Chapter 1

Introduction: Concept and Measurement of Development

The Meaning and Measurement of Economic Development

INTRODUCTION
This chapter discusses the meaning, calculation, and basic indicators of economic growth and
development; the classification of rich and poor countries; the price-index problem; the distortion in
comparing income per head between rich and poor countries; adjustments to income figures for
purchasing power; alternative measures and concepts of the level of economic development besides
income per head; the problems of alternative measures; and the costs and benefits of economic
development.
INTENDED LEARNING OUTCOMES

• After studying this module, the students will be able to:

• 1. Define Development;
• 2. Explain the difference between Economic Development and Economic Growth;
• 3. Discuss the basic indicators of development;
• 4. Explain and discuss human development index and cite an examples; and
• 5. Discuss the characteristics of developing world.

Growth and Development

A major goal of poor countries is economic development or economic growth. The two terms are not
identical. Growth may be necessary but not sufficient for development.

Economic growth refers to increases in a country's production or income per capita. Production is
usually measured by gross national product (GNP) or gross national income (GNI), used
interchangeably, an economy's total output of goods and services.

Economic development refers to economic growth accompanied by changes in output distribution and
economic structure. These changes may include an improvement in the material well-being of the poorer
half of the population; a decline in agriculture's share of GNP and a corresponding increase in the GNP
share of industry and services; an increase in the education and skills of the labor force; and substantial
technical advances originating within the country. As with children, growth involves a stress on
quantitative measures (height or GNP), whereas development draws attention to changes in capacities
(such as physical coordination and learning ability, or the economy's ability to adapt to shifts in tastes and
technology).
Economic development is a broader concept than economic growth. Development reflects social and
economic progress and requires economic growth. Growth is a vital and necessary condition for
development, but it is not a sufficient condition as it cannot guarantee development.

One of the most compelling definitions of development is that proposed by Amartya Sen.

According to Sen, development is about creating freedom for people and removing obstacles to greater
freedom. Greater freedom enables people to choose their own destiny. Obstacles to freedom, and hence to
development, include poverty, lack of economic opportunities, corruption, poor governance, lack of
education and lack of health.
Gross Domestic Product (GDP), Net National Product (NNP), Gross National Product (GNP),
personal income, and disposable income are the important metrics determined by national
income accounting.

However, the most commonly used measure of the economy is GDP. It is the cumulative value
of products and services generated in an economy over a given period of time. Only the goods
produced in the home country are included in the GDP, regardless of the nationality status of the
company owners.

The gross domestic product figure may not represent the correct value, as some goods may not
even make it to the market, which makes it difficult to determine the true value of the market.
Nevertheless, GDP reasonably represents the national output. The other economic measures can
be derived from GDP.

Measures of national income and output

A variety of measures of national income and output are used in economics to estimate total economic
activity in a country or region, including gross domestic product (GDP), gross national product (GNP),
net national income (NNI), and adjusted national income (NNI adjusted for natural resource depletion –
also called as NNI at factor cost). All are especially concerned with counting the total amount of goods
and services produced within the economy and by various sectors. The boundary is usually defined by
geography or citizenship, and it is also defined as the total income of the nation and also restrict the goods
and services that are counted. For instance, some measures count only goods & services that are
exchanged for money, excluding bartered goods, while other measures may attempt to include bartered
goods by imputing monetary values to them.

Market value

In order to count a good or service, it is necessary to assign value to it. The value that the measures of
national income and output assign to a good or service is its market value – the price it fetches when
bought or sold. The actual usefulness of a product (its use-value) is not measured – assuming the use-
value to be any different from its market value.
Three strategies have been used to obtain the market values of all the goods and services produced: the
product (or output) method, the expenditure method, and the income method. The product method looks
at the economy on an industry-by-industry basis. The total output of the economy is the sum of the
outputs of every industry. However, since an output of one industry may be used
by another industry and become part of the output of that second industry, to avoid counting the item
twice we use not the value output by each industry, but the value-added; that is, the difference between
the value of what it puts out and what it takes in. The total value produced by the economy is the sum of
the values-added by every industry.
The expenditure method is based on the idea that all products are bought by somebody or some
organisation. Therefore, we sum up the total amount of money people and organisations spend in buying
things. This amount must equal the value of everything produced. Usually, expenditures by private
individuals, expenditures by businesses, and expenditures by government are calculated separately and
then summed to give the total expenditure. Also, a correction term must be introduced to account for
imports and exports outside the boundary.
The income method works by summing the incomes of all producers within the boundary. Since what
they are paid is just the market value of their product, their total income must be the total value of the
product. Wages, proprietor's incomes, and corporate profits are the major subdivisions of income.

