ECO 120│ Economic Development

INSTRUCTOR’S NAME: MARY GRACE D. VALENZUELA, LPT, M-AE

HOLISTIC MEASURES OF LIVING LEVELS AND CAPABILITIES

I. Overview

In this module we are going to examine the new Human Development Index (HDI) which measure the
national socioeconomic development based on combining the basic indicators of development: measures
of education, health and adjusted real income per capita.

II. Learning Outcomes

At the end of this module, you will be able to:

1. Understand new human development index (HDI).

III. Self-Assessment
Activities (SAA)

In this module, we will focus on the basic indicators of development.

To see if you have basic knowledge about it, here is a pre-assessment test which you will answer before
you proceed to the discussion.

Pre-Assessment #1 (Not graded)

Part I. DEFINITION.
1. An index measuring national socioeconomic development, based on combining measures of
education, health, and adjusted real income per capita.
2. The concept that the subjective value of additional consumption lessens as total consumption
becomes higher.

___________________________________________________________________________________________

IV. Discussion

Hi students! This is Module 9 and we begin by understanding the New Human Development Index.

New Human Development Index

The most widely used measure of the comparative status of socioeconomic development is presented by
the United Nations Development Program (UNDP) in its annual series of Human Development Reports.
The centerpiece of these reports which were initiated in 1990 is the construction and refinement of its
informative Human Development Index (HDI).

The New HDI, like its predecessor, ranks each country on a scale of 0 (lowest human development) to 1
(highest human development) based on three goals or end products of development: a long and healthy life
as measured by life expectancy at birth; knowledge as measured by a combination of average schooling
attained by adults and expected years of schooling for school-age children; and a decent standard of living
as measured by real per capita gross domestic product adjusted for the differing purchasing power parity of
each country’s currency to reflect cost of living and for the assumption of diminishing marginal utility of
income.

There are two steps in calculating the New HDI: first, creating the three “dimension indices” and second,
aggregating the resulting indices to produce the overall New Human Development index (NHDI).

After defining the relevant minimum and maximum values (or lower and upper “goalposts”), each dimension
index is calculated as a ratio that basically is given by the percent of the distance above the minimum to the
maximum levels that a country has attained.

ActualValue−Minimum Value
Dimension index=
Maximum Value−Minimum Value

The health (or “long and healthy life”) dimension of the New HDI is calculated with a life expectancy at birth
index, which takes a minimum value of 20 years and a maximum value of 83.57 years (the observed
maximum value for any country). For example, for the case of Ghana this is:

64.6−20
Life expectancy index= =0.701
83.6−20

The education (“knowledge”) component of the HDI is calculated with a combination of the average years of
schooling for adults aged 25 and older and expected years of schooling for a school age child now entering
school. As explained by the UNDP, these indicators are normalized using a minimum value of 0 and
maximum values are set to the actual observed maximum value of mean years of schooling from the
countries in the time series, 1980-2012, which is 13.3 years estimated for the United States in 2010. For
Ghana, the average years of schooling among adults is 7 years, so the mean years of schooling subindex
is calculated as:
7 .0−0
=0 . 527
13 .3−0

We can think of this as saying that Ghana is about 53% of the way to the global standard of average
education.

In considering expected future education, the highest value (cap, or “goalpost”) is given as 18 years (which
we may think of as approximately corresponding to a master’s degree).

For Ghana, the expected number of years of schooling for a child entering school now is estimated at 11.4
years. The expected years of schooling subindex is then calculated as:

11. 4−0
=0 . 634
18 .0−0

The education index is then calculated as a version of the geometric mean of the two subindexes.

The standard of living (income) component is calculated using purchasing-power-adjusted per-capita gross
national income (GNI). For Ghana, the income index then is (where ln stands for natural log):

Income index=
[ ln ( 1,684 )−ln (100 ) ] =0.417
[ ln ( 87,478 )−ln ( 100 ) ]
Using these three measures of development and applying the formula to data for all 187 countries for which
data is available, the HDI currently ranks countries into four groups: low human development (0.0 to 0.535),
medium human development (0.536 to 0.711), high human development (0.712 to 0.799) and very high
human development (0.80-1.0)

The component indexes of the NHDI are computed by taking the difference between the country’s actual
achievement and the minimum goalpost value, and then dividing the result by the difference between the
overall maximum goalpost and minimum goalpost values. But in calculating the overall index, in place of the
arithmetic mean, a geometric mean of the three indexes is used (a geometric mean is also used to build up
the overall education index from its two components).

