Lecture #7.

HUMAN DEVELOPMENT INDEX

Human Development Index (HDI)

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 can also be used to question national policy choices, asking how two
countries with the same level of GNI per capita can end up with different human
development outcomes. These contrasts can stimulate debate about government
policy priorities.
The Human Development Index (HDI) is a summary measure of average
achievement in key dimensions of human development: a long and healthy life,
being knowledgeable and have a decent standard of living. The HDI is the geometric
mean of normalized indices for each of the three dimensions.
The health dimension is assessed by life expectancy at birth, the education
dimension is measured by mean of years of schooling for adults aged 25 years and
more and expected years of schooling for children of school entering age. The
standard of living dimension is measured by gross national income per capita. The
HDI uses the logarithm of income, to reflect the diminishing importance of income
with increasing GNI. The scores for the three HDI dimension indices are then
aggregated into a composite index using geometric mean.
The HDI simplifies and captures only part of what human development entails. It
does not reflect on inequalities, poverty, human security, empowerment, etc. The
HDRO offers the other composite indices as broader proxy on some of the key issues
of human development, inequality, gender disparity and poverty.
A fuller picture of a country's level of human development requires analysis of other
indicators and information presented in the statistical annex of the report.

SOURCE: UNITED NATIONS DEVELOPMENT PROGRAMME (UNDP)

Lecture #8. BUSINESS CYCLEAND ECONOMIC GROWTH

Phases of Business Cycle

Any economy, whether local, national or international, follows the four phases of a
business cycle. The phases of a business cycle include:
1. Prosperity
2. Recession
3. Depression
4. Recovery

The time frame of each phase depends on various factors that affect an economy.
For instance, insufficient supply of oil leads to increase prices and eventually may lead to a
worse economic situation for importing countries. Also, the calamities hitting many
countries in the world are dragging down the economy to depression.

Circular flow of an Economic Activity

Economic model is a simplification of economic reality. It can be presented into the
following forms:
a. Mathematical equations
b. Set of diagrams
c. Scheme or flow charts

Macroeconomic models provide a systematic guide that permits the complexities of

the operations of the economy as a whole for understanding and interpretation.
Macroeconomic analysis aims to diagnose the reason for failure in achieving
economic goals and to point the way toward better performance in the future.
The economic model depicting the circular flow of goods and services (output) and
income is shown in the following diagram:
 Figure 39. Circular flow of economic activity
reflecting the outflows and inflows
We see that the consumers provide economic resources to the business firms. These
economic resources or inputs of production are utilized to produce goods and services.
These will in turn be passed on to the consumers.
The flow of physical goods is accompanied by a flow of income. The consumers
deliver the economic resources to the producers with corresponding payments. These
payments are in the form of wages and salaries, interest and rent. On the other hand, the
goods and services produced by the firms will be passed on to the consumers thru payments
too, called consumption expenditures.
The incomes received by the consumers are spent for the purchase of goods and
services. If there is an equilibrium, that is the total demand of the consumers equals the
amount of goods and services produced by the business firms then everything is reverted
back into the system. However, the consumers do not always spend all the income they
received. A portion of the income is saved. This amount saved is not returned into the
system. Thus, savings have the effect of decreasing the level of economic activity in the
flow. Savings constitute the first outflow from the stream.
The existence of the government in the model shows that from the income derived
by the consumers, a portion of it goes to the government in the form of taxes. Taxes lessen
the disposable income of the consumers thereby decreasing the amount for spending. Taxes
therefore decrease the level of economic activity and constitute the second outflow.
 When we import foreign goods and services, such amount paid flowed out of the
system. Hence, imports lessen the economic activity and constitute the third outflow.

If there is a continuous outflow in the economy, recession sets in and eventually led
to depression. Siphoning back the lost funds can offset this situation. When consumers save,
normally in banks, such amount can be reverted back to the system if the banks will invest
such funds. Banks can lend the said funds to the business sectors so that the latter will have
money to produce goods and services. If investment is equal to savings, it offsets the
outflow caused by the savings of consumers.

When the government collects taxes, these are used to defray expenses such as
infrastructure, social services, education, etc. In doing so, the amounts are spent back into
the system and offset the outflow in the form of taxes.

When the Philippines imports goods, it expects that other countries reciprocate by
buying our goods. When these countries buy our goods, funds flow back into the system.
Hence, export offsets import.
Equilibrium condition: Outflows = Inflows
Leakages = Injections
S + T + M = I + G + X

When the outflow equals the inflow, the level of economic activity is maintained.
An excess inflow over the outflow results to expansionary. A contracting economy follows
if the outflow exceeds the inflow. Manipulating the outflow and inflow can affect the level
of economic activity. However, the outflows are difficult to control because they are
dependent on income. When income increases, savings, taxes and imports tend to increase
too. In contrast, inflows are easier to manipulate. Therefore, proper government policy can
encourage exports and investments.
In order to manipulate the inflows and outflows, various policies can be
implemented. Monetary policy can affect savings and investment. Fiscal policy can control
taxes and government expenditures. While, trade policy can affect the country’s exports and
imports.

Economic Growth and Business Cycles

No economy can sustain growth and development over a long period of time. This
is because every business is affected by various factors classified as:
1. Exogenous – These are forces outside the economic system like natural
calamities, political crisis, wars or technological changes. No economy can
sustain development if natural calamities, war or any exogenous factors hits the
country.
 2. Endogenous – These are forces within the economic system like multiplier,
accelerator, monetary policies or innovations.

The Human Development Index (HDI) is a composite measurement introduced by Pakistani

Economist Mahub Ul-Haq in 1990 that quantifies the average well-being of people in a
given country. It consists of three dimensions: Life expectancy at birth, Expected years of
schooling for children and mean years of schooling for adults, and Gross National Income
per capita. These dimensions provide a comprehensive assessment of human development
beyond economic measures like gross domestic product per capita. The HDI helps analyze
the relationship between financial and social progress, identifies areas that need attention,
and provides quantitative evidence for discussions on social justice.