eco paper 12pages

Development Economics: Measuring Growth and Development

Reading: Chapter 2 in Perkins et al.

University of Miami Professor: Salvador Ortigueira

Measuring economic growth

● Two measures of national income: – Gross national product (GNP, also GNI): Value of

finished goods and services produced by a nation in a given year.

– Gross domestic product (GDP): The same, but for output produced within the borders of a country (GNP does not count output produced by foreigners in the country)

GDP and value added

● Value added: Incremental gain in price at a production stage.

● Equals payments made to factors of production at this stage of production (wages, profits, interest, depreciation of capital, rent for buildings etc.)

● Total value added at all stages = GDP ● → GDP measures both income and output

GDP: What is left out?

● Housework, child care → home production ● Family work on farms: GDP is adjusted for this. ● Underground economy ● Damage to environment is not accounted for

GDP: Exchange-rate conversion ● 1st approach: Convert at official exchange rate

– Distortions: Government intervention on currency markets

– Differences in price in non-traded goods and services Exchange rates do not reflect the relative prices of non-traded goods

● → Misleading! Understates poor countries' income

● 2nd approach: Purchasing power parity. Assign same value to each good across countries. – A hair cut is assigned the same value no matter if is produced in New Delhi of New York

– UN International Comparison Program: Assigns

international prices → Penn World Tables

● → see data in Perkins ch. 2

History of growth (1)

● Almost no growth in GDP per capita until 1820 → Malthusian trap: Technological advances went into higher population density

● By 1820: Western Europe and offshoots ahead of China, India and others.

● 1820: Industrial revolution, onset of modern growth: >1% per year.

● Growth rates increase towards 20th century

History of growth (2) ● Slower growth in Asia, Africa and Latin America

than in Western Europe and offshoots ● → Have record world inequality today ● Asia growing very fast since 1950 ● → Large reductions in poverty (China, India etc.) ● Lost decades:

– 1980s: Latin America, Sub-Saharan Africa – 1990s: Central and Eastern Europe

● → see figure in Perkins ch. 2

Economic Growth and Happiness ●Relationship between economic growth and happiness is weak (see figure in Perkins):

– Happiness did not increase over time in rich countries

– Relationship between the two is weak in cross- country studies, especially for rich

● Why strive for economic growth then? – Increases range of human choice – Happiness is not the only goal in life – Poor nations want material improvements

● Discussion: What do you think?

Economic development

● Amartya Sen: Goal is to expand capabilities of poor people to lead life they want to choose

● Economic development: Alleviate sources of capability deprivation – Diseases – Environmental factors: Climate, pollution etc. – Political freedom – Relative deprivation: Inequality

Measuring human development

● United Nations Development Program: Human Development Index (HDI), since 1990.

● Combines (with equal weighting): – Health: Life expectancy at birth – Education: Adult literacy and school enrollment rates. – Resources/income: GDP per capita in PPP

● → see data in Perkins ch. 2

Constructing the HDI

Each outcome (Health, Education and Income) must be converted into an index number to

permit aggregation.

Health: A nation’s life expectancy at birth is X Index of health: (X-20)/(83.2-20)

Education: Two variables: (1) Mean years of schooling achieved by adult population (>25 y.o.)

(2) Expected years of schooling for children of school-going age (based on enrollment data).

Index of (1). If mean years of schooling average X, then index is (X-0)/(13.2-0)

Index of (2).If expected years of schooling average X, then index is (X-0)/(20.6)

Income: Income is measured by GNI (PPP in USD). The conversion of income into an index: If a country

has GNI equal to X, then Index= (logX-log163)/(log108,211-log163)

Once the three sub-indexes have been constructed (health, education and income), we have to aggregate them into a single index.

Let us denote the three sub-indexes by I1, I2 and I3, then the HDI is a geometric mean of these three sub-indexes

HDI=(𝐼1 • 𝐼2 • 𝐼3)1 3⁄

HDI vs. GDP

● Strong, but not perfect correlation (see figure) ● → Economic growth is very important for

development, but other factors matter. ● HDI increased faster than GDP over time

Millennium Development Goals (MDGs)

● Specified by UN Millennium Declaration in 2000: – 1: Eradicate extreme poverty and hunger – 2: Achieve universal primary education – 3: Promote gender equality and empower women – 4: Reduce child mortality – 5: Improve maternal health – 6: Combat HIV/AIDS, Malaria and other diseases

MDGs (2)

– 7: Ensure environmental stability – 8: Develop a global partnership for development

● 18 specific targets, some quantifiable, e.g.: – From 1990 to 2015, halve proportion of people living

on less than 1$ a day. – Full enrollment in primary education by 2015

● Some policy suggestions, but not binding: Debt relief, more development aid.

MDGs: Where do we stand?

● Eradication of extreme poverty: On track. ● Primary-school enrollment: Not bad. ● Under-5 mortality: Mixed. ● Doing poorly in all: Sub-Saharan Africa. Problem:

Only 1.2% yearly growth! ● → See figures from MDG Report 2011 ● → Economic growth is central to achieve MDGs,

but we also need policy (see table in Perkins)