HS 422 / HS 622

Development Economics
3-0-0-3

AUTUMN SEMESTER Dr. Mohanasundari Thangavel

(AY 2021-22) Assistant Professor (Economics)
School of Humanities & Social Sciences
Indian Institute of Technology Indore.
Madhya Pradesh, INDIA.

Office: #411, 3rd Floor, POD 1A (Silicon)

Building
Phone: +91-7316603367
Email: Mohana@iiti.ac.in
Lecture 3:
Measures of
Economic
Development
Measuring Development
➢ Measuring how developed one country is compared to other countries, or to the same
country in the past.
➢ Development measures how economically, politically, socially, culturally or
technologically advanced a country is.
➢ There are a few indices and economic development indicators to measure
development.
Economic Development Indicators
 Per Capita Income
 Gross Domestic Product (GDP)
 Gross National Product (GNP)
 Gross Domestic Income (GDI)
 Gross National Income (GNI)
 Inequality of wealth
 Inflation
 Unemployment
1. Per capita Income
 Per capita income or average income measures the average income earned
per person in a given area (city, region, country) in a given time period.

 Total Income/Total Population

 Higher per capita income means higher standard of living.

 So, developed countries have higher per capita income.
2. Gross Domestic Product (GDP)
 Monetary measure of the value of all final goods and services produced in a period (quarterly or
yearly). Also known as Nominal GDP.
 Formula for measuring GDP
GDP = C + I + G + Nx
 C = Consumer Spending
 I = Investment by Businesses
 G = Government Spending
 Net Exports = Nx = (X- M) = Exports – Imports
 Higher GDP also means higher standard of living.
 3. GNP
Increase in the Economy’s real income over a longer period of time

Real terms – Price change is not

considered

Omitted the Change in Population

Does not consider cost to the society –

Pollution, Urbanization

Distribution of income among people

Conceptual Difficulties
Gross Domestic Income (GDI)
 The sum of all income earned while producing goods and services within a
nation's borders is called Gross Domestic Income (GDI)
 GDI = rental income + interest income + profits + wages + income tax +
dividends.
 Developed countries have higher GDI relative to developing countries.

 Theoretically, GDI should equal GDP.

 But GDP is calculated based on expenditure, difference usually exists. It often

differs, because of measurement errors.
Gross National Income (GNI)
 The gross national income (GNI) is the total domestic and foreign output
claimed by residents of a country, consisting of gross domestic product (GDP)
plus incomes earned by foreign residents, minus income earned in the domestic
economy by nonresidents.
 GNI = GDP + Net compensation receipts + Net property income receivable
+ Net taxes (minus subsidies).
 Higher the GNI, higher the development.

 For GNI calculation we have to includes Net taxes (minus subsidies) While
GNP formula does not include it.
GNI per capita
 Increase in Real per capita income over a period of time.

GNI
GNI per capita = Population

 Rate of increase in Rate of increase in

Real per capita income Population
ISSUES in Using these measures
1, May not raise the Standard of living of the masses
( Increase in Saving → Decrease in consumption).
2, Increase in per capita income goes to fewer rich people.
3, Fails to estimate adequate changes in output due to changes in P level
4, International comparisons are inaccurate due to exchange rate conversions of different
currencies.
5, Fails to include Nutrition, Health, Sanitation, Housing, Water and Education
6, The GNP figure also does not reveal the costs to society of environmental pollution,
urbanisation, industrialisation and population growth. It considers natural resources to be free and
treats the earth “like a business in liquidation.”
Wealth Inequality

 Wealth inequality (also known as the wealth gap) refers to the unequal
distribution of assets among residents of a country.
 Wealth includes the values of homes, automobiles, personal valuables,
businesses, savings, and investments.
 Developed countries have low wealth inequality.
Inflation
 Inflation is an increase in the general price level of goods and services in an
economy over a period of time.
 Each unit of currency buys fewer goods and services. Consequently, inflation
reflects a reduction in the purchasing power of the currency.
 Deflation is the decrease in the general price level of goods and services in an
economy over a period of time.
Unemployment Rate
 Unemployment refers to people who are without work are actively seeking work.
 Measure of the prevalence of unemployment and it is calculated as a percentage
by dividing the number of unemployed individuals by all individuals currently in
the labour force.
 (No. of unemployed people/No. of people in labour force) x 100
 Labor Force is all people who supply labour for the production of goods and
services during a specified period. It includes both the employed and the
unemployed.
 Developed countries have relatively low unemployment rate.
 ➢ Economic development can be measured
from the point of view of economic welfare.
➢ Economic development is regarded as a
process whereby there is an increase in the
consumption of goods and services of
Welfare. individuals.
➢ According to Okun and Richardson, economic
development is “a sustained, secular
improvement in material well-being, which we
may consider to be reflected in an increasing
flow of goods and services
Social Indicators or Basic Needs

Some are ‘inputs’, such as nutritional standards or number of hospital beds

or doctors per head of population, while others may be ‘outputs’
corresponding to these inputs such as improvements in health in terms of
infant mortality rates, sickness rates, etc.

