Test 1: 28/03/2024

Development Economic/

Topic 1: overview of economic dev

Topic 2: Eco Growth
Topic 3: Social Adv and Dev

TOPIC 1: OVERVIEW OF ECONOMIC DEVELOPMENT

THE 5Ps’ – planet – people – prosperity – peace – partnership: the world we want.
Developing context: Difference in income/living condition/access to basic needs/illiteracy – a
comparison of developing countries and extremely difficult circumstances

Classification:
1. GNI per capita: LIC (low-income countries)
LMC (Low middle)
UMC (Upper middle)
Low income < Middle income < High income
VN: 2008 – Low middle, published in 2009
 World Income Map
 4 Development hypothesis:
o Geography & Wealth (abundance of natural resources)
o Culture (relationship with wealth – some agree/some don’t)
o Ignorance (Elite – National leaders)
o Institutional (Rules)
- 2 things that separate developed and underdeveloped: tech and colonization. We are not born diff;
it’s just how we handle the economy.
- Universal education can help with illiteracy.
- 1995-2018: an emerging role trend of middle-income countries.
HW: Classify which group of income is VN in? Geopolitical?
In addition to being a developing country, Vietnam can be classified as an emerging economy. Emerging
economies are those in the process of development, with rapid growth rates and significant potential.
Emerging economies often have large GDP scales, high GDP growth rates, rapidly increasing per capita
income, and a tendency to deeply integrate into the global economy.
According to the criteria of the World Bank (WB), Vietnam has been classified as an emerging economy
since 2017. According to the criteria of the International Monetary Fund (IMF), Vietnam has been
classified as an emerging economy with medium income since 2021.

Vietnam possesses characteristics of an emerging economy, including:

Large GDP scale: Vietnam's GDP in 2022 reached around USD 322 billion, ranking 42nd in the world.
High GDP growth rate: Vietnam's GDP growth rate during the 2016-2022 period averaged around 7% per
year.
Rapid increase in per capita income: Vietnam's per capita income in 2022 reached around USD 4,162, a
56-rank increase compared to 2000.
Deep integration into the global economy: Vietnam has participated in numerous free trade agreements
(FTA), including major ones like TPP, CPTPP, and RCEP.
2. Basic Indicators of Development
- HDI: Income – Health – education
- 3 dimensions of HDI:
o Health status: long and healthy life
o Decent living standard: have enough capital to afford necessities – Measured by GNI per
capita.
o Knowledge: education
o Generally, there is a positive and strong correlation between income level and HDI.
3. Common characteristics of Developing countries
o “First World” – developed Western country/ “Second world” – Soviet system countries/
“Third World” – colonized nations that gained independence (in 1959). 1989 – the
“second world” collapsed with the Berlin wall.
o HW: Singapore: Developing or Developed country?
- Common characteristics:
o Low income – low living standard (sanitation – diseases – death rates –
undernourishment – HIV/AIDS)
o High dependency on agriculture (high share of labor force in agriculture – low labor
productivity – low human capital: health status; knowledge, expertise, exp; attitude –
High level of inequality and poverty)
o High population growth rate (unsuccessful family planning – gender inequality, son
preference – back-up plan: pension, welfare – improved medical services – over
crowdedness)
o High dependency on external factors (technological advancement - low playing jobs –
investments – experts/scholars
o Rural – urban migration (better life – jobs opportunities – forced migration – healthcare
services – better education)
 80-20 rule: 20% richest people account for 80% nation wealth and vice versa.
o Diversity within Commonality
 o High social fragmentation?
o Others:
 History
 Geography
 Economy size – GDP per capita
 Religion
Vicious cycle of poverty – capital

