Economic

Development
11th Edition
Michael P. Todaro
& Stephen C. Smith
Chapter 2 : Comparative Economic
Development

Nadia Fauzana
Syadza Salsabyla Tamam

MPWK UGM
2023
2.2. Basic Indicators
of Development Real Income per capita
adjusted for purchasing
power

Real
Income

Health Education
Life expectancy, Literacy,
Undernourishment, Schooling
Child mortality
Todaro & Smith, (2011), “Economic Development 11th Edition”
1 REAL INCOME

Gross domestic product (GDP) Gross national income (GNI)

• 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.
• The total domestic and foreign output
claimed by residents of a country
• Per capita, divided by mid-year
population, is  income per person in a
country
• a summary index of the relative economic
well-being of people in different nations

GNI = GDP + factor incomes earned by foreign residents - income earned in

the domestic economy by nonresidents
GNI = (Consumption + Investment + Government Spending + (Exports – Imports)) + (Country’s
citizens earn abroad - Income that foreign residents earn in the country and send out of the
country)
Source : https://www.masterclass.com/articles/what-is-gross-national-income-definition-and-formula-for-gni

Todaro & Smith, (2011), “Economic Development 11th Edition”

1 REAL INCOME
COMPARISON OF GNI AND GDP BETWEEN COUNTRIES
Official foreign-exchange rates
• to convert national currency figures into U.S.
dollars
• This conversion does not measure the relative
domestic purchasing power of different
currencies
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
• the number of units of a foreign country’s
currency = $1 would buy in the United States

For example, China’s 2008 GNI per capita was only

6% of that of the United States using the exchange-
rate conversion but rises to 13% when estimated by
the PPP method of conversion

GNI per capita, PPP (constant 2017 international $)

Source : https://data.worldbank.org/ Last Updated Date : 7/25/2023

Country Name 2022

Hong Kong SAR, China 63,132.35
Malaysia 27,288.53
Indonesia 12,045.56 Todaro & Smith, (2011),
“Economic Development 11t
India 6,954.20 Edition”
2 INDICATORS OF HEALTH AND EDUCATION
HEALTH EDUCATION
• Life expectancy is the average number of years • Literacy is the fraction of adult males and
newborn children would live if subjected to the females reported or estimated to have basic
mortality risks prevailing for their cohort at the abilities to read and write
time of their birth. • functional literacy is generally lower than the
• Undernourishment means consuming too little reported numbers
food to maintain normal levels of activity
(problem of hunger)
• Birth Rate, high fertility can be both a cause and
a consequence of underdevelopment

Note that in addition to big differences across these

income groupings, the low-income countries are
themselves a very diverse group with greatly
differing development challenges

Todaro & Smith, (2011), “Economic Development 11th Edition”

 2.3. Holistic Measures of Living Levels and Capabilities

Traditional Human Development Index (HDI) The Formulas

• Income Index
= Measuring national socioeconomic development
Low High
(0.0 to 0.499) (0.80 to 0.90) • Life Expectancy Index
0 1
Lowest Highest
• Adult Literacy Index
human Medium Very human
development high development
(0.50 to • Gross enrollment Index
0,799) (0.90 to 1.0)

• Education Index
1/3 Standard of = 2/3 adult literacy index + 1/3
1/3 Longevity  1/3 Knowledge
Living  income gross enrollment index
3 health  education
real capita GDP  cost
Goals/ life expectancy at average adult
of living and
products of birth literacy and gross
assumption of
development school enrolment
“diminishing marginal
ratio
utility”
Todaro & Smith, (2011), “Economic Development 11th Edition”
… furthermore

Advantages of HDI Criticism and Possible Drawbacks

1. Reveals that a country can do much better 1. Gross enrolment number could be a hole since
than might be expected at a low level income it counted students who begins primary
2. Reveals that substantial income gains can still school without considering possible drops out
accomplish relatively little in human 2. Equal weight (1/3) is given to each of three
development components
3. Points up that income disparities are greater 3. There is no attention to the role of quality
than other indicators of development (health (only the quantity)
& education)
1
4. Reminds that Development mean broad 0.27 “ Despite this
0.8
human development, not just higher income 0.23 expected pattern,
0.6 0.23 0.24 there is still such
0.14
0.4 great variation
0.14
between income and
0.2 0.45 0.45 broader measures of
0.32
Human 0
well-being

Capital HDI 1 H D I 2a H D I 2b

GDP Health Education

Todaro & Smith, (2011), “Economic Development 11th Edition”
Variations
shown by > HDI shows the
HDI comparation
between each
indicator in which a
higher GDP could
also has lower
health or education
aspect

> HDI shows the

great range
between groups
within countries

Todaro & Smith, (2011), “Economic Development 11th Edition”

 The New Human Development Index
• Introduced by UNDP in 2010
• GNI replace GDP per capita
• The education index, two new components: the average actual
educational attainment of the whole population and the expected
attainment of today’s children. Where as, the two previous components,
literacy and enrollment, have been correspondingly dropped
• The upper goalposts (maximum values) in each dimension have been
increased and The lower goalpost for income has been reduced
• Use natural log (ln) instead of log
• Computed with a geometric mean instead of arithmetic mean

Todaro & Smith, (2011), “Economic Development 11th Edition”

THANK YOU