Basic needs focus on alleviation of poverty by providing basic human

needs to the poor.

Basic needs lead to a higher level of productivity and income through

human development in the form of educated and healthy people.
 Social indicators tell us how different countries prefer to allocate the GNP
among alternative uses. Some may prefer to spend more on education and
less on hospitals. Moreover, they give an idea about the presence, absence
or deficiency of certain basic needs.
Development Indices
Human Development Index

Inequality adjusted HDI

Physical Quality Life Index

Gender Inequality Index

Multi-dimensional Poverty Index

World Happiness Report

 The Human Development Index (HDI)
The United Nations Development Program (UNDP) defines human development as "a process of enlarging
people's choices.
The HDI summarizes a great deal of social performance in a single composite index combining three
indicators
• Longevity (a proxy for health and nutrition)
• Education
• Living standards.
Educational attainment is a composite of two variables, a 2/3 weight based on the adult literacy rate (in
percentage) and a 1/3 weight on the combined primary, secondary, and tertiary gross enrolment rate (in
percentage).
HDI

 The most critical ones are to lead a long and healthy life, to be educated and enjoy a decent standard of
living."
 A country scores a higher HDI when the lifespan is higher, the education level is higher, and the gross
national income GNI (PPP) per capita is higher.
HDI, 2019
 The Planetary pressures-adjusted HDI
The Planetary pressures-adjusted Human Development Index
(PHDI) is level of human development adjusted by
Ecological & Environmental factors like carbon dioxide
emissions per person (production-based) and material
footprint per capita to account for the excessive human
pressure on the planet.
An experimental index that adjusts the Human Development
Index (HDI) for planetary pressures in the Anthropocene.
The PHDI discounts the HDI for pressures on the planet to
reflect a concern for intergenerational inequality, similar to
the Inequality-adjusted HDI adjustment which is motivated by
a concern for intragenerational inequality.
It is computed as the product of the HDI and (1 – index of
planetary pressures)
 The Inequality-adjusted Human Development Index (IHDI)
 The 2010 Human Development Report introduced an Inequality-adjusted Human Development Index (IHDI). It
stated that "the IHDI is the actual level of human development (accounting for inequality)
 It adjusts the Human Development Index (HDI) for inequality in distribution of each dimension across the
population.
 The IHDI “discounting” each dimension’s average value according to its level of inequality.
 The IHDI equals the HDI when there is no inequality across people but is less than the HDI as inequality rises.
 IHDI is the actual level of human development (accounting for this inequality), while the HDI can be viewed as an
index of “potential” human development (or the maximum level of HDI) that could be achieved if there was no
inequality.
The Gender Inequality Index (GII)
 Reflects women’s disadvantage in three dimensions reproductive health, empowerment and the labour
market.
 The index shows the loss in human development due to inequality between female and male achievements in
these dimensions. It ranges from 0 to 1. 0 → women and men are equal, 1 → women are treated as poorly as
possible.
 Health dimension : maternal mortality ratio and the adolescent fertility rate.
 Empowerment dimension: share of parliamentary seats held by each sex and by secondary and higher education
attainment levels.
 Labour dimension: women’s participation in the work force.
 It reveal the extent to which national achievements in these aspects of human development are eroded by gender
inequality, and to provide empirical foundations for policy analysis and advocacy efforts.
Allyson’s story on
Gender inequality

RESULT: NIKE AND OTHER 3 FAMOUS

SPONSORS AGREED TO PROVIDE 18
MONTHS SALARY AND BONUS BENEFITS
FOR MATERNITY
The Multidimensional Poverty Index (MPI)
 The Multidimensional Poverty Index (MPI) identifies multiple deprivations at the
individual level in health, education and standard of living.
 It uses micro data from household surveys, and—unlike the Inequality-adjusted
Human Development Index—all the indicators needed to construct the measure must
come from the same survey.
 Each person in a given household is classified as poor or nonpoor depending on the
number of deprivations his or her household experiences.
Components
of MPI
 The Physical Quality of Life Index (PQLI)
a) infant mortality (the annual number of deaths of infants under one year of age per 1000 live births)
b) life expectancy (at age one, to not overlap with infant mortality)
c) adult literacy rate, the ability to read and write in any language (in percentage).
• The first two variables represent the effects of nutrition, public health, income, and the general
environment.
• Life expectancy is positively correlated with GNP per capita through the impact of GNP on incomes of
the poor and public spending, especially on health care.
• HDI represents both physical and financial attributes of development and PQLI has only the physical
aspects of life.
The World Happiness Report
 The World Happiness Report is a publication of the United Nations Sustainable Development
Solutions Network.
 It contains articles and rankings of national happiness, based on respondent ratings of their own lives,
which the report also correlates with various (quality of) life factors.
 The happiness study ranks the countries of the world on the basis of questions from the Gallup
World Poll. The results are then correlated with other factors, including GDP and social security.
 As of March 2021, Finland had been ranked the happiest country in the world four times in a row.
 The Nordic nation is followed by Iceland, Denmark, Switzerland, The Netherlands, Sweden, Germany
and Norway.
Thank you