- Development Economics?
o Economics >< Dev Eco
 Traditional Eco: efficient allocation of scare resources
 Inputs: Resources, Labor, Capital, Tech -> Black box -> Outputs:
Commodities
o In Economics, a BLACK BOX is a system which can be viewed
in terms of its input and output (vectors), without any knowledge
of its internal workings or the possible interactions with the
environment.
o GDP is a forerunner goal, but not the ultimate goal.
 Political Eco: social and political process
 Use “power” to allocate “real outputs.”
 Dev Eco (roles of values, attitudes, and institutions): the study of how economies
are transformed from stagnation to growth and from low income to high-income
status and overcome problems to poverty – a branch of economics that focuses
on the process of improving the economies of developing countries.
 The process of REALLOCATION/REDISTRIBIUTION of “real
outputs” – mostly through the “visible hand” – governments
- Eco growth vs Eco dev: Eco growth is necessary, eco dev is “enough”; dev is broader.
o Eco growth: the increase of nation’s real output from: greater resource + quality + tech
(GDP, GNI…)
o Eco dev: the process by which a nation enhances its standard of living over time. (Income
per capita)
 Measure “trí lực”: knowledge (edu) + Skills + Exp/Expertise
 Indicators: long term + modern eco structure + social advancement (edu,
healthcare, decent work, equality [income]) + poverty reduction
o Income gap -> unfairness -> riot/hatred/…
 o “Green revolution” (3rd agri): chemicals/pesticides/fertilizers => insecticides/other small
animals => “Silent spring” => Environmental concerns

- Sen’s “capabilities” Approach:1985 => Despite disparities, “capability” mattersa

o Eco growth is not an end itself and has to enhance living condi and freedom.
o Capability to function is what matters for status as a poor/non-poor person and it goes
beyond availability of commodities.
o Capability: “freedom that a person has in terms of the choice of his functioning…”
o Functioning: what a person does with commodities of given characteristics that they
possess/control.
o Criticize:
 Utilitarianism => “having” not “being”
 Bias against: disadv/poor/disability/vulnerable/
 Five disparities:
 Personal heterogeneity
 Environmental diversities
 Social climate variations
 Diff in relational perspectives.
 Distribution within family
- 1990s (World Bank)
o Similarity: better life/income/…
o Differences: richer cultural life, equality of opportunities, freedom of speech
 Conclusion: “Development is a multi-dimensional process involving changes in social
structures, popular attitudes, and national institutions, as well as the acceleration of economic
growth, the reduction of inequality, and the eradication of poverty” (Todaro and Smith)

Breakdown:
o Process: longer term
o Economic structure: Agri, industry, Service, share of GDP.
o Social structure: Demography: age, sex, employment, edu level
o National institution: formal (legal system: laws, constitutions, policies) + informal (social
norms/custom, set of belief)
o Reduction of inequality: income + opportunities: education + employment + healthcare
o Eradication of poverty: “zero” income gap -> “zero” poverty

- 3 basic core values of development:

o Sustenance (food, shelter health and protection – basic needs)
o Self-esteem (is it the same between rich vs poor country) – respect
o Freedom from servitude – availability of choices
 3 objectives of Development:
o Increase availability and distribution of basic goods
o Raise level of living
o Expand the range of social and economic choices available to individuals.
Topic 2: Economic Growth
Indicators: GDP, GNI, GO
GO: gross output = p.q = total revenue of all sectors in the economy = VA + IC (value added +
Intermediate Cost/Consumption)
GO fluctuates => Represent the “health” of the economy
Drawbacks: “double counting in “middle cost” (IC)”, “susceptible to current price”

GDP: Gross Domestic Products

- The market value of all final goods and services produced within a country in a given period of
time. (keyword: traded, final, territory)
- Downsides:
o Fails to reflect income distribution/sustainability.
o Fails to reflect informal economy (no bills).
o Faits to reflect externality.
o Fails to reflect Green GDP
o Ignore quality.
o ≠ GNI