Let’s look at why this change is important and how the calculations are done.

Computing the NHDI

The use of a geometric mean in computing the New HDI is very important. When using an arithmetic mean
(adding up the component indexes and dividing by 3) in the HDI, the effect is to assume perfect
substitutability across income, health and education. For example, a higher value of the education index
could compensate, one for one, for a lower value of the health index. In contrast, use of a geometric mean
ensures that poor performance in any dimension directly affects the overall index. Thus, allowing for
imperfect substitutability is a beneficial change but, there is active debate about whether using the
geometric mean is the most appropriate way to accomplish this.

Thus, as the UNDP notes, the new calculation “captures how well rounded a country’s performance is
across the three dimensions”. Moreover, the UNDP argues “that it is hard to compare these different
dimensions of well-being and that we should no let changes in any of them go unnoticed.”
So, in the New HDI, instead of adding up the health, education and income indexes and dividing by 3, the
New HDI is calculated with the geometric mean:

1 1 1
NHDI =H 3 E 3 I 3
Where:
H stands for the health index
E stands for the education index and
I stand for the income index
This is equivalent to taking the cube root of the product of these three indexes. The calculations of the
NHDI are illustrated for Ghana in Table 1.

Table 1. Computing the New HDI: Ghana

Indicator Value
Life expectancy at birth (years) 64.6
Mean years of schooling 7.0
Expected years of schooling 11.4
GNI per capita (PPP$) 1,684
Indexes

Note: Values are rounded

64.6−20
Life expectancy index= =0.701
83.6−20

7.0−0
Mean years of schooling index= =0.527
13.3−0

11.4−0
Expected years of schooling index= =0.634
18.0−0
 Educationindex=
√ 0.527 ×0.634−0 =0.596
0.971−0

ln ( 1,684 )−ln ⁡(100)

Income index= =0.417
ln ( 87,478 )−ln ⁡(100)

Human Development Index= √ 0.701 ×0.558 × 0.417=0.584

3

Note: 0.558 comes from Table 2 below. Look New HDI value for Ghana.

UN income estimate will differ somewhat from World Bank Estimate.

Source: UNDP, Human Development Report, 2013, Technical Notes (online):

http://hdr.undp.org/en/media/HDR%202013%20technical%20notes%20EN.pdf.

Table 2. 2013 New HDI and its Components for Selected Countries

Table 2 shows the 2013 values of the New HDI for a set of 31 countries. South Korea has achieved the
status of a fully developed country, ranking below Canada but above the United Kingdom. Countries such
as the United Arab Emirates, Turkey, Guatemala, Gabon, Cote d’Ivoire, Pakistan, Papua New Guinea and
South Africa perform more poorly on the New HDI than would be predicted from their income level while the
reverse is true of South Korea, Chile, Bangladesh, Cuba, Madagascar and Ghana. Countries such as
Russia, Mexico, India and Niger perform on the New HDI just about as predicted by their income levels.

Income predicts rather weakly how countries will perform on education and health, or on the NHDI in
particular. For example, Cuba and Egypt have nearly the same real income per person but Cuba ranks 59 th
on the New HDI (44 points above whereas predicted by its income level) and Egypt ranks 112 th (6 below
whereas predicted by income). Mexico and Gabon have a very similar income but Mexico is 4 places above
what would be predicted by its income and Gabon is 40 points below. Bangladesh and Pakistan have an
identical New HDI ranking but Pakistan has a much higher income and Bangladesh is 9 places higher than
expected while Pakistan is 9 places below.
 Clearly, the Human Development Index in its Traditional as well as new forms has made a major
contribution to improving our understanding of what constitutes development which countries are
succeeding and how different groups and regions within countries are faring. By combining social and
economic data, the New HDI allows nations to take a broader measure of their development performance,
both relatively and absolutely.

