MEASURES OF ECONOMIC DEVELOPMENT

GROSS-DOMESTIC PRODUCT (GDP):

  • GDP is the total value of final goods and services at market prices produced in an economy during a specific period (usually a year).
  • It excludes the value of raw materials and semi-finished products in order to avoid double counting.
  • It excludes income earned by domestic residents from overseas investments.
  • It includes income earned in the domestic economy by non-nationals.

GDP 'PER CAPITA':
Per capita means per person, so GDP per capita is estimated by dividing GDP by the country’s population.  This gives an average ‘income’ for each person in the economy.


So to get the GDP per capita for a nation you:
Divide the total value of all final goods and services at market prices, produced in an economy during a specific period (the GDP) by the country’s population.

Economic development can be seen as an indicator of improvement in the standard of living. An improved standard of living can be further defined as an increase in average national income or gross domestic product per capita.

GROSS NATIONAL PRODUCT (GNP):

  • GNP is the total value of all final goods and services at market prices, produced in an economy during a specific period (usually a year) - it is very similar to GDP but is calculated with different inclusions and exclusions.
  • It includes income earned by domestic residents from overseas investments.
  • It excludes income earned in the domestic economy by non-nationals.
  • GNP calculates income by the location of ownership and residence. It takes into account citizenship and ignores where goods were produced.

GNP 'PER CAPITA':
Divide the total value of all final goods and services at market prices, produced in an economy during a specific period (usually a year) by the country’s population.

GNP has gradually been replaced by GNI per capita.

GROSS NATIONAL INCOME (GNI):

  • GNI is the total domestic and foreign income by residents minus the income earned in the domestic economy by the non-residents in an economy during a specific period (usually a year).
  • GNI has become more popular for calculating economic development because it is the money that the country produces in goods and services with the addition of net money earned overseas. It is considered to give a more accurate picture of an economy.

GNI 'PER CAPITA':
Divide the total national income (i.e. total domestic and foreign income by residents minus the income earned in the domestic economy by the non-residents) in an economy during a specific period (usually a year) by the country’s population. (GNI per capita is often presented in USD, converted from local currency using the Atlas method)


  • Low-income countries are defined as those with a GNI per capita of USD 1,025 or less in 2015.
  • Lower-middle income countries with a GNI per capita of USD between 1,026 and 4,035.
  • Upper-middle income countries with a GNI per capita of USD 4,036 and 12,475.
  • High-income countries are those with a GNI per capita of USD 12,476 or more.

NON-MONETARY MEASURES OF DEVELOPMENT:

  1. Equality of opportunity
  2. Provision of basic goods (e.g. food, shelter, clothing) and services (e.g. education, health, access to water and transport) irrespective of gender, ethnic groups, religions and races.
  3. Political and civil liberties
  4. Participation in decision making
  5. Freedom of expression
  6. Freedom of religion

MULTI-DIMENSIONAL MEASURES OF ECONOMIC DEVELOPMENT
It is just not about improvements according to a single criterion (i.e. improvements in living standards), but multiple criteria (Todaro and Smith 2009).


  • The multi-dimensional approach recognises that major changes in social structures, popular attitudes, and national institutions may be necessary as well as acceleration of economic growth, the reduction of inequality, and the eradication of absolute poverty.
  • A change in popular attitudes emphasises process of social change that are required to produce economic advancement. That is this approach examines changes in social, psychological and political processes.

The welfare of a population clearly derived from a range of factors such as health, education and life satisfaction. With this in mind, there has been a recent trend towards taking a multi-dimensional approach to development.

THE CAPABILITY APPROACH:

  • It argues that expansion of freedom is both a primary and principal means of development.
  • Capability is treated as the freedom to promote or achieve combinations of valuable functioning (i.e. the things that individuals manage to do in leading a life).
  • Sen (1980) advocates for a multi-dimensional approach, defining development as an ‘expansion of capability but not as increase in income growth’. Sen originally thought about development in terms of expanded “capability” and more recently simply as freedoms that people can enjoy.
  • More recently there have been attempts to develop a more all-encompassing concept of wellbeing. With this in mind the concept of human development has increased in popularity.

HUMAN DEVELOPMENT INDEX (HDI):

  • The Human Development Index (HDI) is based on the Sen’s work on capabilities.
  • The UN Development Program’s HDI adds broader indicators identifying basic capabilities that people must have in order to participate in and contribute to society. It includes measures of physical well-being and education.

These measures include the ability to:

  • Lead a long and healthy life (proxied by life expectancy).
  • Be knowledgeable (proxied by adult literacy, years of schooling).
  • Have access to the resources needed for a decent standard of living (proxied by GNI per capita)

This was to highlight that a rich country does not necessarily have educated, healthy people at all levels.

CRITICISM OF THIS MEASURE:
Critics say the HDI has weaknesses in that it doesn’t measure other aspects of a good life such as the number of good choices available to individuals, the ability to have a say in how the country is run and freedom from persecution.