How to calculate:
1. Income/Earning method: Wage + Rent + Interest + Profit + Tax + Deplete.
2. VA: GO - ∑IC
3. Expenditure: Y=C+I+G(no subsidy,…+NX
GNI: Is the market value of all final goods and services produced by permanent residents of a country in a
given period of time.
Keyword: market values, final goods, residency
GNI = GDP + Net factor income from abroad (earnings received from abroad – earnings paid for
foreigners/non-citizenship agents)
With developing countries, GNI tend to be smaller than GDP and vice versa with developed country
GDP: better for reflecting growth of the country (economic activities)
GNI: better for reflecting economic power/strength of a nation
Factors influencing growth and developments of developing countries:
1. Economic factors (Direct impact)
- Aggregate Demand: C, I, G, NX
- Aggregate Supply: Labor (quantity and quality) + Capital (physical) + Tech + Resource (nat)
2. Non-economic factors (indirect impact)
- Political issues
- Culture
- Religion
 HW: which one is more important?

Classic Eco Growth models

- Ricardian model of Growth (David Ricardo)
o Agricultural (land)
 Quantity ~ constant
 Quality (futile)
 Population increase -> demand of Agricultural/Commodities increase.
 Price increase => wage increase => total cost increase => profit decrease => Investment
decrease => zero GDP growth (ceteris paribus)
 Limitations:
o overlook the importance of technology in agriculture.
o Population contingent on family planning, edu.
o Disregard the addition of I, C, G, NX, T, R, K,… -> GDP

Rostow’s Model – the Stages of Economic Development (linear)

1. Traditional Society
- Agriculture dominates (~90% GDP)
- Saving ~0
- Customary laws permeate every corner.
2. Pre-conditions for take-off
- Importance of science (tech)
- Agriculture – Industry
- The role of Infrastructure (Road, Irrigation system,…)
- Saving >>0
3. Take-off
- Entrepreneurs
- Transnational trading
- Saving ~20% GNP
- Customary laws step down
- Industry – Agriculture – Service
4. The drive to maturity
- Science/Tech dominate.
- Expansion of transnational trade
- Saving ~40%GNP
- Industry – Service – Agri
5. High mass consumption
- High-end consumption
- Skilled labor
- Rural-urban migration: less dev -> more dev
1929-1933: great depression
C ↓, NX ↓, I↓, contingent on G

Harold-Domar model: (INCLUDED IN FINALS)

- Suggests that the economy’s rate growth depends on:
o The level of saving (ratio) (s [saving rate] = S/Y [Y=GDP]; s uses current price)
 GDP in constant price: GDPr; in current price: GDPn
o The productivity of investment i.e the capital output ratio
 ICOR index (incremental capital output ratio):
∆K
 ICOR = k = K/Y =
∆Y
(S (total savings) -> I (investment) -> K; K = physical capital)
∆ Kt
 ICOR = =¿ It-1/∆ Yt (real)
∆ Yt
∆Y
o g= ( economics growthrate ) = Yt/Yt-1
Y
∆ Kt
o k= = ICOR
∆ Yt
o St = It = Kt+1
o s = S/Y
 gt = st-1/ICORt
 The Harod-Domar model was developed to help analyze the business cycle. However, it was
later adapted to ‘explain’ eco growth. It concluded:
o Economic growth depends on the amount of labour and capital.
o As LDCs often have an abundant supply of labour it is a lack of physical capital that
holds back economic growth and development.
o More physical capital generates economic growth.
o Net investment leads to more capital accumulation (capital stock(, which generates
higher output and income.
o Higher income allows higher levels of saving.
- To decrease ICOR
o Increase productivity/ effectiveness/ of investments
o Decrease tech level.
o Decrease scarcity of resources
- Compare ICOR  everything else is the same.

Exercises
1. In constant 2010 $US, GDP in VN increased from 200B $USD in 2015 to 215B %USD in 2016.
Investment in 2015 was 40$
 1) ICOR2016=?
2) If saving rate = 24% in 2016, GDP2027 =?