Methods of measuring national income Output

The output approach focuses on finding the total output of a nation by directly finding the total value
of all goods and services a nation produces.
Because of the complication of the multiple stages in the production of a good or service, only the final
value of a good or service is included in the total output. This avoids an issue often called 'double
counting', wherein the total value of a good is included several times in national output, by counting it
repeatedly in several stages of production. In the example of meat production, the value of the good from
the farm may be $10, then $30 from the butchers, and then $60 from the supermarket. The value that
should be included in final national output should be $60, not the sum of all those numbers, $100. The
values added at each stage of production over the previous stage are respectively $10, $20, and $30. Their
sum gives an alternative way of calculating the value of final output.
Key formulae are:
GDP (gross domestic product) at market price = value of output in an economy in the particular year
minus intermediate consumption
GDP at factor cost = GDP at market price minus depreciation plus NFIA (net factor income from abroad)
minus net indirect taxes (GNP)
NDP at factor cost = Compensation of employees plus net interest plus rental & royalty income plus
profit of incorporated and unincorporated NDP at factor cost

The world population

By 2017, the world population had grown to 7,500 million (7.5bn) (Source: world meters.
According to the Population Reference Bureau it took just 12 years for the global population to increase
from 6 to 7bn. Of this number, only 15% will achieve a standard of living of at least 50% of that achieved
in the USA. According to the World Bank over 20% of the world’s population live on less than $1 a day.
In fact, the majority subsist at a standard of living similar to, or lower than, that typically achieved 10,000
years ago.

During the next 50 years the world population is predicted to grow to 9,000 million, and at this rate, the
proportion of those impoverished is likely to increase.

Indicators of development
The extent to which a country has developed may be assessed by considering a range of narrow and broad
indicators, including per capita income, life expectancy, education, and the extent of poverty.

The Human Development Index (HDI)

The HDI was introduced in 1990 as part of the United Nations Development Programme (UNDP) to
provide a means of measuring economic development in three broad areas – per capita income, health and
education. The HDI tracks changes in the level of development of countries over time.

Each year, the UNDP produces a development report, which provides an update of changes during the
year, along with a report on a special theme, such as global warming and development, and migration and
development.

The HDI has two main features:

A scale from 0 (no development) to 1 (complete development). An

index, which is based on three equally weighted components:

1. Longevity, measured by life expectancy at birth

2. Knowledge, measured by adult literacy and number of years children are enrolled at school
3. Standard of living, measured by real GDP per capita at purchasing power parity

What the figures mean:

 An index of 0 – 0.49 means low development – for example, Nigeria was 0.42 in 2010.
 An index of 0.5 – 0.69 means medium development – for example, Indonesia was 0.6. 3.
 An index of 0.7 to 0.79 means high development – for example, Romania was 0.76. 4.
 Above 0.8 means very high development – Finland was 0.87 in 2010.

The HDI is a very useful means of comparing the level of development of countries. GDP per capita
alone is clearly too narrow an indicator of economic development and fails to indicate other aspects of
development, such as enrolment in school and longevity. Hence, the HDI is a broader and more
encompassing indicator of development than GDP, though GDP still provides one third of the index.

Life expectancy
A variety of factors may contribute to differences in life expectancy, including:
1. The stability of food supplies
2. War
3. The incidence of disease and natural disasters

According to World Bank figures, life expectancy at birth in developing countries over the past 40 years
has increased by 20 years. However, these increases were not evenly distributed. Indeed, in many
countries in sub-Saharan Africa, life expectancy is falling due to the AIDS epidemic.

