Chapter 2
Meaning and
Measurement
of Economic
Development
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©E.Wayne Nafziger Development Economics
The Meaning & Measurement of
Economic Development
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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?
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©E.Wayne Nafziger Development Economics
What is economic growth?
What is economic development?
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Economic growth – growth in GNI or
GNP per capita
Economic development – economic
growth accompanied by changes in
output distribution & economic
structure
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©E.Wayne Nafziger Development Economics
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
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©E.Wayne Nafziger Development Economics
U.S. (2005) Wants Changes in U.N. Draft
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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
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Selected Indicators of Development
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Data for Low-Income, Middle-Income, & High-Income
Economies front inside cover and left back inside cover)
World Bank Country Classification – click
(
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United Nations Conference on Trade and Development
(UNCTAD)
Third World
Economies in transition
OPEC
Least developed countries
Newly industrializing countries (NICs).
World Trade Organization
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PROBLEMS WITH USING GNP TO
MAKE COMPARISONS OVER TIME
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Economists use national-income data to
compare a given country's GNP or GNI
over time.
p q
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P
Laspeyres price index.
p q
Paasche price index.
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n
0
0
0
p q
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P
p q
n
n
0
n
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©E.Wayne Nafziger Development Economics
Imprecision in Comparing GNP
per Capita in DCs & LDCs
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India - $530
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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
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©E.Wayne Nafziger Development Economics
Imprecision in Comparing GNP
per capita in DCs & LDCs
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US - $37,610
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US more intermediate goods
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Purchasing-Power Parity (PPP)
(P) price level of GNP – ratio of the
purchasing power exchange rate to
actual exchange rate – both measures as
domestic currency price of US$.
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Purchasing-Power Parity (PPP)
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
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How do Penn economists
(Summers & Heston) calculate PPP
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Use series of simultaneous equations to
solve PPP for 81 benchmark & quasibenchmark 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.
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©E.Wayne Nafziger Development Economics
Summers & Heston (cont.)
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A potato is a potato, regardless when or
where purchased.
Estimating equation to compute PPP in 57
nonbenchmark countries.
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Purchasing-Power Parity (PPP)
Food exchange rate (Deaton)
Rs. 442 = $10 (actual)
Rs. 442 = $44 (food exchange rate)
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Measurement Errors for GNP
Adjusted for Purchasing Power
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What are the confidence intervals for gross products
PPPs? (Firebaugh)
A + or - 9% (18 nations)
B + or - 15% (7 nations)
C+ + or - 18% (1 nation)
C + or - 21% (34 nations)
C- + or - 24%
D+ + or – 27% (11 nations)
D + or – 30% (38 nations)
China + or – 50% (also see pp. 25-26)
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Physical Quality of Life Index
Combines 3 indicators:
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infant mortality rate
life expectancy (age 1)
adult literacy
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Human Development Index (HDI)
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Longevity (average life expectancy –
years)
Education (2/3 adult literacy); 1/3
combined school enrollment rate
GDP per capita (PPP US$) logarithm
Notice the variability in data sheet from
Mozambique (0.354) to Norway (0.956)
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Development as Freedom –
Amartya Sen
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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
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©E.Wayne Nafziger Development Economics
"BASIC-NEEDS"ATTAINMENT
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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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