1. Y2016= 215-200= 15; S2015=I2015=40=K2016

∆ K 2016
 ICOR2016= =40/15= 8/3
∆ Y 2016
2. ICOR = const => ICOR2017=8/3 => g2017=s2016.ICOR2017  g2017= 8/3 x 0.24 = 0.09
=> GPD2017= g2017.GDP2016 = 0.09*215=234.35
2. Given the figures in the year X: GDP = 65B $, Foreign saving = 5.5B $ ~ ¼ Total saving, ICOR=4.5
a) gGDP in year X+1=?
S = 5.5*4=22 => s=22/65= 33.84%
Gx+1= sX/ICOR X+1= 33.84/4.5=7.5%
b) if this country wants gGDP = 7.5%, what should be done? I => ~31.5%
either adjust s or ICOR

3. The country A has ICOR = 6, total saving = 32B $, Current GDP (current price – nominal
GDP) = 150B $
a) GDPr next year = ? if GDP deflator (GDP nominal/GDP real) = 3.5
GDP deflator = GDPn/GDPr => GDPr = 150/3.5 = 42.86
s = S/GDPn = 32/150 = 21.33%
g (x+1) = s/ICOR = 32/150*6x100= 3.6% => GDPr = 42.86+0.036*42.86 = 44.402
b) If the country expects to have eco growth at 7.5%, what should it do?
g = 7.5% and ICOR = constant  7.5 = st-1 / ICORt => Increase st-1 to 45%/ Decrease ICOR to
2.844

Modals of structural change: The Lewis 2-sector model

- 2 sectors = 2 industries: industry + traditional sector (agri)
- There exists “surplus labor” ~ Marginal product of labor (MPL) = 0
- Add labors with MPL => no total change of production
- MPL = 0 only exists in agri => “surplus labor” will be transferred over from agri sector to
industry sector => 1-way transfer of “surplus labor”
Graphs:
First stage:
- People with MPL = 0 and MPL > 0
o MPL = 0 transfer from agri to industry

Agriculture (MPL = 0) Industry MPL > 0

First stage People with MPL = 0 and MPL > 0 MPL = 0 transfer from agri to industry with
W (const) ≥ 1.3APL (agri APL)
=> L ↑ => surplus in industry ↑
=> Capital stock ↑ + income gap ↑

Second MPL > 0 MPL > 0 transfer to industry but W increase

stage ↑ => surplus in industry ↓
=> Capital stock ↓ + income gap ↓

Investment Stage 1: Labor-intensive investment

policy Stage 2: Labor-saving investment
Criticize - W might not be constant even if MPL=0.
- Unemployment exists in the industry.
- Ignore an open economy + service + trade union.
- Labor transfer process is both ways: Agri -> industry and industry -> Agri

Exogenous economic growth model (Robert Solow) – Tech adv (ngoại sinh)
- Production function: Y = f(K,L,T)
o K and L determine short-term economic growth
o T determine long-term eco growth  With T, L -> E.L (effective labor) – T is exogenous
- Limitations:
o Ignore the role of internal agents (Gov, research, institute)
o Solow’s residual is overrated

Endogenous economic growth model (nội sinh) – Stress on Human capital ~ Expertise, skill, attitude
- Knowledge – creating (uni + research institute) through edu and training
 Skilled labor ------------------ Production => human capital determine long-term economic
growth
- Emphasize the importance of Gov, Edu institutions.
- Proposition: catching-up effect never happens due to: knowledge gap between developed and
developing countries

Production function Cobb-Douglass: Y = Kalpha.Lbeta.TFP

 - TFP = total factor productivity: the residual contribute to Y; consist of Technological
advancement + policy + market forces (competition demand) + …
- Y = Kalpha.Lbeta.TFP => Ln(Y) = Ln(Kalpha.Lbeta.TFP)
Δy Δk ΔL ΔTFP
 =α +β +
y k L TFP
αk
 g(y)= α k + β L + tfp (percentage point) => %K = ∗100 do the same to L and FTP
g( y )

