Lecture #2

Economic Growth vs. Economic

Development
 Economic Growth
Gross domestic product (GDP)
• GDP is the value of all final goods and services produced within
a nation in a given year basic measure of a country's economic
performance or economic growth. i.e. the total value produced
within a country

• GDP = private consumption + gross investment +

government spending + (exports − imports),

• GDP = C + I + G + (X − M).

• The profits of a US-owned company operating in the UK will

count towards US GNI and UK GDP, but will not count towards
UK GNI or US GDP.
 Economic Growth
Gross domestic product (GDP)
• Per capita income or per capita GDP means
how much everyone receives, in monetary
terms, of the yearly income generated in the
country.
• GDP/Capita
• Accordingly, economic growth can simply be
defined as a rise in GDP or GDP per capita.
 Economic Growth
Gross domestic product (GDP)

• When measuring economic growth by using

per capita income figures to classify countries
into rich and poor and compare rates of
development in different countries, we face 2
difficulties:
1. problem of national income accounting in
developing countries.
2. problem of converting each country’s per
capita income using foreign exchange.
 Economic Growth
Gross domestic product (GDP)
1.For national income accounting :
Only goods produced and sold in the market are included in the
value of national income, much output in developing countries is
not reaching the market, particularly in the rural sector, where
production for subsistence purposes misleads the accurate
output.
 Economic Growth
Gross domestic product (GDP)
2. For converting each country’s per capita income:
The domestic currency of each country must be transferred into
a common unit of account ( that is US $) to be able to make
meaningful international comparisons of living standards which
involves exchange rate difficulties as well as not the same prices
as .
Also, per capita income ignores the distribution of income
within the countries, differences in development potential, and
other physical indicators of the quality of life.
 Question...!!!
• If you know the real per-capita GDP
or GNP of two economies, can you
compare the welfare level of the
people in these two economies?
The answer is ........
• NO...!!!
 Economic Development

• Development looks at a wider range of

statistics than just GDP per capita.
• Development is concerned with how people
are actually affected. It looks at their actual
living standards.
 Measurement of Economic Development

• The United Nations Development Programme

(UNDP) has two alternative indexes to compare the
level of development and the progress of countries :
1. Human Development Index (HDI).
2. Human Poverty Index ( HPI).
We will focus on the HDI. Human Development Index
(HDI) analyze systematically and comprehensively the
comparative status of socioeconomic development in
different countries.
 Human Development Index
• The HDI attempts to rank all countries on a scale of 0
(lowest human development) to 1 (highest human
development). It is based on 3 variables :
1. Life expectancy at birth.
2. Educational attainment, measured by a
combination of ;
adult literacy (2/3)
Gross enrollment ratio- primary, middle,
secondary schools & post-secondary education
(1/3)
3. Income Index measured by real GDP per capita at
PPP adjusted for the differences of each country’s
currency.
 Human Development Index

