Measuring Economic Growth
and Development
based on Cypher and Dietz
The Process of Economic Development
Ch. 2
Is Development synonymous simply with
Economic Growth?
Different Development Goals of Society
•
•
•
•
•
•
•
•
•
•
•
Equality of opportunity
Rising income and standard of living
Equity in the distribution of income and wealth
Political democracy and wide-spread participation
Expanded role for women, minorities and all social classes
in public life
Increased opportunities for education and selfimprovement
Expanded availability of and improvements in health care
Public and private safety nets to protect the vulnerable
A clean and healthy environment
Efficient, competent and fairly administered public sector
A reasonable degree of competition in the private sector
High-quality growth
• Over the 1990s, the IMF seemed slowly to be learning from
the criticisms of its policies
• Now, the IMF sees itself as promoting so-called `high-quality
growth’,
• “defined as growth that is sustainable, brings lasting gains in employment
and living standards and reduces poverty. High-quality growth should
promote greater equity and equality of opportunity. It should respect
human freedom and protect the environment. Obviously, growth cannot be
high quality ... if it does not benefit fully, tangibly, and equitably a group
that constitutes more than one half the population of the world and still
bears the primary responsibility for the care, nutrition, and education of
the world’s children. Achieving high-quality growth depends, therefore,
not only on pursuing sound economic policies, but also on implementing a
broad range of social policies.”
•
IMF(1995)
Measuring Economic Growth and
Development
What is the criterion for development?
1. The economic growth / income criterion:
GNP, GDP, rate of growth
• Simple and easy to use
• Yet does it really capture development?
2. The indicators criterion:
e.g. Human Development Index (HDI), PI, GDI, GPI
• More comprehensive and realisitc
• Yet difficult to measure and use for international
comparisons
The economic growth
or economic income criterion
Gross National Product (GNP) is the total value of all
income (= value of final output) accruing to residents of a
country, regardless of the sources of that income.
Gross Domestic Product (GDP) is the total value of all
income (= value of final output) created within the borders
of a country, regardless of whether the ultimate recipient of
that income resides within or outside the country.
Difference between GNP vs. GDP
•
•
•
•
•
•
If an economy were closed, GNP = GDP.
with capital & labor flows across borders, GNP & GDP
diverge from one another.
– profits
– dividends
– interest payments
– worker remittances
net income from the rest of the world=
income flows into the country from the ROW – income
leakages from the country to the ROW
If inflows > outflows, then GNP > GDP
If inflows < outflows, then GDP > GNP
Table 2.1 GDP and GNI comparisons, selected nations, 1990 & 2006
Population
(millions)
1990
2006
Algeria
25.3
33.3
Argentina
32.6
39.1
Bangladesh
104.0
144.3
Bolivia
6.7
9.3
Botswana
1.4
1.8
Brazil
149.4
188.7
Cambodia
9.7
14.4
Chile
13.2
16.5
China
1,135.2
1,311.8
Côte d’Ivoire
12.7
18.5
Costa Rica
3.1
4.4
Egypt
55.7
75.4
Ethiopia
51.2
72.7
Ghana
15.5
22.5
Guatemala
8.9
12.9
Haiti
6.9
8.6
India
849.5
1,109.8
Indonesia
178.2
223.0
Jamaica
2.4
2.7
Kenya
23.4
35.1
Korea (Rep.)