Exercise: calculate the contribution of factors to economic growth (included in finals)

2023 2024
GDPr 100 107
K 50 55
L 20 22

Assume that the production function shows constant return to scale

 Alpha = 0.6 => beta = 0.4
Y= K0.6L0.4.TFP => TFP (2023) = 2.89; TFP (2024) = 2.62

ΔTFP ΔTFP −3
 g(y) = 7/100 = 5/50*0.6(k) + 0.4*2/20(l) + (%) => =
TFP TFP 100
 g(y) = 7 = 0.6*10 (K) + 0.4*10 (L) + tfp => tfp = -3 (percentage point)
%K = 6/7*100; %L= 4/7*100; %TFP = -3/7*100
 TFP hampers economic growth.
 TFP indicates effectiveness/efficiency.
 If sum of % contribution of K, L ------> GDP > 50% => Resource-based economic model and
vice versa if %contribution of TFP >50% => Effectiveness-based economic model

Topic 3: Social advancements and Development

Inequality and eco dev

Equity vs Equality

BASIS FOR
EQUITY EQUALITY
COMPARISON
Meaning Equity is the virtue of being just, Equality is described as a state,
even-handed and impartial. where everyone is at the same
level.

What is it? Means (the process) End (result)

Distribution Fair (same thing) Even (same amount)

Recognizes Differences, and attempts to Sameness and treats everyone as

counteract unequal individual equal.
opportunities.

Ensures People have what they need. Providing everyone, the same
things.

Measuring Inequality
- Personal or size distribution of income
o Quintiles and deciles
o Lorenz curves (Exercises in Finals) – “qualitative”
 How to draw a Lorenz curve:
 Info -> Income of the population
 Ascending order
 Create quintiles (5) – same size
 Share of Income (%) of each quintile
 Visualize
o Gini coefficient:
 o Income gap index:
 This criterion reflects how much unequal that results of economic growth be
distributed. This index is measure by the ratio between the income of the 20%
richest people (households) and the 20% poorest people (households) –
AVERAGE VALUE
 Based on international specification, if the mentioned index is more than 10, a
society is highly unequal. If it ranging from 8 to 10, this society is immediately
unequal. If this index is lower than 8, this society is slightly unequal.
o The “40” criterion of World Bank
 This criterion measure inequality base on the proportion of the income of 40%
poorest people (household) in a society.
 According to this, if the proportion is below 12%, a society is highly unequal. If
it ranging from 12% to 17%, this society is fairly unequal. When it rise up to
more than 17%, this society has a low inequality.

Inequality in income Little unequal (Highly Fairly Unequal Highly unequal

distribution equal) (Little equal)

GINI Coefficient

GINI < 0.4 0.4 <= GINI <= 0.5 GINI > 0.5
 Income gap index
(IG)
IG < 8 8<= IG <= 10 IG > 10

"40" Criterion

> 17% 12% <= … <= 17% < 12%

o Summary:

Exercise:
1 15 20 25 30 40 50 60 100 150 => Total income: 491

Quintile Income Share Cumulative %

I 3.26% 3.26%
II 9.16% 12.42%
III 14.26% 26.68%
IV 22.4% 49.08%
V 50.92% 100%

Income gap index: 125/8= 15.625 = highly unequal

“40” criterion = 61/491 = 12.42% = fairly unequal

1.2

0.8

0.6

0.4

0.2

0
0 0.2 0.4 0.6 0.8 1 1.2
Kuztnez’s curve
- Trickle-down theory in Development: Dual economy
o East (advantaged) vs West (disadvantaged)
o First move to West (low GNI) when West is developed -> move to East => GINI decrease
after turning points

Why is inequality bad?

- Extreme inequality leads to economic inefficiency and curtails growth.
- Extreme inequality undermines social stability and solidarity.
- Extreme inequality is viewed as unfair.