• HDI = 1/3 (income index) + 1/3 (life

expectancy Index) + 1/3 (education index)
• Using these three measures of development and
applying a formula to data for 177 countries, the HDI
ranks countries into three groups: low human
development (0.0 to 0.499), medium human
development (0.50 to 0.799), and high human
development (0.80 to 1.0).
 Human Development Index
1. Income Index
• Adjusted income is found by simply taking the natural log of
current income. Then, to find the income index, one subtracts
the natural log of $100PPP from the natural log of current
income. This $100 is seen as the lowest possible income a
country can achieve.
• To put this achievement in perspective, consider it in relation
to the maximum that a country could reasonably aspire to
over the coming generation. The UNDP takes this at $40,000
PPP.
 Human Development Index
1. Income Index
• This gives each country an index number that ranges
between 0 and 1.
• For example, in the case of Bangladesh, whose 2004
PPP income was $1,870, the income index is
calculated as follows:
 Human Development Index
1. Income Index
• With a value of the income index about midway
through the maximum and minimum points (0.49 is
close to 0.5), for the case of Bangladesh, it indicates
that an income of $1,870, which is already enough to
reach nearly halfway to the maximum value that the
index can take.
 Human Development Index
2. Life Expectancy Index
• To find the life expectancy (health proxy) index, the
UNDP starts with a country’s current life expectancy
at birth and subtracts 25 years. The latter is the lower
reference, the lowest that life expectancy could have
been in any country over the last generation.
• Then the UNDP divides the result by 85 years minus
25 years, which represents the range of life
expectancies expected over the previous and next
generations.
 Human Development Index
2. Life Expectancy Index
• That is, it is anticipated that 85 years is the maximum
reasonable life expectancy for a country to try to
achieve over the coming generation.
• For example, in the case of Bangladesh, whose
population life expectancy in 2004 was 63.3 years,
the life expectancy index is calculated as, follows:
 Human Development Index
3. Education Index
• The education index is made up of two parts, with
two‐thirds weight on literacy and one‐third weight
on school enrollment.
• This index is also capped at 100%. In the case of
Bangladesh, adult literacy is estimated (rather
uncertainly) at 41 %, so
 Human Development Index
3.Education Index
• For the gross enrollment index, Bangladesh
estimates that 57% of its population are enrolled in
primary, secondary, and high schools, so the country
receives the following value:
 Human Development Index
3. Education Index
• Then, to get the overall education index, the adult
literacy index is multiplied by two‐thirds and the
gross enrollment index is multiplied by one‐third.
• This choice reflects the view that literacy is the
fundamental characteristic of an educated person.
In the case of Bangladesh, this gives us
 Human Development Index
HDI Calculation
• In the final index, each of the three
components receives equal, or one‐third,
weight. Thus,
 Advantages of HDI
1. One major advantage of the HDI is that it does reveal that a
country can do much better than might be expected at a low
level of income and that substantial income gains can still
accomplish relatively little in human development.
2. The HDI reminds us that by development we mean broad
human development, not just higher income. Many
countries, such as some of the higher‐income oil producers,
have been said to have experienced “growth without
development.”
Ex: Nigeria in Africa and Venezuela in Latin America
 Advantages of HDI
3. Improvements in health and education are also important
development goals. We cannot easily argue that a high-income
country with a low life expectancy and literacy index has
achieved a higher level of development than a low-income
country with a high life expectancy and literacy index.
 Criticisms of the HDI
1. One is that gross enrollment in many cases
overstates the amount of schooling because in
many countries a student who begins primary
school is counted as enrolled without considering
whether the student drops out at some stage.
2. Equal (one‐third) weight is given to each of the
three components, which clearly has some value
judgment behind it, but it is difficult to determine
what this is. Note that because the variables are
measured in very different types of units, it is
difficult even to say precisely what equal weights
mean.
 Criticisms of the HDI
3. Finally, there is no attention to the role of quality.
For example, there is a big difference between an extra
year of life as a healthy, well‐functioning individual and
an extra year with a sharply limited range of capabilities
(such as being confined to bed).
4. Moreover, the quality of schooling counts, not just
the number of years of enrollment.
 Some further remarks
• In 2020, the country with the lowest HDI (0.400) was
Chad, and the one with the highest (0.959) was
Iceland.
 Application #1
True or false:
1. Real GDP measures the standard of living( ).
2. The HDI attempts to rank all countries on a scale of
1 to 100( )
3. HDI is a summary measure of average achievement
in key dimensions of human development ( ).
4. The education dimension is measured by the gross
enrollment index only ( )
5. Health dimension is assessed by mortality rate( ).
 Application #1
• Compare between the advantages and
disadvantages of HDI.
• Explain briefly the components of the HDI
• In 2005, India’s life expectancy was 71.4 years.
Adult literacy rate and gross enrollment ratio
were 87.4% and 68.7% respectively. GDP per
Capita (PPP) was 8407$. Calculate HDI.
The End

Good Luck!