High income economies
designating some that have achieved relatively Advanced…

Newly industrializing countries (NICs) Countries at a relatively advanced level of economic development
with a substantial and dynamic industrial sector and with close links to the international trade, finance,
and investment system. (And included tayo dun) these are the countries that have undergone rapid
industrialization and experienced significant economic growth. They are typically characterized
by transitioning from primarily agrarian economies to more industrialized ones. Dito sa ph,
which only recently made the transition from an agricultural-based economy towards one based
on services(BPO Tourism and Hospitality:) and manufacturing, Electronics and Semiconductors:
This sector has attracted foreign direct investment and generated employment

Another widely used classification which is a United Nations designation of countries with low
income….
Least developed countries A United Nations designation of countries with low income, low human
capital, and high economic vulnerability.( Dependency on a Single Industry, like sa agriculture,political
conflict, war.pandemic, limit spending.comodity price, oil, drought)

These nations typically face a combination of structural challenges, including weak institutions,
limited access to education and healthcare, and susceptibility to external shocks/ natural
disaster.

Afghanistan: political instability, armed conflict, and a weak infrastructure.

Haiti is one of the poorest countries in the Western Hemisphere, facing issues such as political
instability, natural disasters, and a high level of poverty. low literacy rates , food insecurity Haiti
is prone to various natural hazards, including hurricanes and tropical storms. The vulnerability of
its infrastructure and the high population density in vulnerable areas make the country
susceptible to the impact of natural disasters.,

So why the world needs classification or stratification

The classification helps international organizations tailor assistance and support to address the
specific needs of these countries in their pursuit of sustainable development.

2.2 Basic Indicators of Development: Real Income, Health, and Education

In this section we examine the basic indicators of three aspects of

development first is
the real income per capita which is adjusted for purchasing power
second Health as measured by life expectancy under nourishment and child mortality lastly educational
attainments as measured by literacy and schooling.

Gross national income (GNI) The total domestic and foreign output claimed by residents of a country,
consisting of gross domestic product (GDP) plus factor incomes earned by foreign residents, minus
income earned in the domestic economy by nonresidents.

while GDP measures the total economic output within a country's borders, GNI provides a more
comprehensive picture by including the net income earned by a country's residents both
domestically and abroad. GNI is often considered a more accurate indicator of a country's
economic well-being from a national income perspective.
In accordance with the World Bank’s income-based country classification scheme, gross national income
(GNI) per capita, the most common measure of the overall level of economic activity, is often used as a
summary index of the relative economic well-being of people in different nations. It is calculated as the
total domestic and foreign value added claimed by a country’s residents without making deductions for
depreciation (or wearing out) of the domestic capital stock

Calculation:

hindi sinasama sa pagcompute ng pambansang kita ang tinatawag na undergound economy

dahil hindi sila registered or walang documents ang nagpapakita kung HM ang totoong kinikita nila.

vendor, taho, at sa 2nd hand

para hindi maulit ang pagcompyut.

GDP: GDP is calculated by adding up consumption, investment, government spending, and net exports
(exports minus imports) within a country's borders.

total market value P&s produced within geographical area over specific time. regardless of the
nationality

GDP=C+I+G+(X−M)

GNP: GNP is calculated by adding GDP to the net income earned from abroad. by the residents of a
country, including production that occurs domestically and abroad. GNP includes the income earned by
a country's residents both within the country and from overseas.

GNP=GDP+Net Income Earned from Abroad

same with GNI

total income earned by the residents of a country from both domestic and foreign sources. It is
essentially the same as GNP, and the terms are often used interchangeably. GNI includes GDP plus net
income earned from abroad.

Value added -The portion of a product’s final value that is added at each stage of production.
value added captures the incremental increase in a product's value at each production stage,
Ex, Smartphone,the value added during the assembly stage includes the labor, technology, and
expertise required to put together the individual components, resulting in a final product with a
higher value than the sum of its parts.
ex2. domestic value added is the contribution made by a country's residents within their own
borders, while foreign value added is the contribution made by residents of other countries. The
final product, in this case, the smartphone, represents a combination of domestic and foreign
value added

Depreciation (of the capital stock) The wearing out of equipment, buildings, infrastructure, and other
forms of capital, reflected in write-offs to the value of the capital stock.
Depreciation reflects the decline in the value of capital goods over time, Example: Imagine a
company that owns a fleet of delivery trucks. Over time, these trucks experience wear and tear
due to usage and other factors. The decrease in the value of these trucks, reflecting their aging
and reduced efficiency, is depreciation.

Capital stock The total amount of physical goods existing at a particular time that have been produced
for use in the production of other goods and services.
capital stock represents the total accumulated physical goods used in the production process at
a given point in time. These concepts are fundamental in economic analysis, accounting, and
assessing the overall health and capacity of an economy.. Example: Consider a manufacturing
plant. The capital stock of the plant includes all the physical assets used in production –
machinery, buildings, and equipment. If the company invests in a new, state-of-the-art machine
to enhance production capabilities, that adds to the capital stock. On the other hand, if some
machinery becomes outdated and is retired, it represents a reduction in the capital stock. The
total value of all these physical assets at a specific point in time constitutes the capital stock of
the manufacturing plant.

Gross domestic product (GDP) The total final output of goods and services produced by the country’s
economy within the country’s territory by residents and nonresidents, regardless of its allocation
between domestic and foreign claims.

GNI=GDP+Income from Abroad−Payments to Nonresidents

ex; country a & B
In this example, we can see how GNI takes into account not only the production that happens
within a country's borders (GDP) but also the income residents receive from abroad and the
payments made to nonresidents. This helps us understand the overall economic well-being of
the people in different countries.

