CHAPTER 2©E.Wayne Nafziger Development Economics Chapter 2 Meaning and Measurement of Economic Development

CHAPTER 2 ©E.Wayne Nafziger Development Economics

Chapter 2

Meaning and Measurement of Economic Development


The Meaning & Measurement of Economic Development

Growth & Development Millennium Development Goals Selected Indicators of Development Imprecision in Comparing GNP per Capita in

DCs & LDCs Purchasing Power Parity (PPP) & Human

Development Index (HDI) Basic Needs Development as Freedom Is Economic Development Worthwhile?


What is economic growth? What is economic development?

Economic growth – growth in GNI or GNP per capita

Economic development – economic growth accompanied by changes in output distribution & economic structure


U.N. Millennium Development Goals

1. Reduce poverty & hunger from 17% to 8% of world’s population

2. All children complete primary school3. Gender equality in education & literacy4. Reduce 5-year mortality (now 88 p 1000 LDCs) 5. Reduce maternal death rate (now 1/48)6. Reduce HIV/AIDS (1.44% globe, 8.44% SSA)7. Progress in environmental sustainability8. Global partnership for development


U.S. (2005) Wants Changes in U.N. Draft Strike mention of MDGs Too much focus on poverty Scrap call to halt climate change Eliminate nuclear powers dismantling nuclear

arms & signing test ban treaty More emphasis on free market reforms,

government accountability (when aid & debt relief), actions against terrorism, promoting human rights & democracy, & halting spread of world’s deadliest weapons, no reference to International Criminal Court or 0.7% aid/GNP, streamline UN bureaucracy

Source: C. Lynch, Wash Post & others


Selected Indicators of Development

Data for Low-Income, Middle-Income, & High-Income Economies (front inside cover and left back inside cover)

World Bank Country Classification – click

United Nations Conference on Trade and Development (UNCTAD)

Third World Economies in transition OPEC Least developed countries Newly industrializing countries (NICs). World Trade Organization

http://web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:20420458~menuPK:64133156~pagePK:64133150~piPK:64133175~theSitePK:239419,00.html


PROBLEMS WITH USING GNP TO MAKE COMPARISONS OVER TIME

Economists use national-income data to compare a given country's GNP or GNI over time.

Laspeyres price index.

Paasche price index.

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Imprecision in Comparing GNP per Capita in DCs & LDCs

India - $530 India more own production by home or village India more household economies of scale India cheap labor-intensive goods no impact on

exchange rate India more likely not market clearing exchange

rate


US - $37,610 US more intermediate goods

Imprecision in Comparing GNP per capita in DCs & LDCs


Purchasing-Power Parity (PPP)

(P) price level of GNP – ratio of the purchasing power exchange rate to actual exchange rate – both measures as domestic currency price of US$.



Big Mac Exchange RateReal 4.55 & $2.71 for Big Mac in 2003Thus, Real 1.68 = $1 Big Mac exchange rateReal 3.07 = $1 actual exchange rate P = 0.55 in Brazil Big Mac $2,710 p.c./0.55 = $4927 Big Mac PPP P = 0.36 in Brazil actual PPP $2,710/0.36 = $7,480 GNP p.c. PPP


How do Penn economists (Summers & Heston) calculate PPP Use series of simultaneous equations to

solve PPP for 81 benchmark & quasi-benchmark countries & world average prices for 400-700 detailed commodities & services.

Researchers calculate cost of making appropriate quality adjustments to substitute item that is directly available.


Summers & Heston (cont.)

A potato is a potato, regardless when or where purchased.

Estimating equation to compute PPP in 57 nonbenchmark countries.



Food exchange rate (Deaton)

Rs. 442 = $10 (actual)

Rs. 442 = $44 (food exchange rate)


Measurement Errors for GNP Adjusted for Purchasing Power

What are the confidence intervals for gross products PPPs? (Firebaugh)

A + or - 9% (18 nations) B + or - 15% (7 nations) C+ + or - 18% (1 nation) C + or - 21% (34 nations) C- + or - 24% D+ + or – 27% (11 nations) D + or – 30% (38 nations) China + or – 50% (also see pp. 25-26)


Physical Quality of Life Index

Combines 3 indicators:

infant mortality rate life expectancy (age 1) adult literacy


Human Development Index (HDI)

Longevity (average life expectancy – years)

Education (2/3 adult literacy); 1/3 combined school enrollment rate

GDP per capita (PPP US$) logarithm

Notice the variability in data sheet from Mozambique (0.354) to Norway (0.956)


Development as Freedom – Amartya Sen

Freedom is ultimate goal of ec life Overcoming deprivation Unfreedoms include hunger, famine,

ignorance, unsustainable economic life, unemployment, premature death, violation of political freedom, environmental threats, little access to health, sanitation or clean water



"BASIC‑NEEDS"ATTAINMENT

Many economists are frustrated at the limited impact economic growth has had in reducing third-world poverty.

These economists think that programs to raise productivity in developing countries are not adequate unless they focus directly on meeting the basic needs of the poorest 40‑50 percent of the population‑‑the basic‑needs approach.

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CHAPTER 2©E.Wayne Nafziger Development Economics Chapter 2 Meaning and Measurement of Economic Development