It is greatly increasing our understanding of which countries are experiencing development and which are
not. By modifying country’s overall New HDI to reflect income distribution, gender, regional and ethnic
differentials are presented in recent Human Development Reports, we are now able to identify not only
whether a country is developing but also whether various significant groups within that country are
participating in that development.

V. Summary/Key
Points

 Human Development Index (HDI) is an index measuring national socioeconomic development, based
on combining measures of education, health, and adjusted real income per capita.
 Diminishing marginal utility is the concept that the subjective value of additional consumption lessens
as total consumption becomes higher.
 Clearly, the Human Development Index in its Traditional as well as New forms has made a major
contribution to improving our understanding of what constitutes development which countries are
succeeding and how different groups and regions within countries are faring.
 By combining social and economic data, the New HDI allows nations to take a broader measure of their
development performance, both relatively and absolutely.
 It is greatly increasing our understanding of which countries are experiencing development and which
are not. By modifying country’s overall New HDI to reflect income distribution, gender, regional and
ethnic differentials are presented in recent Human Development Reports, we are now able to identify
not only whether a country is developing but also whether various significant groups within that country
are participating in that development.

VI. End of Module

Assessment (EMA)

Gentle Reminders: All answers should be written in notebook. Take a clear picture and send it to me via
messenger chat. Submit your answers on or before Saturday, April 10, 2021 at 12nn.

Task # 1 Short Essay. 10 points.

Instruction: Answer the questions using 5 sentences only.
1. Now that you already understand New Human Development Index, what is its role in every
country?

Rubric for short essays:

Needs
Very Satisfactory Satisfactory
Criteria Excellent (90-100) Improvement
(80-89) (60-79)
(0-59)
The content
The content The content
answers the
answers the answers the
question. The content
question directly. question directly.
Demonstrates does not
Content (80%) Demonstrates Demonstrates
little answer the
comprehension comprehension
comprehension question.
and explanation is and explanation is
and does not
very clear. clear.
explain.
Organization and The essay is The essay is The essay is The essay is
Grammar (20%) logical and well- logical and logical and difficult to
 organized. It is
organized. It is organized.
consistent and
consistent and can Does not show understand.
can be easily
be understood. consistency.
understood.

VII. Looking Ahead

In preparation for the next module, read books/e-books about Characteristics of the Developing World:
Diversity within Commonality.

VIII. Self-Learning
Module Evaluation

Rate your learning experience in using this module according to the following scale.

Put a check mark on your response.

 4 – I learned a lot from this module.

 3 – I learned just right.
 2 – I still need guidance on certain topics.
 1 – I did not understand anything.

VIII. References

Todaro Michael, Smith Stephen, Economic Development 11th Edition 2010, Addison-Wesley, New York
University, The George Washington University, pdf

Nafziger E. Wayne, Economic Development 4th Edition 2006, Kansas State University, Cambridge
University Press, pdf

The International Economic Development Council’s, Economic Development Reference Guide, pdf

Images retrieved from Google

https://slideplayer.com/slide/17617175/

IX. Answer Keys on

Module 08

Pre-assessment#1 (Not Graded)

Part I. DEFINITION.
1. The portion of a product’s final value that is added at each stage of production. VALUE ADDED
2. The wearing out of equipment, buildings, infrastructure and other forms of capital reflected in
write-offs to the value of the capital stock. DEPRECIATION (OF THE CAPITAL STOCK)
3. The total amount of physical goods existing at a time that have been produced for use in the
production of other goods and services. CAPITAL STOCK
4. The total final output of goods and services produced by the country’s economy within the
country’s territory by residents and nonresidents, regardless of its allocation between domestic
and foreign claims. GROSS DOMESTIC PRODUCT (GDP)
5. The calculation of GNI using a common set of international prices for all goods and services, to
provide more accurate comparisons of living standards. PURCHASING POWER PARITY (PPP)