Lecture Development economics - Lecture 2: Comparative Economic Development

After completing this unit, you should be able to: See how economists apply the methods of science, consider how assumptions and models can shed light on the world, learn two simple models - the circular flow and the production possibilities frontier, distinguish between microeconomics and macroeconomics,...

Lecture 2

Comparative Economic Development

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Common Characteristics of

developing countries

• Lower levels of living and productivity

• Lower levels of human capital

• Higher levels of inequality and absolute poverty

• Higher population growth rates

• Greater social fractionalization

• Larger rural population- rapid migration to cities

• Lower levels of industrialization and manufactured exports

• Adverse geography

• Underdeveloped financial and other markets

• Colonial legacies- poor institutions etc.

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Defining the Developing World

• World Bank Scheme- ranks countries on

GNP/capita

– LIC ($975 or less)

– High income countries – OECD- Organisation

for Economic Co-operation and Development ($11907 or more)

Table 2.1 Classification of Economies

by Region and Income, 2007

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Table 2.1 Classification of Economies by

Region and Income, 2007 (continued)

(Latin America and the Caribbean) (Sub-Saharan Africa)

Table 2.1 Classification of Economies by

Region and Income, 2007 (continued)

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Figure 2.1 Nations of the World,

Classified by GNI Per Capita

Measuring Development for Quantitative

Comparison across Countries

• Gross National Income (GNI)

• Gross Domestic Product (GDP)

• PPP (Purchasing Power Parity – Calculation

of GNI using a common set of international price for all goods and services, to provide more accurate comparisons of living

standards) method instead of exchange

rates as conversion factors (see figure 2.2)

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Figure 2.2 Income Per Capita in

Selected Countries

Table 2.2 A Comparison of Per Capita

GNI, 2005

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Some Basic Indicators of

Development

• Health

• Life Expectancy

• Education

• HDI as a holistic measure of living levels

– HDI also varies for groups within countries

– HDI also varies by region in a country

– HDI also reflects rural-urban differences

Table 2.3 Commonality and

Diversity: Some Basic Indicators

Holistic Measures of Living

Levels and Capabilities

The Traditional Human Development Index

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Origin of HDI:

• The index was developed in 1990 by Pakistani economist Mahbub ul Haq and Sir Richard Jolly, with help from Gustav Ranis of Yale University and Lord Meghnad Desai of the 

London School of Economics

Dimensions of HDI

• Life expectancy  at birth, as an index of population health  and longevity 

• Standard of living , as measured by the  natural logarithm  

of  gross domestic product  (GDP) per capita at 

purchasing power parity  (PPP) in  United States dollars  

Calculation of HDI

• Individual indices can be computed according to the  general formula:

• Index = Actual xi value – minimum xi value/

        Maximum xi value – minimum xi value For eg: the life expectancy at birth in a country is 63.7  years the index of life expectancy for the country 

would be:

Life expectancy index = 63.7­25/85­25 = 40/60 = 

0.645

Calculation of HDI

Adult literacy index =61.0-0/100-0=0.61

Combined gross enrolment index

=63.8-0/100-0=0.638

Real GDP is 3452,then adjusted GDP

=log(3452)-log(100)/log(40000)-log(100)=0.591

Categories of HDI:

• Very High Human Development Index – HDI 0.900 to 1.0

• In a more equal society, however, an increase

    in the HDI of the poorer person should count 

more

  Countries with the same HDI may be very different in how 

human development is distributed, either from region to region, 

or from social group to social group.

Figure 2.3 Human Development

Disparities within Selected Countries

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Figure 2.3 Human Development Disparities

within Selected Countries (continued)

Table 2.4 Human Development for

23 Selected Countries (2004 Data)

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Table 2.4 Human Development for 23

Selected Countries (2004 Data)

(continued)

Table 2.5 Human Development Index

Variations for Similar Incomes (2004 Data)