42.9
48.4
Malaysia
17.8
25.8
Mexico
83.2
104.2
Mozambique
13.4
20.1
Nigeria
94.5
144.7
Pakistan
108.0
159.0
Philippines
61.1
84.6
Rwanda
7.1
9.2
Sri Lanka
17.0
19.8
Sudan
26.1
37.0
Thailand
54.6
64.7
Venezuela
19.8
27.0
Vietnam
66.2
84.1
a billions of US dollars
Total
GDPa
1990
2006
62.0
114.7
141.4
214.1
30.1
62.0
4.9
11.2
3.8
10.3
462.0
1,068.0
1.1
7.2
31.6
145.8
354.6
2,668.1
10.8
17.5
7.4
22.1
43.1
107.5
12.1
13.3
5.9
12.9
7.7
35.3
2.9
5.0
316.9
906.3
114.4
364.5
4.6
10.5
8.6
21.2
263.8
888.0
44.0
148.9
262.7
839.2
2.5
7.6
28.5
114.7
40.0
128.8
44.3
116.9
2.6
2.5
8.0
27.0
13.2
37.6
85.3
206.2
47.0
181.9
6.5
60.9
Total
GNIa
1990
2006
60.0
107.3
135.2
208.6
30.8
65.4
4.6
10.8
3.7
9.7
449.7 1,038.4
1.1
6.9
29.8
129.8
355.7
2,694.8
9.2
16.0
7.2
21.4
42.0
108.0
12.0
13.3
5.8
12.8
7.5
35.3
2.8
4.3
312.7
900.9
109.2
348.7
4.2
9.4
8.2
20.9
263.6
888.0
42.2
144.2
254.1
830.7
2.3
6.9
25.6
103.3
41.7
126.2
44.1
127.8
2.6
2.5
7.9
26.6
12.4
34.2
84.3
202.1
46.3
180.4
6.1
59.4
GDP/GNI GNI per capita
gapb
2006
7.4
5.4
-3.5
0.4
0.7
29.5
0.3
16.0
-26.8
1.5
0.8
-0.5
0.0
0.1
0.0
0.6
5.3
15.7
1.1
0.3
0.0
4.7
8.5
0.7
11.4
2.7
-10.9
0.0
0.4
3.4
4.1
1.5
1.5
($)
19902006
2,371 3,218
4,148 5,333
296
453
694 1,156
2,580 5,498
3,010 5,503
114 481
2,261 7,892
313 2,054
728 865
2,325 4,870
755 1,433
235
183
373
569
843 2,735
413
501
368
812
613 1,563
1,740 3,525
351
596
6,149 18,340
2,362 5,596
3,053 7,970
173
344
271
713
387
793
721 1,511
362
268
462 1,344
476
925
1,542 3,122
2,342 6,676
92
706
b GDP/GNI gap = GDP – GNI, in billions of US dollars. A positive value means that GDP > GNI; a negative value indicates that GNI > GDP
Source: World Bank, World Development Indicators Online.
Using GNP or GDP for Ranking Nations:
Five Necessary Adjustments
1. Adjusting for Population Size
GNP per capita
=
GNP
total population
GDP per capita
=
GDP
total population
% change GNI per capita = % (total GNI/total population)
= % total GNI – %  population
• Caution: this an identity, no causal relation
– not correct to infer from this equation that slow population growth causes
a faster rate of growth of income per person or that rapid population
growth causes slower growth in income per person.
– More on that in chapter 12…
Using GNP or GDP for Ranking Nations:
Five Necessary Adjustments
2. Adjusting for Nominal Income
Total nominal GDP = i=1n PiQi
n :the no. goods and services produced;
P the price of each good
Q the quantity of each good
Real GDP at base year’s prices
2008 GDP at 1992 prices = i=1n Pi,1992 Qi,2008
Alternatively:
Real GDP = nominal GDP / GDP deflator
total nominal GDP in 2008 = US$3,337 million,
the price index for 2008 (deflator)= 331.7
1992, the base year deflator = 100
Then
2008 total GDP x 100 = US$3,337 million x 100
2008 Price Index
331.7
= US$1,006 million
Using GNP or GDP for Ranking Nations:
Five Necessary Adjustments
Accounting for Income Distribution: Gini Coefficient
hypothetical income distribution for a country:
Accounting for Income Distribution:Gini Coefficient
The Gini coefficient = area A/ area(A+B)
percentage of income
X % of families receive exactly X % of income
10% of the population receive 10% of the income
dispersion of actual income
distribution what would be a
perfectly equal distribution
percentage of population
Table 2.3 Income distribution, selected economies
Country
Poorest 20%
Richest 20%
Richest 20%a
Poorest 20%
Gini
coefficient
Algeria (1995)
7.0
42.6
6.1
35.3
Argentina (2004)
Bangladesh (2000)
Botswana (1993)
Brazil (2004)
Chile (2003)
China (2004)
Côte d’Ivoire (2002)
Egypt (1999-2000)
Ethiopia (1999-2000)
Ghana (1998-99)
Guatemala (2002)
India (2004-05)
Indonesia (2002)
Jamaica (2004)
Kenya (1997)
Korea (1998)
Malaysia (1997)
Mexico (2004)
Morocco (1998–99)
Mozambique (2002-03)
Pakistan (2002)
Philippines (2003)
Rwanda (2000)
Thailand (2002)
Venezuela (2003)
Vietnam (2004)
3.1
8.6
3.2
2.8
3.8
4.3
5.2
8.6
9.1
5.6
2.9
8.1
8.4
5.3
6.0
7.9
4.4
4.3
6.5
5.4
9.3
5.4
5.3
6.3
3.3
4.2
55.4
42.7
65.1
61.1
60.0
51.9
50.7
43.6
39.4
46.6
59.5
45.3
45.3
51.6
49.1
37.5
54.3
55.1
46.6
53.6
40.3
50.6
53.0
49.0
52.1
44.3
7.9
5.0
20.3
21.8
15.8
12.1
9.8
5.1
4.3
8.3
20.5
5.6
5.4
9.7
8.2
4.7
12.3
12.8
7.2
9.9
4.3
9.4
10.0
7.8
15.8
10.5
51.3
33.4
60.5
57.0
54.9
46.9
44.6
29.5
25.5
40.8
55.1
36.8
34.3
45.5
42.5
31.6
49.2
46.1
39.5
47.3
30.6
44.5
46.8
42.0
48.2
34.4
Japan (1993)
US (2000)
10.6
5.4
35.7
45.8
3.4
8.5
24.9
40.8
a Share of total income (or, for some economies, consumption) received by the richest 20 percent of the population divided by
the share of total income (or consumption) received by the poorest 20 percent of the population.
