The Meaning and Measurement of Economic Development

Galuh Eka Pramithasari (125020107121009)

Growth and Development

Economic Growth

v s
definition

Economic Development

Increase in a countrys production or income per capita / increase over time in the capacity of an economy to produce goods and services to improve the well being of it citizen

Refers to economic growth accompanied by changes in output distribution and economic structure

Measureme nt
Economic Growth Economic Development

Quantitative approach

Qualitative approach

Example : by GNP (Gross National Product) or GNI (Gross National Income)

Example : by Real Income per capita

3 basic question about countrys development according to Dudley Seers :

What has been happening to poverty? What has been happening to unemployment? What has been happening to inequality?

If all of these three question become less severe, we can conclude that there are no problem again in developing of this country. But if one or two or all of them still happening within a country, then we can conclude that this country has development problem even if per capita income is very high.

Millenium Development Goals (MDGs) targets for reducing poverty, hunger, disease, illiteracy, environmental degradation, and discrimination against women

Reducing the pople suffering from hunger and living on less than a dollar a day from one of six billion to half that proportion. Ensuring that all boys and girls complete primary school. Promoting gender equality and empowering women by eliminating gender disparities. Reducing by two-thirds mortality among children under five years. Reducing the precentageof women dying in childbirth by three-fourth. Halting and reversing the spread of HIV/AIDS, malaria, tubercolosis, and other diseases.

ensuring environmental sustainability, by reversing the loss of environmental resources, reducing by half the proportion of people without access to safe drinking water by 2015, and achieving significant improvement in the lives of at least 100million slum dwellers developing a global partnership for development, including an open trading and financial system, a commitment to good governance, reducing the debt burden of developing countries, reducing the poverty of least developed countries, providing productive employment for youth, providing access to affordable essential drugs in developing countries, and making available the benefits ofnew technologies, especially in telecommunications

Classification of Countries
Serious study about development economics began in late 1940s and early 1950s, there are rich and poor country separated by wide gulf. Rich country included western europe, US, Canada, Australia and New Zaeland, and Japan. And poor one is Asia, Africa and Latin america. But during first decade of 21st century, boundaries between rich and poor countries become more blurred. Today, an increasing a number of high-and-upper-middle-income countries are non western, and the fastest-growing countries are not necessarily countries with highest per capita GNP. Poor countries between 1950s such as Taiwan, Singapore, south Korea , Malaysia, Thailand and Mexico grow rapidly than higher-income countries in 1950 (such as New Zaeland, Argentina, Uruguay and Venezuela) From data that I developed from many sorce there are some fact about developing country nowdays. We can see from GNI per capita and GDP per capita.

GNI per capita ( Indonesia and World Region)

As you can see above, in 1990 according data Latin America and Caribbean has GNI per capita almost same with Europe and Central Asia and followed by Middle east and North Africa. But in periode 1995-2000, Middle East and North africa is almost same with Europe and Central Asia. And in period 2005-now Europe and Central Asia has almost same GNI per capita as Latin America and Caribbean Source : World Bank

GNI per Capita ( Indonesia and Countries)

From data (http://www.studentsoftheworld.info/infopays/rank/PNBH2.html) i found that Luxembourg has highest GNP per capita until 2005. but as you can see in 2010-now, Singapore that used in Developing country has GNI per capita almost same with Luxembourg (even more). Even US that used be rich country is under singapore and almost same with Hongkong, China. Australia that in the past is rich country is under Hongkong and Singapore. And Indonesia still in low rank below South Africa.

Source : World Bank

Classification of Countries
GDP per capita (current US$)

From this data you can see in 2010-now are that Singapore has same GDP amount as US and followed below it Hongkong and South Korea.
Source : World Bank

From all data above we can see that boundary between rich and poor country become more blurred. Some develop country jump as high as rich country in the past decade. high-income countries are designated as developed countries (DCs) or the North, and middle- and low-income countries as developing, underdeveloped, or less-developed countries (LDCs), or the South. Underdeveloped was the term commonly used in the 1950s and 1960s, but it has since lost favor.