Purchasing power parity (PPP) Calculation of GNI using a common set of international prices for all
goods and services, to provide more accurate comparisons of living standards.

A-earns P100k in Japan (50% higher income)40k-rent,30k bills =30k

B- 50K here in PH.
But when we use PPP, which takes into account the cost of living in both places, it turns out that
Alice's income is still much higher than Bob's, but it's more like 173 times higher, which is still a
lot but more realistic. In simple terms, PPP helps us understand the real buying power of people
in different countries, making comparisons more accurate. It's like saying, "Yes, Alice makes
more money, but things also cost more where she lives, so let's look at it in a way that makes
sense for both places."

2.3 Holistic Measures of Living Levels and Capabilities.

Human Development Index (HDI) An index measuring national socioeconomic development, based on
combining measures of education, health, and adjusted real income per capita.

The Human Development Index (HDI) is like a report card for how well a country is doing in terms of the
average well-being of its people. It considers three important things:

Life expectancy: It looks at how long people in a country are expected to live. This is based on factors
like how many years people go to school and how long they live on average.

Education: It checks how much access to education people have. This includes both the number of years
kids are expected to go to school and how much schooling adults typically have.

Standard of Living: It looks at the overall income of a country and how evenly that income is spread
among its people.
Now, why does this matter? Well, it helps us see beyond just the economic side of things and
understand how everyday people are doing in terms of their health, education, and living standards.

The HDI gives each country a score between 0 and 1, and based on that score, countries are grouped
into categories like very high, high, medium, or low human development.

So, in simple terms, the HDI helps us see how well a country is taking care of its people in terms of
health, education, and living standards. It's like a way of measuring the overall quality of life for the
average person in a country.

Diminishing marginal utility The concept that the subjective value of additional consumption lessens as
total consumption becomes higher. Meaning, is that the more you consume or experience something,
the less additional satisfaction each unit provides. Ex, pizza,This concept is essential in economics and
decision-making, as it helps explain why people make choices based on maximizing their overall well-
being given limited resources. The Human Development Index (HDI) works similarly—it shows that as
countries progress and improve in health, education, and income, each extra bit of improvement
doesn't have the same big impact as the initial steps.

Human capital Productive investments in people, such as skills, values, and health resulting from
expenditures on education, on-the-job training programs, and medical care.

The concept of Human Development Index (HDI) underscores the importance of human capital
in a nation's development. Human capital refers to the skills, knowledge, and health of a
population, seen as valuable assets for economic and social progress. HDI recognizes that
improvements in health and education are investments in individuals. recognizes human capital
as a vital driver of development, emphasizing the need to invest in health and education for
the overall well-being and progress of a nation.

2.4 Characteristics of the Developing World: Diversity within Commonality

Absolute poverty The situation of being unable or only barely able to meet the subsistence essentials of
food, clothing, shelter, and basic health care.

absolute poverty, where people struggle to meet basic needs like food, clothing, and shelter is
somehow linked to rapid birth rate. Many developing countries are experiencing a rapid increase
in population, especially those with low incomes. In these places, the number of children born is
much higher compared to wealthier nations. This can be a challenge because the workforce has
to support a larger number of children, making it harder for everyone to have a decent living.

Crude birth rate The number of children born alive each year per 1,000 population. the birth rate that
is not adjusted to reflect differences in age groups)

High birth rates in places like the Philippines mean that the working adults have to support almost
double the number of children compared to wealthier countries. For instance, in the Philippines, the
crude birth rate was 21.6 in 2021. On the flip side, developed countries have more elderly people, and
both children and the elderly are considered an economic burden because the working-age population
(typically 15 to 64 years old) has to financially support them.

Dependency burden The proportion of the total population aged 0 to 15 and 65+, which is considered
economically unproductive and therefore not counted in the labor force.

Fractionalization Significant ethnic, linguistic, and other social divisions within a country.
Countries with more fractionalization might find it challenging to work together smoothly, and it
can affect their development. Researchers noticed that places with more diversity often face
economic challenges, like less education or unstable politics. So, fractionalization is about
looking at how diverse a country is and how it can impact its development.

Resource endowment A nation’s supply of usable factors of production including mineral deposits, raw
materials, and labor.
However, having a lot of resources doesn't always guarantee success. For example, the
Democratic Republic of Congo has significant mineral wealth, but it has faced challenges like
conflicts over resource profits, inequality, and governance issues.

Infrastructure Facilities that enable economic activity and markets, such as transportation,
communication and distribution networks, utilities, water, sewer, and energy supply systems.

Imperfect market A market in which the theoretical assumptions of perfect competition are violated by
the existence of, for example, a small number of buyers and sellers, barriers to entry, and incomplete
information.ex telecom.pldt and globe (telecom provider)

Incomplete information The absence of information that producers and consumers need to make
efficient decisions resulting in underperforming markets.(producer cant telemarket,new trend online
marketing) When people or businesses don't have all the necessary information, they might
make choices that are not the most effective or efficient, resulting in a misallocation of
goods and resources. This issue is common in many developing countries and contributes to
their challenges in progressing. This challenge is common in many developing countries and
contributes to their underdeveloped state.

In many developing countries, markets don't work smoothly. Issues like weak rules, unstable currencies,
and poor infrastructure create challenges. Lack of information also leads to poor decision-making. To
put it simply, because information is hard to get and expensive, it often leads to things like
products, money, and resources being used in the wrong way.