Adult literacy
The percentage of those aged 15 and above who are able to read and write a simple statement on their
everyday life. More extensive definitions of literacy include those based on the International Adult
Literacy Survey. This survey tests the ability to understand text, interpret
documents and perform basic arithmetic.

GDP per capita

GDP per capita is the commonest indicator of material standards of living, and hence is included in the
index of development. GDP per capita It is found by measuring Gross Domestic Product in a year, and
dividing it by the population.

Evaluation of the HDI

Despite the widespread use of the HDI there are a number of criticisms that can be made, including:

1. The HDI index is for a single country, and as such does not distinguish between different rates of
development within a country, such as between urban and traditional rural communities.
2. Critics argue that the equal weighting between the three main components is rather arbitrary.
3. Development is largely about freedom, but the index does not directly measures this. For
example, access to the internet might be regarded by many as a freedom which improves the
quality of people's lives.
4. As with the narrow measure of living standards, GDP per capita, there is no indication of the
distribution of income.
5. In addition, the HDI excludes many aspects of economic and social life that could be regarded as
contributing to or constraining development, such as crime, corruption, poverty, deprivation, and
negative externalities.
6. GDP is calculated in terms of purchasing power parity, and the value can change.

Chapter Test

I- MULTIPLE CHOCE: (20 pts).

Read each statement carefully and select the best answer/s from among the given alternatives.

1. The concept of opportunity cost is based upon the principle of

A. need
B. consumption
C. scarcity
D. profit
2. Economic growth measures the :
A. growth of productivity
B. increase in nominal income
C. increase in output
D. none of the above
3. Economic growth is necessary and sufficient to eradicate most of absolute poverty.
A. true
B. false
4. Income level or GDP is criticized as an indicator of development mainly because it takes no
account of the distribution of income.
A. true
B. false
5. A certain amount of goods and services is necessary for a minimum standard of living. This is called:
A. basic needs
B. absolute poverty
C. an international standard of living
D. the concept of development
6. All but one of the following are methods to represent overall income inequality:
A. Gini coefficient
B. ratio of the top income decile to the lowest income decile
C. Lorenz curve
D. GDP per capita
7. Most lists of basic human needs include all the following items except
A. basic transportation, such as bicycles.
B. minimal levels of nutrition
C. minimal provision of shelter
D. provision of basic health care
8. What is the most typically used measure of a country's level of development?

A. Technological innovation
B. Mobility
C. Income
D. Gender equity
9. Social outcomes commonly used to measure a country's level of human development
include:
A. Duration of hospital stays during pregnancy and nominal interest rate
B. Infant mortality and adult literacy rate
C. Average number of Facebook friends per user and other social media indicators
D. Average years to graduation and admissions rates to universities
10. What does the Gini coefficient measure?
A. General efficiency of the economic system
B. Rule of law
C. Poverty
D. Inequality
11. Which of the following would typically be considered “human capital”?
A. Gender and race
B. Health and education
C. Prime ministers and presidents
D. Religious
12. Approaches to development that emphasize the environment often want to focus attention on which
of the following?
A. Sustainability
B. Accountability
C. Transparency
D. Autonomy
13. Which of the following indicates a classification which does not determine a country’s level of
development?
A. Level of industrialization
B. Level of Income
C. GDP per capita
D. Population
14. Population growth is higher in high income countries rather than in low income countries.

A. True
B. False
15. Sustainability is principally a national issue and is not an international or global one.

A. True
B. False
16. Which of the following countries in the Americas is least developed?

A. Canada
B. Mexico
C. Guatemala
D. Brazil
17. Which of the following is a goal of economic development?

A. Economic growth
B. Reduction of poverty
C. Improvement of human development (education, health, etc.).
D. All of these answers
18. Development economics is the study of the:
A. alleviation of absolute poverty
B. transformation of institutions
C. allocation of resources in developing countries
D. all of the above

19. A good definition of the meaning of development is the:

A. elimination of absolute poverty
B. improvement in the quality of life
C. fulfilment of the potential of individuals
D. all of the above
20. Which of the following is a low-income country?
A. Mexico
B. Thailand
C. Turkey
D. Banglases