Inequality in income distribution between countries: pre-tax and post-tax

Living standard: relationship with economic growth?
- Y (income) = C+S (reflected by Consumption)
o Consumption – Basic needs (Volume and Share[%])
 Food
 Shelter, clothing, traveling, edu, healthcare
- Measures of poverty – deprivation
o Income – Poverty line/threshold – absolute poverty
 Food < 2000kcal
 Shelter, clothing, traveling, edu, healthcare
 Relative poverty: uses median to indicate
 Indicator:
 HCI (head count index) – No. of poor (people/household)
o HCO = No. of poor/ Total pop/household
o Why is there dif between pop and household: intra-family
income + welfare system
H
 TPG (total poverty gap) = ∑ ( y p− y 1 )
i=1

Exercise:
10 people:

1:10000$
2:5000$
3:30000$
4:50000$
5:70000$
6:15000$
7:20000$
8:25000$
9:40000$
10:250k$
Poverty line: 35k$
HCI, TPG=?
HCI = 0.6
TPG = 25k+30k+5k+20k+15k+10k=105k

o Multi-dimensional
 MPI dimensions weights and indicators:
 Health: nutrition, child mortality (33.33%)
 Education: Years of schooling, school attendance (33.33%)
 Living standard: Cooking Fuel, sanitation, water, electricity, floor, assets
(33.33%)
 If deprived > 33.33% => multi-dimensional poverty
 MPI = H.A (H: percent of ppl who is identified as poor, it shows the incidence of multi-
dimensional poverty; A is the average proportion of weighted deprivation)
- Poverty intervention:
o Direct:
 Tax
 Transfer
 Cash subsidy.
 Commodity.
o Indirect:
 Capability approach
 Opportunity

Finals:
90’
10 T/F (0.5x10= 5 points)
2 exercises (1.5x2= 3 points)
MCQ (2 points)
T/F exercise:

1. Methodologically, GDP doesn’t reflect commodities produced and consumed in household. T/F?
True => GDP: total market value of good/services in the region => commodities/services self-
produced in houses doesn’t count.
2. GDP growth increase if savings rate increases.
True => g = s/ICOR (ceteris paribus)
 False => ICOR increases/decreases
3. Tech progress plays the most important role in long-term economic growth.
True => Solow model
False => other models
4. Economic growth and poverty rate have a negative relationship.
False => When income inequality is high, economic growth doesn’t necessarily come from the
poor.
5. Gender equality is when the employment shares of males and females are equals.
False => Doesn’t necessarily require an equal share of employment of males and females.
Instead, job opportunities are not limited by gender basis.

Dev eco BROADER than Traditional eco. T/F?

True => List 2 definitions. In contrast Dev eco made a step further, not only …. But also redistribute
income and forces. Not just pure economics but also social and economics aspects.

Exercises
1. Data of year X, GDPn=250, deflator = 2.5, Domestic savings =15 and accounts for 40% total.
ICOR =5
a) GDPr in year x+1?
Total savings = Domestic + foreign savings => Domestic = 15 accounts for 40% => total savings
= 37.5
Saving rate (x) = 37.5/250 = 0.15
g (x+1) = s(x)/ICOR = 3%
GDPr (x) = 100 => GDPr (x+1) = 103
b) IF GDPr = 120, what should it do?
Expected GDPr (x+1) > Estimated GDPr (x+1)
Therefore 2 ways:
- Increase savings:
o Increase domestic savings. (ceteris paribus)
 o Increase foreign investments. (ceteris paribus)
- Decrease ICOR:
o Increase Effectiveness of Investment

2. Size distribution of income as follows: 1;5;20;30;100;50;70;90;10;80

a) Plot the Lorenz curve
1 5 10 20 30 50 70 80 90 100
Total = 456

Quintile Income Share Cumulative %

I 1.31 1.31
II 7.89
III 25.43
IV 58.33
V 100%

b) If Poverty line = 25, calculate headcount index

40%