The 134 Asian, African, and Latin American members of the UN Conference on Trade and Development (UNCTAD)often are referred to as the third world, a term originating in the early postWorld War II decade. Today, the term has lost its original meaning, no longer connoting nonalignment but distinguishing the low-and middleincome economies of the developing world from the first world, the highincome capitalist countries, where capital and land are owned by private entities; and the second world socialist, or centrally directed countries, where the government owns the means of production.

Problems with using GNP to make Comparison over Time

We can calculate price index by 2 way : Laspeyres Price Index,or Paasche Price Index
Lespeyres Price Index Paasche Price Index

Fisher Ideal Index A geometric average of Lespeyres and Paasche indices

Problem in Comparing Developed and Developing Countries GNP

GNP is understated for developing countries, because a greater proportion of their goods and services are produced within the home by family members for their own use rather than for sale in the marketplace. GNP may be understated for developing countries, where household size is substantially larger than that in developed countries, resulting in household scale economies. GNP may be overstated for developed countries, because a number of items included in their national incomes are intermediate goods, reflecting the costs of producing or guarding income The exchange rate used to convert GNP in local currency units into U.S. dollars, if market clearing, is based on the relative prices of internationally traded goods

GNP is overstated for countries (usually developing countries) where the price of foreign exchange is less than a market-clearing price. This overstatement can result from import barriers, restrictions on access to foreign currency, export subsidies, or state trading.

Purchasing-Power Parity (PPP)

Definition : The equality of the prices of a bundle of goods (usually the CPI) in two countries when valued at the prevailing exchange rate. Term was introduced by Cassel (1918) and today is sometimes called absolute PPP.
The equality of the rates of change over time in the prices of a bundle of goods in two countries when valued at the prevailing exchange rate. Called relative PPP. Implies that the rate of depreciation of a currency must equal the difference between its inflation rate and the inflation rate in the currency to which it is being compared.

Source : Deardorffs Glossary of International Economics

Measuring Economic Development

The Physical Quality of Life Index (PQLI) This measure combine three indicators infant mortality rate, life expectacy, and adult literacy rate, the ability to read and write in any language. However, these indicators can not be separated from the criticism that: a. PQLI not show anything new because the relationship PQLI indicators and composite index Gross National Product (GNP) per capita shows that things are not different. Indicators PQLI effective only if the GNP distinguish the level of development is still low. b. There is no conclusive scientific basis in the manufacturing index score 1-100 c. PQLI gave equal weight over the three indices preparation

The Human Development Index (HDI)

The HDI summarize a great deal of social performance in a single composite index combining three indicators-longevity (a proxy for health and nutrition), education, and living standards.

Indonesias HDI

above 75,00 70,00 74,99 65,00 - 69,99 60,00 - 64,99

Weight Indices for GNP Growth

Another reason why the growth rate of GNP can be a misleading indicator of development is because GNP growth is heavily weighted by the income shares of the rich. A given growth rate for the rich has much more impact on total growth than the same growth rate for the poor. We can illustrate the superior weight of the rich in output growth two ways : 1. The same growth for the rich as the poor has much more effect on total growth. 2. Given dollar increase in GNP raises the income of the poor by a higher precentage than for the rich. One alternative to measure GNP growt is to equal weight to a 1-percent increase in income for any member of society. Another alternative is used poverty-weighted index in which a higher weight is given a 1-percent income growth for low income groups than for high income groups. Althought the different weighting system reflect different value premises, economist usually us e GNP weights because of convenience and easy intrepretation

Conclusion
Economic growth is an increase in a countrys per capita output. Economic development is economic growth leading to an improvement in the economic welfare of the poorest segment of the population or changes in educational level, output distribution, and economic structural change.

We cant categorize a country only by their income category, we rather rank with measure of the level economic welfare than a dichotomy. The third world country is very diverse, ranging from the least developed countries with a lowper-capita income and little industrialization to newly industrializing countries. Economic growth is worthwhile when people not only increases their happiness, not only by having more wants met but also by renouncing certain material goods. However economic growth give us more control over our environment and greater freedom of choices. LDCs faced with rising expectation, or may not have the option of a no-growth society.

Thank you