Approaches to International
Comparisons of Human
Development
Beyond GDP
• French President Nicolas Sarkozy calls for
commission to study alternative measures
of welfare.
FT Link
Economist Link
Critique of GDP as Measure of Welfare
Commission on the Measurement of Economic Performance and Social Progress
1. Need better measures of economic performance
2. Don’t measure production, measure well-being.
3. Well-being is multi-dimensional and not just
about income.
4. Use subjective measures as well as objective
measures.
5. Pragmatically measure sustainable economy.
6. Physical measures of environment
1. Better Measures of Economic
Performance
• Services especially are not adjusted for
quality.
• Government services are measured by
inputs but quality of outputs is not
measured.
• Some expenditures (military, police,
security) are defensive and don’t add to
welfare.
How do we measure value-added of nonmarket goods?
• Production of government bodies and nonmarket institutions is measured at cost.
• Value of housing services of owner-occupied
housing valued at imputed rental value, i.e.
market rent of similar housing stock.
• Value of non-compensated household work
valued at zero.
2. Measure Well Being
A. Measure income and consumption
B. Give More Prominence to Distribution of
Income.
C. Incorporate Measures of Leisure
National Income vs. Domestic Income
GNI
Gross National Income
GDP
Gross Domestic Product
= income earned by
= income created within
national residents
domestic borders.
GNI = GDI +NFI
• Net Factor Income [NFI] is income earned on
overseas work or investments minus income
generated domestically but paid to foreigners.
A. Income vs. Output
Macau: GDP/GNI
120.0%
115.0%
110.0%
105.0%
100.0%
95.0%
90.0%
1998
1999
2000
UN Main Aggregates Link
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
B. Consumption vs. Production
Household final consumption expenditure per Capita, PPP
Constant 2005 international
25000
20000
15000
10000
5000
0
2000
2001
2002
2003
2004
2005
Hong Kong
2006
Singapore
2007
2008
2009
2010
2011
2012
B. Distribution of Income
• GDP per Capita shows how much income
people have if all income were split evenly.
• But income is never split evenly and
evenness of division varies across
countries.
• Examine the distribution of income
Why?
Rawls: Justice as Fairness
• Welfare of all individuals within a society
have a non-negotiable value and must be
considered when considering social welfare.
• To consider welfare of all individuals, must
consider the system of distribution.
• “Veil of Ignorance” Only pure-hearted way to
think about system of distribution is to think
about it from the standpoint of someone who
does not know where they will fall in the
distribution.
Link
• “Difference Principle.”
Median Income
• Per Capita Income
= Total Income divided by Total
Population
• Median Income
= Income of the person in the precise
middle of the distribution.
Better representative of the typical person.
Estimating the Median
World Development Indicators
China, 2005
Income share held by third 20%
14.66
GDP per capita, PPP (constant 2005 international $) 4114.57352
• Estimate the median by examining the per capita
income of people in the middle percentile.
• In China, middle income 20% of the population
makes 14.66% of the GDP. Per capita income of
the middle is
.1466  GDPt .1466 GDPt


 3015.98
.2  POPt
.2
POPt
Distribution of Income
World Development Indicators: 2000-2005
Income share held by
70
60
50
%
40
30
20
10
0
0
1
2
3
4
Quintile
China
Quintile: Twenty % of the Population
Sweden
Brazil
5
Cumulative Distribution
• What fraction of income is earned by the
population below a certain fraction.
Quintile
lowest 20%
second 20%
third 20%
fourth 20%
highest 20%
China
5.73
9.8
14.66
22
47.81
Cumulative
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
0
5.73
15.53
30.19
52.19
100
Lorenz Curve
Mapping the Cumulative Distribution
Cum ulative Distribution: China 2005
100
90
80
70
%
60
50
40
30
20
10
0
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
Evenly distributed economy looks
like a 45% line
Cumulative Distribution: Perfectly Even Economy
100%
90%
80%
70%
60%
%
Cumulative Distribution
0%
0%
20%
20%
40%
40%
60%
60%
80%
80%
100%
100%
50%
40%
30%
20%
10%
0%
0%
20%
40%
60%
80%
100%
Gini Coefficient
Lorenz Curve
100
90
80
70
60
%
• Size of the gap
between the Lorenz
curve is the key
measure of economic
inequality.