Using GNP or GDP for Ranking Nations:
Necessary Adjustments
Accounting for value of home or nonmarket production
– Non-market activities left out:
• Home-baked cake vs. market bought cake
• Kindergarten care vs. home care
• Cleaning lady vs. self-cleaning
– Mostly women’s work –invisible work
– Yet very important
• Women’s unpaid activities estimated around 50% of global
GDP
• they account for an important share of a population’s
consumption contributing to higher life standards.
• After all isn’t this what development is all about? Higher life
standards.
• Satellite GDP accounts
Using GNP or GDP for Ranking Nations:
Necessary Adjustments
• Accounting for environmental destruction:
• A number of productive activities that detract from quality of life,
– production of military weapons
– operations that cause environmental destruction of forests,
– production processes that
• spew toxic wastes into the air and water and then force society to
pay for their clean-up or
• which create health problems requiring remediation
These are still counted as positive contributions to the measured
level of GNP and GDP.
• Rather than adding to welfare, actually these are negative
externalities of the production process.
• economists have developed some alternative measures of
economic welfare
International Comparisons of Income:
Purchasing Power Parity
• Qi,m = output vector of all newly produced final goods or
services i, in country M
• Pi,us = price vector for goods and services i in US prices
• As such PPP measure provides the estimated value of
Mozambique’s physical output and income weighted by
the prices for such goods and services prevailing in the
U.S.
Table 2.4 The purchasing power parity (PPP) measure of GNI per capita
GNI per capita at official exchange rate, 2005
PPP GNI per capita, 2005
Algeria
Argentina
Bangladesh
Botswana
Brazil
Chile
China
Côte d’Ivoire
Egypt
Ethiopia
Ghana
Guatemala
Haiti
India
Indonesia
Jamaica
Kenya
Korea
Malaysia
Mexico
Morocco
Mozambique
Pakistan
Philippines
Thailand
Rwanda
Venezuela
Vietnam
2,730
4,470
470
5,590
3,550
5,870
1,740
870
1,260
160
450
2,400
450
730
1,280
3,390
540
15,840
4,970
7,310
1,740
310
690
1,320
2,720
230
4,820
620
6,770
13,920
2,090
10,250
8,230
11,470
6,600
1,490
4,440
1,000
2,370
4,410
1,840
3,460
3,720
4,110
1,170
21,850
10,320
10,030
4,360
1,270
2,350
5,300
8,440
1,320
6,440
3,010
Ireland
Japan
41,140
38,950
34,720
31,410
Source: World Bank, World Development Indicators 2007: Table 1.1, pp. 14-16..
Measuring Economic Growth and
Development
What is the criterion for development?
1. The economic growth / income criterion
• Simple and easy to use
• Yet does it really capture development?
2. The indicators criterion
• More comprehensive and realisitc
• Yet difficult to measure and use for
international comparisons
The Indicators Criterion of
Development
• Measure of Economic Welfare (MEW)
• Genuine Progress Indicator (GPI)
• Human Development Index (HDI)
“longevity, knowledge, and a decent standard
of living”
• Gender-related Development Index
(GDI)
• Human Poverty Index
Human Development Index
HDI = 1/3 L + 1/3 E + 1/3 Y
E = Educational attainment
L = Life Expectancy
Y = Income
xi = E, L, Y
xi = actual value of xi – minimum value of xi
maximum value of xi – minimum value of xi
E = 2/3 adult literacy rate (A) + 1/3 combined enrollment ratio (C)
max E = 100%; min E = 0%
min L= 25 yrs; max L = 85 yrs
Y = log (PPP measure of GDP per capita) – log (100)
log (40,000) – log (100)
Calculation of the HDI
Example: Albania 2001
L = 73.4 – 25 = 0.807
85 – 25
A = 85.3 – 0 = 0.853
100 – 0
C = 69 – 0 = 0.690
100-0
E = 2/3(0.853) + 1/3 (0.690) = 0.798
Y = log(3680) – log(100) = 0.602
log(40,000) – log (100)
HDI = 1/3 L + 1/3 E + 1/3 Y
= 1/3 (0.807) + 1/3 (0.798) + 1/3 (0.602)
= 0.735
Adjustments to the HDI
• The gender-related development index: GDI
– takes into account the differences between women and
men on the values of the indicators that enter the HDI.
