Chapter 2 Perkins with notes by Professor Sisay Asefa Norton Media Library Chapter 2 Measuring Economic Growth and Development Dwight H. Perkins Steven Radelet David L. Lindauer

Chapter 2:Measuring Economic Growth & Development:Outline I. Measuring Economic Growth Measuring GDP: What is Left Out? Exchange-Rate Conversion Problems II. What Do We Mean by Economic Development? III. Economic Growth Around the World IV. Trends in Economic Development Measuring Human Development What Can We Learn from the Human Development Index? Millennium Development Goals The MDGs and Economic Growth V. Is Economic Growth Desirable? Access to Figures & Tables: https://elearn.wmich.edu/webct/urw

Measuring Growth I. Measuring Economic Growth Measured by GDP (Gross Domestic Product) counts all output produced within the borders of the country, including by foreigners but excludes value of production of citizens living abroad GNP: is the same as GDP or the value of goods and services but includes citizens who live overseas GNP is the most commonly used by countries including Multinational Institutions like the World Bank who call it GNI (Gross National Income) GNP excludes intermediate goods such as steel in Car production for example GNP per capita= GNP/total population is more accurate Conversion Problems

Limitations of GNP Per capita It does not include subsistence production in Developing Countries & Africa, which is large Does not account for “public bads” such as Pollution, crime, congestion, etc. To capture this we need to calculate Net Economic Welfare (NEW) Exchange Rate problems-does not account for nontraded services such as haircut, maid services, shoe shine services that are very cheap in Africa.

Exchange Rate versus Purchasing Parity Methods (see table 2.1 also) Assume: Assume official exchange rate 45R=$1US If total GDPs using local currencies in billionsfor US & India US=$30 and India- R312 Indian GDP in US Dollars =312/45 =$6.9B (GDP Method) Indian GDP in US dollars calculated by US Prices applied to Indian quantities Produced (PP method) Steel 8M x $200=$1.6B Retail sales 4M x $5000= $20B Total GDP (using PP)= 20+1.6= $21.6 Billion Ratio of PPMethod/GDPmethod= 21.6/6.9= 3.1

Table 2.1: Exchange Rate vs PP Method of Converting GDP

Table 2. 2: GNP Per capita of countries in 2002: Exch Table 2.2: GNP Per capita of countries in 2002: Exch.rate/GDP & PP methods

Economic Development & Growth II. Economic Development: Economic growth structural change with significant participation of people in producing wealth. Economic Development is about expanding capabilities of people their lives. Income is one determinant of that capability. (A.K. Sen)

A.K Sen’s Capabilities view of Development: Beyond income poverty State of Health wellbeing Environmental adversity Social climate: crime, violence, security Relative Deprivation & inequality These sources of “capability deprivation” that prevent people the lives they desire.

III. Economic Growth Around the World (see Figure 2.1& table2.3) Since 1950 patterns of economic growth has changed Income GAP between rich & poor nations have grown. In 1821 it was 3/1 In 1950 it was 15/1 Now it is 18/1 and rising

Fig. 2.1: Levels of GDP Per capita by Region 1820-2001

Table 2.3: Rate of Growth in GDP Per capita (%) across world regions

Trends in Development IV. Trends in Economic Development Measuring Human Development (HD): is an index of health, knowledge and income: It is measured by weighted average of adult literacy, primary & Secondary school enrollment, Life Expectancy, & GDP Per capita income HDI is based on 3 indexes on Life expectancy, education & GDP or income per capita

What Can We Learn from the Human Development Index (HDI)? See figures 2.2, 2.3. 2.4 Some criticisms of three indexes: too limited? We need other measures such as Gender Gap, etc.. HDI is a better or more comprehensive measure than GDP per capita. HDI ranges from 0 to 100% or (0 to 1) The higher the HDI the better the development See Country rankings by HDI compared Per capita income (figure 2.2) including their relationships

Human Development Report Online See webage or goodle hdr.undo.org/reports/global/3003/indicator/

Fig. 2.2 HDI Versus GDP per capita ranking 2001

Fig. 2.3: HDI versus log GDP rankings

Fig. 2.4: GDP versus GDPper capital by country

Millennium Development Goals (MDGS) by the United Nations Adopted by world nations in September 2000 that declared 8 goals 1. Eradicate Extreme Poverty and Hunger 2.Achieve Universal Primary education 3. Promote gender equality and empower women 4.Reduce Child Mortality 5.Improve Maternal Health 6.Combat HIV?AIDS, Malaria and other diseases 7.Ensure environmental sustainability 8. Develop Global Partnership for Development See Box 2-2 for 18 targets to meet the 8 goals

Target Date of Meeting some of MDGs One important target date for reducing absolute poverty rate by 50% is 2015. How is this possible? What level of growth is necessary? At least 7%? More than Economic growth is needed

Table 2.4: Economic Growth is not Enough to reach MDGs

Is Economic Growth Desirable Does greater economic Growth lead to more happiness? There is no corelation between growth and happiness or growth does not increase happiness Growth may not increase happiness but it increases the range of human choice including more control over the environment.. (Easterl)

Fig. 2.5: How Happy Are People Around the world, 1995-2002

A Brief Summary :Chapter 2 CHAPTER OUTLINE 1.Development economics ultimately is about mass poverty and suggesting s for achieving rapid and equitable growth. chapter addresses the measurement of economic growth and development across economies and over time. Concepts & measures national (GNP) & domestic (GDP) 2.Basic index-number problems involved in making comparisons or over time in the same country (CPI, GDP deflators). Exchange rate and PPP conversions specific example on PPP calculation (Table 2–1). 3.. A brief overview of the historical record on interregional differences in initial income levels and divergent growth rates in the past two centuries is provided based on historian Angus Maddison to provide stylized facts of growth that will have to be explained by theory. 4 indicators of economic development are discussed including human development index (HDI) including a discussion of the Millennium Development Goals (MDGs) and their impact on economic growth. For most regions, growth would be sufficient to meet most of the goals with exception of Africa.The chapter concludes with the philosophical question of whether economic growth is desirable

Economics of Development SIXTH EDITION End Chapter 2 W. W. Norton & Company Independent and Employee-Owned This concludes the Norton Media Library Slide Set for Chapter 2 Economics of Development SIXTH EDITION By Dwight H. Perkins Steven Radelet David L. Lindauer

Supplementary text: Todaro, 10th edition http://wps.aw.com/aw_todarosmit_econdevelp_10/.html Supplementary text: Todaro, 10th edition website:http://wps.aw.com/aw_todarosmit_econdevelp_10/

Chapter 3:Economic Growth Concepts & Patterns Divergent Patterns of Economic Growth since 1960 Factor Accumulation, Productivity Growth, Econ. Growth Saving, Investment, & Capital Accumulation Sources of Growth Analysis Characteristics of Rapidly Growing Countries Macroeconomic and Political Stability Investment in Health and Education Effective Governance and Institutions Favorable Environment for Private Enterprise Favorable Geography ?? Diminishing Returns and the Production Function The Convergence Debate Economic Growth and Structural Change