• A country’s Gini
coefficient is
equivalent to the size
of the area between its
Lorenz curve and the
45º angle
50
40
30
20
10
0
0.00%
20.00%
40.00%
Perfect
60.00%
China
80.00%
100.00%
Estimating the Gini Coefficient
•
Size of the Gini Coefficient is the size of
the triangle under the perfect Lorenz
curve minus the area under a country’s
Lorenz curve (multiplied by 2 for
normalization)
1. Area under the triangle is (1 x 1)/2 = ½
2. Break the country’s Lorenz curve into
trapezoids. Find the area of each
trapezoid.
China
1
1
0.9
0.8
0.6
%
5 Trapezoids
0.7
0.5219
0.5
0.4
0.3019
0.3
0.1533
0.2
0.0573
0.1
.2
.2
0 0
0
.2
1
2
.2
Quintile3
.2
4
5
If total range is divided into q = 1,…Q evenly
spaced points with LCq = Lorenz cuve at
point q, the area of the trapezoid is
1
1
  LCq  LCq 1  
2
Q
Ex. q= 4, the 4th QuintileLC China  .5219
q 4
China
And LCq 3  .3019
So the area of the 4th of 5
trapezoids is
LC4  LC3
.5219  .3019
 .2 
 .2
2
2
 0.08238
LCq-1
1/Q
LCq
Estimating the Gini Coefficient
3. Add up the area of all the trapezoids
4. Subtract from area of triangle (1/2) than
double to normalize
Q
Gini  1    LCq  LCq 1  
q 1
1
 1  2*.30688  .38624
Q
5. Multiply by 100 to
get index
GINI  38.62
By breaking population into deciles we could get an even more
accurate estimate
Country Name
Brazil
China
Sweden
GINI
56.4
41.5
25
C. Leisure
• Time Use Surveys National statistical
agencies increasingly take surveys of how
people are using their time to give a better
measure of leisure.
Hours Worked per Working Age Adult, 2011
1,573
1,478
1,342
1,174
1,079
943
France
Germany
USA
Korea
Japan
Hong Kong
Commission on the Measurement of Economic Performance and Social Progress
3. Multidimensional Measures of
Well-being
A.
B.
C.
D.
E.
F.
G.
H.
Material living standards;
Health;
Education;
Personal activities including work
Political Voice and Governance
Social connections and relationships
Environment
Insecurity
Capabilities as Development
• Economic philosopher Amartya Sen
argues that because of diversities of
needs and ambitions of people,
development should be defined as
“advancing richness of human life.” Link
• Sen defines capability: “(i.e. the
opportunity to achieve valuable
combinations of human functionings —
what a person is able to do or be)” Link
Positive Freedom
Measures of Development
Different People
require different level of
resources to achieve
functionings
Resources
Things that we
have
Money, commodities
Different People value
different functionings
Capabilities
Set of
functionings
That might be
achieved
Functionings
Things to Do or
Be That we
Value &
Have Reason
to Value
Activity, roles
Deprivation, Poverty Constraints on
Capabilities
Utility
Subjective
Satisfaction
Human Development Index
• Under Mahbub al-Haq, UN constructs an
index of human development to measure
people’s opportunity to make choices abou
their lives Link
• Emphasizes health, education and income
as proxies for capabilities of achieving
functionalities.
Human Development Index
•
Combine three measures of welfare
1. Income
2. Health
3. Education
http://hdrstats.undp.org/en/tables/default.html
Create Comparable Index
• Compare the value of a development
indicator with its hypothetical or observed
maximum and minimum.