– All countries do worse as reflected in the deterioration
of their HDI as converted into GDI.
• The human poverty index: HPI
– corrects for another weakness of HDI in that it does not
show what’s happening to the poorest members of
society.
– slightly different variables in the index – e.g. % of
people not using improved water sources; % of children
under five who are underweight, etc.
Table 2.5 Human development index (HDI) and GDI, selected countries, 1990 & 2004
HDI value
1990
2004
High Human Development (HDI > 0.800 in 2004)
Australia
0.893
0.957
Japan
0.914
0.949
United States
0.917
0.948
United Kingdom
0.889
0.940
Singapore
0.823
0.916
Korea
0.823
0.912
Argentina
0.813
0.863
Chile
0.787
0.859
Costa Rica
0.793
0.841
United Arab Emirates
0.810
0.839
Mexico
0.766
0.821
Malaysia
0.723
0.805
HDI ranka
2004
PPPGDP ranking-HDI Rankingb
2004
GDId
3
7
8
18
25
26
36
38
48
49
53
61
11
11
-6
-5
-4
5
10
18
13
-25
7
-44
0.956
0.942
0.946
0.938
-0.905
0.859
0.850
0.831
0.829
0.812
0.795
Medium Human Development (0.500<HDI<0.799 in 2004)
Brazil
0.720
0.792
Venezuela
0.760
0.784
Thailand
0.717
0.784
Saudi Arabia
0.708
0.774
China
0.628
0.768
Philippines
0.722
0.763
Turkey
0.682
0.757
Sri Lanka
0.706
0.755
Jamaica
0.719
0.724
Indonesia
0.626
0.711
Vietnam
0.618
0.709
South Africa
0.735
0.653
Morocco
0.549
0.640
India
0.515
0.611
Botswana
0.680
0.570
Pakistan
0.463
0.539
Bangladesh
0.422
0.530
Congo
0.528
0.520
69
72
74
76
81
84
92
93
104
108
109
121
123
126
131
134
137
140
-5
17
-9
-31
9
19
-22
13
6
8
12
-66
-15
-9
-73
-6
7
25
0.789
0.780
0.781
0.744
0.765
0.761
0.745
0.749
0.721
0.704
0.708
0.646
0.615
0.591
0.555
0.513
0.524
0.519
Low Human Development (HDI < 0.500 in 2004)
Zimbabwe
0.639
0.491
Kenya
0.548
0.491
Rwanda
0.339
0.450
Nigeria
0.407
0.448
Côte d'Ivoire
0.443
0.421
M o z a mb i q u e
0.316
0.390
Ethiopia
0.314
0.371
Niger
0.246
0.311
151
152
158
159
164
168
170
177
-18
7
-5
-1
-15
-14
1
-7
0.483
0.487
0.449
0.443
0.401
0.387
-0.292
High Income Economies 0.942
Middle Income Economies 0.768
Low Income Economies 0.556
Source: UNDP (2006: Tables 1 and 2,
pp. 283-91; Table 21, 210-13).
a The highest, or best, ranking was 1
(Norway) in 2004; the lowest, or
worst, ranking, was 177 (Niger).
b If positive, the ranking for the
country on the HDI is better than the
country’s ranking on per capita PPP
GDP (PPP GDP rank – HDI rank > 0);
if negative, the HDI ranking for the
country is worse than the per capita
PPP GDP ranking (PPP GDP rank –
HDI rank < 0).
d Gender-related Development Index;
adjusts HDI for differences in
achievement on the HDI variables
between males and females.
Economic Growth and Equity:
Are they at odds or are they complimentary?
• If a country places emphasis on factors such as education,
equity, health, will this adversely affect growth?
• Or, if a country places emphasis on growth, how will that
affect equity?
• Kuznets, 1955:
– explores historical relation between per capita income
and income distribution for a number of countries.
– Finds an inverted U-shape; an empirically derived
statistical relationship.
– at low income levels economic growth and rising
average income tended to create more income
inequality
– After a threshold level of income further economic
growth and even higher average income tended to
reduce a nation’s overall income inequality
Economic Growth and Equity:
Are they at odds or are they complimentary?
Gini Coefficient
Kuznets‘ Curve
Treshold income
0.6
0.5
0.4
0.3
0.2
0.1
0
0
500
1000
1500
Income per capita
2000
2500