CDAE 272 International Economic Development Spring 2008

Class 06 Jan. 31 Last class: 2. Measuring economic growth & development Today: Result of Quiz 1 2. Measuring economic growth & development Next class: 3. Economic concepts and methods Quiz 2 (Chapter 2) Reading: 2. Measuring economic growth & development Important date: Problem set 1 due Tuesday, Feb. 5

Result of Quiz 1 N = 36 Range = 7 – 10Average = Factors that have contributed to economic globalization: Transportation Transportation costs Change in transportation costs Significant decrease in transportation costs 2. Simple growth rate: 3. How can the index of openness be greater than 100%? Export is greater than GDP Import is more than export Imports raw materials and exports final products – export counts the total value of the exported final products but GDP counts only the added value 4. Average annual growth rate

Result of Quiz 1 5. Calculate GNP Method 1: Total value of the final products Method 2: Value of primary product + added values 6. Calculate both GNP and GDP GDP: the same as the GNP in problem 5 GNP: 7. One of the two questions: A. Conclusions from the graphs of economic growth around the world from 1970 to 2007 B. Positive and negative impacts of economic globalization

2. Measuring economic growth & development 2.1. Economic growth vs. economic development 2.2. Classical indicators 2.3. New indicators 2.4. Trends in economic development

2.3. New indicators Purchasing power parity (PPP) -- The idea is similar to the CPI for cross- region comparisons in the U.S. -- The same product or service should have the same value in different nations -- One example: Steel production and retail sales in the U.S. and India

Steel production and retail sales in the U.S. and India USAIndia Production100T x $200/T = $20,0008T x R9,000/T = R72,000 Retail sales2 x $5,000 = $10,0004 x R60000 = R240,000 GDP $30, ,000 Rupees Official exchange rate based on steel: R9,000 / $200 = 45 GDP based on this rate $30,000 $6,933 Using the U.S. prices $30,000 $21,600 PPP ratio = 21,600 / 6,933 = 3.115What does this result mean?

Per capita GNP and PPP in 2002 Per capita GNP*Per capita PPPRatio USA$35400$ Japan$34010$ Germany$22740$ Poland $4570$ India $470 $ China $960 $ Ethiopia $100 $ * Based on office exchange rates

Applications of PPP Per capita income Per capita PPP USA$35,000$35,000 Japan$38,000$30,400 Germany$23,000$27,600 Mr. Johnson, an IBM programmer in Essex Junction, is making $65,000 per year. What should be the income in Japan that will enable Mr. Johnson to have the same purchasing power as he has in the U.S.? How about in Germany? Class exercise (Thursday, January 31): Ms. Snow currently makes $30,000 in Germany, what should be the income in Japan that will enable her to have the same purchasing power as she has in Germany?

2.3. New indicators Human development index (HDI) -- Constructed by United Nations Development Program (UNDP) and published in “Human Development Report” (sine 1990). -- Measures the major components of human development: (a) To live a long and healthy life (b) To acquire knowledge (c) To have access to resources for a decent standard of living

2.3. New indicators Human development index (HDI) -- How is HDI calculated for each nation? (1) Life expectancy index, education index, and income index (2) HDI = simple average of the three indexes

2.3. New indicators Human development index (HDI) -- An example: Peru’s HDI in 2001: (a) Life expectancy index = (69.4 – 25)/(85-25) = 0.74 (b) Education index = 0.67 * Adult literacy rate * enrollment rate = 0.88 (c) Income index based on per capita PPP = (ln 4570 – ln 100)/(ln – ln 100) = 0.64 (d) HDI = ( )/3 = (82th place among the 175 nations)

2.4. Trends in economic development -- Correlation between economic growth and HDI -- Correlation between economic growth and happiness -- Difference between rich and poor nations -- Policy implications: how to make the world a better place?