– Assess how well a country is doing filling the
gap between
actual value - minimum value
Dimension Index =
maximum value - minimum value
Scaling variables chosen based on history
http://hdr.undp.org/en/media/HDR_2010_EN_TechNotes_reprint.pdf
Example: Health
actual value - 20 actual value - 20
Health Index =

83.2 - 20
63.2
74.7 - 20 54.7
Malaysia Health Index =

 0.866
63.2
63.2
Combine Multiple Indicators
Geometric Average
• If you have N indicators multiply all of the
indices by each other then
I  N I1  I 2  ....  I N
HDI vs. GNI
4. Subjective Measures
• Studies quantitative measurements that
assess “happiness” often using survey
methods which rely on self-reporting on
subjective well-being.
• Suppose the top of the ladder represents
the best possible life for you and the bottom
of the ladder the worst possible life. Where
on this ladder do you feel you personally
- 10
stand at the present time?.
-.
R. Veenhoven, World Database of
.
Happiness, collection Happiness
in Nations Link
-0
Comparisons of Happiness
• Happiness research develops many
results for individuals.
Happier
Women
People with lots of friends
The young and old
Married and cohabiting people
The highly educated
The healthy
Those with high income
Less Happy
The unemployed
Newly divorced and separated people
Andrew Oswald Esmee
Fairbank Lecture 2006
Money and Happiness
• Set Point Theory: Everyone has own
personal level of happiness which can be
temporarily moved by events but not for
long. (Short run only).
– Focus illusion: People evaluate happiness
relative to some idea. Idea changes with
circumstances.
• Capabilities Theory: Money expands
freedoms (Long run only)
Easterlin Paradox
• Modern international evidence suggests a
strong correlation between GDP per capita
and average level of happiness.
• GDP per Person Rises over time, but
subjective measures of Well Being do not.
Explanation: People get happiness from
relative income, economic growth is like a
treadmill.
Link
Proto-text: In general, how happy would you say you are?:
- very happy
Cite as: R. Veenhoven, World Database of Happiness,
- fairly happy
collection Happiness in Nations, Overview of happiness
surveys using Measure type: 111B / 3-step verbal Happiness,
- not very happy
viewed on 2011-09-02 at
http://worlddatabaseofhappiness.eur.nl
Very = 3...not very = 1
USA Happiness: 1 to 3 Point Scale
2.4
2.35
2.3
2.25
2.2
2.15
2.1
2.05
19
46
19
63
19
71
19
73
19
75
19
77
19
80
19
83
19
85
19
87
19
89
19
91
19
93
19
96
20
00
20
04
20
06
2
Does Money Buy Happiness
Deaton, Angus, 2008, http://www.nber.org/papers/w13317
World Happiness Report UN
Sustainable Development
Solutions Network
• Updated data for a variety of “happiness”
studies
http://worlddatabaseofhappiness.eur.nl/
• World Happiness Report
Critiques of Subjective Measures
1. Orthodox: Study Revealed Behavior
through Actions not Words
2. No precise definition of “happiness” which
may have different meaning to different
people or across countries or across
languages.
3. Measures of happiness may be biased by
phrasings or ordering of questions.
4. Is Happiness the purpose of life?
5. Pragmatic Approaches to
Sustainable GDP
A. Natural Capital Accounting
B. Green GDP
A. Natural Capital Accounting
• Gross Capital Formation is the
Accumulation of Physical Man-made
assets.
• Sustainable GDP: Subtract extraction of
sub-soil assets from GDP as
disinvestment.
• Critique: Also add the accumulation of
sub-soil assets
Link
“Green GDP
Two Methods
• EDP1 = GDP - Imputed treatment cost
• EDP2 = GDP – Environmental degradation costs
GREEN ACCOUNTING PRACTICE IN CHINA
(Draft Report) April 2008
http://www.caep.org.cn/english/paper/Green-GDPAccounting-Pratice-in-China-Draft-by-UNEP-Tongji-Team.pdf
6. Physical Measures of the
Environment
A. Economic Value of Environmental Damage
B. Millennium Development Goals
Millennium Development Indicators