THE DIAMOND DIALOGUE METHOD:

  • This method allows practitioners to measure well-being using a simple diamond as the basis for discussion.
  • The diamond displays a happy face at the top, a sad face at the bottom and a line across the centre meaning ‘average’ or ‘enough’. In literate focus groups keywords can be used but the tool works equally well even if there is no common written language or poor numeracy.

This method demonstrates that not all measurement happens at the nation or country level - the effectiveness of development projects of all sizes must be measured whether in large countries or small communities.

IS ECONOMIC GROWTH LINKED TO WELLBEING?
Generally speaking, increases in income generally align with improvements in people’s lives - for example, rising incomes are correlated with increased life expectancy.


Deaten's (2013) Great Escape from Poverty:

  • Deaton focuses on the issue of inequality in the world.
  • Using the metaphor of escaping POWs, he tries to search for reasons why some people escape poverty. Unlike many economists, however, he focuses on the vexed issue of inequality.
  • Deaton’s argument is not that income doesn’t matter, it’s that there are other measures that must be taken into account. One of the most obvious is health. It is fairly easy to measure health in terms of life expectancy and infant mortality, for instance. Another measure that has become popular is “life satisfaction”. This employs using sophisticated methods of psychometric testing.

Traditionally economists have focused on measuring progress in terms of a concept known as 'Pareto Optimality'. Always encourage measures whereby everyone or the most people possible win.

The Pareto Optimality:

  • According to this the rising incomes and health standards of few amongst the poverty of the many is still better than generalised poverty so don’t measure the poverty.
  • If some people start to do better it is best not take any measures to that may harm this. Hence re-distributing wealth could be more harmful if it takes away from productive members of world society and thereby dis-incentivising hard work.
  • As Deaton (2013: 8) concedes though, if those with wealth, however, act in ways that deny benefits for the poor: such as reducing access to health, education and a clean environment then there can hardly be said to be Pareto optimality any broader sense. In other words, inequality is an inevitable outcome of some people escaping poverty first. If only some people escape poverty that means that some people must be wealthier than others.
  • The persistence of inequity does not always have to be. The question is whether or not inequalities are helpful or not to society at a particular times.

The Great Divergence:
An expression used by Deaton and other economists to define the last 200 years of human history. Massive wealth inequalities emerged within the world even though many would maintain most people’s lives are better.


It doesn’t matter whether comparison is made simply between incomes or other aspects of life (such as life expectancy) clearly a number of principles are widely accepted. These are: 

  1. A transformation took place in the economies and societies of select countries over this period allowing for significant improvements in people’s lives.
  2. This was historically unprecedented.
  3. While modest changes have taken place in other countries, there remains a massive gulf between countries considered to be developed and developing.

CATEGORISATION:


There is the familiar division of the world into various categories of nation-states, such as:

  • The global north and south (according to the Brandt commission)
  • East-developed and developing and developed states (used by the United Nations).
  • Low, middle and high-income economies (utilised by the World Bank).

MADDISON'S DATA SET:

  • Accurate data has only recently been collected on wealth and income (and often this can be suspect). Generally, some of the most sophisticated estimates come from the noted economic historian Angus Maddison.
  • Maddison used research techniques and his own knowledge to construct country comparisons of GDP per capita back to year 1 AD.
  • Examining the one variable that traditionally defined development (per capita income) gives an indication of both the magnitude of the great divergence historically and its enduring effects today.

PURCHASING POWER PARITY (PPP):

  • PPPs are the rates of currency conversion that try to equalise the purchasing power of different currencies, by eliminating the differences in price levels between countries.
  • This indicator is measured in terms of national currency per US dollar.
  • PPP allows comparison across different currencies, economic systems and years.

The basket of goods and services priced is a sample of all those that are part of final expenditures:

  1. Final consumption of households and government
  2. Fixed capital formation
  3. Net exports.

FACTORS AFFECTING ECONOMIC GROWTH:
The World Bank's World Development Report (1999) notes that there are several factors that can influence economic growth beyond financial or economic factors.


1. Social and political stability: Countries with stable political systems and low levels of social unrest tend to attract more investment and experience more economic growth.


2. Education and human capital: A well-educated workforce can drive innovation and productivity, leading to higher economic growth.


3. Technological progress: Technological advancements can lead to increased productivity and efficiency, leading to economic growth.


4. Infrastructure: Adequate infrastructure, including transportation, communication, and energy, is necessary for economic growth.


5. Natural resources: Countries with abundant natural resources, such as oil or minerals, can experience rapid economic growth if these resources are managed effectively.


6. Demographic factors: Population growth, age distribution, and urbanisation can all affect economic growth.


7. Cultural and historical factors: Cultural and historical factors can shape economic institutions and policies, which can impact economic growth.