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 school
3. Gender equality in education & literacy
4. 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 sustainability
8. 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

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 Rate
Real 4.55 & $2.71 for Big Mac in 2003
Thus, Real 1.68 = $1 Big Mac exchange rate
Real 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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