Economic Development
Contact Information
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Email: Nancy.Virts@csun.edu
Phone: 818-677-2434 or 2462
Office: BB 4256
Office Hours: Tuesday and Thursday 1-2,
Thursday 6-7 and by appointment
Contact
• My website can be found through the Econ Dept
website under faculty.
• It has class syllabus , readings and other course
materials
• I will post any powerpoints of lectures used
• I will contact you by University Email
Class rules
• DO NOT DISRUPT THE CLASS IN ANY WAY
– No Talking
– No Cell Phones
– Computers may be used only to look at class
material
– No Reading of Other Material
Suggestions for Success
• Read the syllabus, have it available at home
and school
• Attend class both physically and mentally
• Have a regular study schedule
• Do not take this class if you cannot come
every week.
Course Requirements
• One Midterm
– Essay
– worth 100 points
• Paper
– Worth 100 points
• Comprehensive final
– Will be given only on date scheduled which is
December 9 at 8 pm
– Worth 200 points
• Economic growth is very uneven
• A look at a satellite photo taken makes this
very clear
• Not all area with light have same standard of
living
• Some dark areas have low population density
but not all
Why isn’t the whole world
developed?
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Differences in resources
Differences in culture
Maybe part of the answer but not all of it
Consider the next satellite photo of North and
South Korea, countries with similar resources
and culture
Why do we care about economic
growth?
• Economic Growth is connected to well being
• Correlation between GDP per capita and life
expectancy and literacy
GDP, Life Expectancy, and Literacy
Copyright©2004 South-Western
Cost of slow growth in India
• Economic growth was slow in India prior to
1981
• After economic reforms were implemented in
the 1980s, per capita growth increased from
1.4 % per year to 2.89 in the 1980s, 4.19% in
1990s and 6.78% from 2001-2006
• Swaminathan S. Anklesaria Aiyar estimates
that if economic reforms had taken place 10
years earlier, 14.5 million infant deaths could
have been avoided
• In addition there would have bee 261 million
fewer illiterates, and 109 million fewer poor
people.
No Easy Answers
• Will look at growth and development from
different perspectives
• Before growth can be explained it must be
measured.
• How do we measure size of economy?
Measurement Issues
• When judging whether the economy is doing
well or poorly, it is natural to look at the total
income that everyone in the economy is
earning.
• Before WWII there were no statistics to
measure the size of the whole economy
THE MEASUREMENT OF GROSS DOMESTIC
PRODUCT
• Gross domestic product (GDP) is a measure of the
income and expenditures of an economy.
• It is the total market value of all final goods and
services produced within a country in a given period
of time.
Measurement of GDP
• GDP is the Market Value . . .”
– Output is valued at market prices.
– Cannot add eggs to cars to oranges directly
– GDP is a weighted average
– When prices are determined in markets they
reflect the marginal value people place on them.
Measurement of GDP
• Of All Final . . .”
– It records only the value of final goods, not
intermediate goods (the value is counted only
once).
– If a baker buys flour, it is not part of GDP, the
bread produced from it is. If you buy flour in the
supermarket it is part of GDP.
Measurement of GDP
• Goods and Services . . . “
– It includes both goods (food, clothing, cars)
and services (haircuts, doctor visits).
• Includes only those goods and services
produced in market
– Not those produced at home
• A women marries her gardener and GDP falls
• Important to remember because in developing
countries many goods may be produced outside the
market
– No illegal goods
• Prostitution is part of GDP in Nevada, not CA
• Important to remember differences in legal structure
when comparing different countries
Measurement of GDP
• “ . . . Within a Country . . .”
– It measures the value of production within the
geographic confines of a country.
• GNP is a similar measure
– total value of all final goods and services produced
by a country’s citizens regardless of where
produced.
GDP and Welfare
• GDP is the best single measure of the economic
well-being of a society.
• GDP per person tells us the income and
expenditure of the average person in the
economy.
• Higher GDP per person indicates a higher
standard of living.
• GDP is not a perfect measure of the happiness or
quality of life, however.
GDP and Welfare
• Some things that contribute to well-being are
not included in GDP.
– The value of leisure.
– The value of a clean environment.
– The value of almost all activity that takes place
outside of markets, such as the value of the time
parents spend with their children and the value of
volunteer work
Problems with GDP measurement for
developing economies
• Does not include non traded goods
– Home production
– Illegal activities
• Data may not be accurate
– Limited resources for data collection
– Difficult to count production in agricultural area
– Incentive to under report production to avoid
taxes etc
Growth vs Development
• Growth rate of GDP may rise without
development
– Discovery of oil or other natural resources
• Development measured by increases in
literacy, health care etc.
• Most of the time they are correlated but not
always
GDP per Capita
• GDP per Capita is GDP per person
– GDP/population
• GDP and GDP per capita can be different
– China vs. Switzerland
• Which measure is best depends on the
problem
– Marketing Rolex watches vs. KFC
Example Ghana
year
GDP (PPP) (billion GDP per capita
dollars)
(PPP) dollars
2007
32.56
1400
2008
34.94
1500
2009
36.58
1500
Real Vs. Nominal
• Nominal GDP values the production of goods
and services at current prices.
• Real GDP values the production of goods and
services at constant prices
Real vs. Nominal
• An accurate view of the economy requires
adjusting nominal to real GDP by using a
measure of inflation like the GDP deflator or
the CPI.
Nominal to Real GDP
• Converting Nominal GDP to Real GDP
– Nominal GDP is converted to real GDP as follows:
Real GDP20XX
Nominal GDP20XX

 100
GDP deflator20XX
Or CPI20xx
• CPI is calculated by finding how the cost of
purchasing a fixed basket of goods changes
over time
• Problems to be aware of include
– Substitution bias (If relative prices change the
composition of the basket shifts)
– Quality changes
• How do we compare GDP between different
countries with different currencies?
• Exchange rates
– How much one currency trades for another
– Determined by the supply and demand for
currency which depends on traded goods only
– Fluctuate daily
• Many goods, like Big Macs are not traded
between countries.
– Services like haircuts, rents etc,
• These tend to be much cheaper in poor
countries than developed countries
Purchasing Power Parity
• If exchange rates are used to compare the size
if these countries to developed countries will
make them seem smaller than the really are.
• Should use PPP to compare size of economies
across countries
– Calculated by taking a basket of goods and finding
how much it costs in different countries
How much difference does it make?
• For Ghana in 2009
• GDP in official exchange rate was 14.76 billion
dollars
• GDP in PPP was 36.58 billion dollars
Alternate Measures
• Life expectancy, infant mortality, height by age
can all be used to judge standard of living
Growth Calculations
• Growth rate for a year is calculated by
(GDPt+1 –GDPt )/GDPt
• Growth rate over N years is calculated by
GDPt+N=GDPt(1+g)N
Examples
• Nominal GDP for Ghana was 16.7 billion
dollars in 2008 and 14.9 billion in 2007. What
was the rate of growth?
• (16.7-14.9) /14.9 = .12 or 12%
• Do you think these numbers are using
exchange rates or PPP?
• Real GDP growth in Ghana was 7.3%, what
was happening to prices?
• Prices were Rising
Examples
• If the GDP of Ghana is 16.7 billion dollars in
2008 and growth rate of GDP is 5% for 10
years, how much will GDP be in 2018?
• GDP 2018=16.7(1+.05)10=27.2