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Measuring Development Measuring Development Development Economics Development Economics 4.2a 4.2a

Measuring Development Development Economics 4.2a

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Page 1: Measuring Development Development Economics 4.2a

Measuring DevelopmentMeasuring Development

Development EconomicsDevelopment Economics

4.2a4.2a

Page 2: Measuring Development Development Economics 4.2a

Review . . . Review . . .

What is the difference between economic growth What is the difference between economic growth and economic development? Is it possible to and economic development? Is it possible to have one without the other?have one without the other?– Growth:Growth: increase in economies real level of output increase in economies real level of output

over time. Quantitative – GDP ect.over time. Quantitative – GDP ect.– Development:Development: The process to improve the lives of all The process to improve the lives of all

people in a country. This include increase living people in a country. This include increase living standards (goods and services), improved dignity, standards (goods and services), improved dignity, respect and self-esteem, freedom etc. Qualitative.respect and self-esteem, freedom etc. Qualitative.

– YES! Growth is possible w/o development.YES! Growth is possible w/o development.

Page 3: Measuring Development Development Economics 4.2a

Production Possibility FrontiersProduction Possibility Frontiers

Weak Agricultural SectorWeak Agricultural Sector Land and agriculture are Land and agriculture are key to studying key to studying developmentdevelopmentSupply of land is fixed Supply of land is fixed and with growing and with growing populations this leads to populations this leads to law of diminishing law of diminishing returns. returns. Here manufacturing is Here manufacturing is growing, but food output growing, but food output is growing at smaller and is growing at smaller and smaller increments as smaller increments as population growspopulation grows

Food

Man

ufac

ture

s

A

B

C

D

Page 4: Measuring Development Development Economics 4.2a

Production Possibility FrontierProduction Possibility Frontier

Improved land qualityImproved land quality Main development Main development goal is to improve goal is to improve productivity of land.productivity of land.– IrrigationIrrigation– DrainageDrainage– Use of fertilizersUse of fertilizers– Pest controlPest control

So here improving the So here improving the quality of land allows quality of land allows the food supply to the food supply to increase.increase.

food

man

ufac

ture

s

A

BC

D

Page 5: Measuring Development Development Economics 4.2a

Consequences of GrowthConsequences of Growth

1.1. ExternalitiesExternalities

2.2. Income DistributionIncome Distribution

3.3. Poverty CyclePoverty Cycle

Page 6: Measuring Development Development Economics 4.2a

Consequence of Growth # 1:Consequence of Growth # 1: Externalities Externalities

LDC’s Pollution and Environmental LDC’s Pollution and Environmental DegradationDegradation– Increased population puts pressure on landIncreased population puts pressure on land– Soil erosion as people more likely to farm Soil erosion as people more likely to farm

marginal landmarginal land– Forests cut down for fuelForests cut down for fuel– Desertification stemming from overgrazingDesertification stemming from overgrazing– Over-fishingOver-fishing

Page 7: Measuring Development Development Economics 4.2a

Externalities continued:Externalities continued:

Industrialized countries and COIndustrialized countries and CO22 emissions.emissions.– Positive correlation between COPositive correlation between CO22 and national and national

incomeincome– 80% of all fuel is burnt by 20% of the richest 80% of all fuel is burnt by 20% of the richest

peoplepeople– In 1997 China had 500 bikes for every car . . . In 1997 China had 500 bikes for every car . . .

Today???Today???

Page 8: Measuring Development Development Economics 4.2a

Consequence of Growth #2:Consequence of Growth #2:Income DistributionIncome Distribution

Income distribution is a key concern for Income distribution is a key concern for development economics.development economics.

Goal: development plan that promotes Goal: development plan that promotes evenly distributed income.evenly distributed income.

Page 9: Measuring Development Development Economics 4.2a

Consequence of Growth 2:Consequence of Growth 2:Income Distribution and Saving Income Distribution and Saving

RatesRatesSome assume that development will follow Some assume that development will follow growthgrowth– To encourage growth encourage technology To encourage growth encourage technology

and investment, BUTand investment, BUT– Increased investment means increased Increased investment means increased

saving is necessary. For saving to increase saving is necessary. For saving to increase income more likely to be income more likely to be unevenlyunevenly distributed. distributed.

Rich = higher propensity to save Rich = higher propensity to save

Poor = high propensity to consumePoor = high propensity to consume

Page 10: Measuring Development Development Economics 4.2a

Income Distribution-Income Distribution-Lorenz CurveLorenz Curve

Lorenz CurveLorenz Curve A way to measure A way to measure income distribution income distribution and the degree of and the degree of inequalityinequality

The more unequal The more unequal the income the income distribution the more distribution the more bowed the curve.bowed the curve.

Line of Equality

LorenzCurve

Percentage of incomeRecipients (population)

Per

cent

age

of in

com

e

Page 11: Measuring Development Development Economics 4.2a

Income Distribution-Income Distribution-Gini CoefficientGini Coefficient

Lorenz CurveLorenz Curve The GINI coefficient The GINI coefficient converts the Lorenz converts the Lorenz curve into a single curve into a single statisticstatistic

Equation:Equation:Shaded area AShaded area A

area BCDarea BCD

Smaller coefficient is Smaller coefficient is betterbetter

Line of Equality

LorenzCurve

Percentage of incomeRecipients (population)

Per

cent

age

of in

com

e

A

B C

D

Page 12: Measuring Development Development Economics 4.2a

Income Inequality in America

Page 13: Measuring Development Development Economics 4.2a

2. Income Distribution-2. Income Distribution-Purchasing Power Parity, PPPPurchasing Power Parity, PPP

A more realistic measurement of living A more realistic measurement of living standard than GDPstandard than GDPAccounts for local buying power of a Accounts for local buying power of a currency to determine GDPcurrency to determine GDPCalculated by the IMF and used by the Calculated by the IMF and used by the World Bank in attempt to mitigate the World Bank in attempt to mitigate the impact of exchange rates.impact of exchange rates.A GDP adjusted for PPP is generally A GDP adjusted for PPP is generally higher than just GDPhigher than just GDP

Page 14: Measuring Development Development Economics 4.2a

3. Poverty Cycle 3. Poverty Cycle

** **

Low StandardOf Living

Low Standard Of Living

Poor healthPoor Education

Low Productivity

Low Savings

LowInvestment

Page 15: Measuring Development Development Economics 4.2a

Now some practice . . . Now some practice . . .

Measuring Measuring Development 4.2 Development 4.2 practice worksheet.practice worksheet.