GDP on PPP Basis and

Human Development Index

WHAT IS PURCHASING POWER
PARITY?
• One popular macroeconomic analysis metric to compare
economic productivity and standards of living between countries
is purchasing power parity (PPP). PPP is an economic theory
that compares different countries' currencies through a "basket
of goods" approach,
• According to this concept, two currencies are in equilibrium—
known as the currencies being at par—when a basket of goods is
priced the same in both countries, taking into account the
exchange rates.
• Purchasing Power Parity (PPP) is the measurement of prices in
different countries that uses the prices of specific goods to
compare the absolute purchasing power of the countries'
currencies. In many cases PPP produces an inflation rate that is
equal to the price of the basket of goods at one location divided by
the price of the basket of goods at a different location. The PPP
inflation and exchange rate may differ from the market exchange
rate because of poverty, tariffs, and other transaction costs.
Comparing Nations' Purchasing Power
Parity
• Tomake a meaningful comparison of prices across countries, a
wide range of goods and services must be considered. However,
this one-to-one comparison is difficult to achieve due to the sheer
amount of data that must be collected and the complexity of the
comparisons that must be drawn. To help facilitate this
comparison, the University of Pennsylvania and the United
Nations joined forces to establish the International Comparison
Program (ICP) in 1968.
 Country GDP by PPP Nominal GDP
China $25.3t $13.4t

United States $20.5t $20.5t

India $10.5t $2.7t

Japan $5.6t $5.0t

Germany $4.4t $4.0t

Russia $4.2t $1.6t

Indonesia $3.5t $1.0t

Brazil $3.4t $1.9t

United Kingdom $3.0t $2.8t

France $3.0t $2.8t

Mexico $2.6t $1.2t

• With
this program, the PPPs generated by the ICP
have a basis from a worldwide price survey that
compares the prices of hundreds of various goods
and services. The program helps international
macroeconomists estimate global productivity and
growth
• Every
few years, the World Bank releases
a report that compares the productivity
and growth of various countries in terms of
PPP and U.S. dollars. Both the
International Monetary Fund (IMF) and
the Organization for Economic Cooperation
and Development (OECD) use weights
based on PPP metrics to make predictions
and recommend economic policy.
• The
recommended economic policies can have an
immediate short-term impact on financial markets
• Also,some forex traders use PPP to find potentially
overvalued or undervalued currencies. Investors who
hold stock or bonds of foreign companies may use the
survey's PPP figures to predict the impact of exchange-
rate fluctuations on a country's economy, and thus the
impact on their investment.
• Incontemporary macroeconomics, gross
domestic product (GDP) refers to the total
monetary value of the goods and services
produced within one country.
• Nominal GDP calculates the monetary
value in current, absolute terms. Real GDP
adjusts the nominal gross domestic product
for inflation.
• However, some accounting goes even
further, adjusting GDP for the PPP value.
This adjustment attempts to convert
nominal GDP into a number more easily
comparable between countries with
different currencies
• To better understand how GDP paired with purchase
power parity works, suppose it costs $10 to buy a shirt in
the U.S., and it costs Rs 1000 to buy an identical shirt in
India. To make an apples-to-apples comparison, we must
first convert the Rs1000 into U.S. dollars. If the exchange
rate was such that the shirt in India costs $15.00, the
PPP would, therefore, be 15/10, or 1.5.
• In
other words, for every $1.00 spent on the shirt in the
U.S., it takes $1.50 to obtain the same shirt in India
buying it with the rupees
• The HDI was created to emphasize that people and their
capabilities should be the ultimate criteria for assessing
the development of a country, not economic growth
alone. The HDI can also be used to question national
policy choices, asking how two countries with the same
level of GNI per capita can end up with different human
development outcomes. These contrasts can stimulate
debate about government policy priorities.
• The Human Development Index (HDI) is a summary
measure of average achievement in key dimensions of
human development: a long and healthy life, being
knowledgeable and have a decent standard of living. The
HDI is the geometric mean of normalized indices for each
of the three dimensions
• The health dimension is assessed by life expectancy at
birth, the education dimension is measured by mean of
years of schooling for adults aged 25 years and more and
expected years of schooling for children of school
entering age. The standard of living dimension is
measured by gross national income per capita.
• TheHDI uses the logarithm of income, to reflect the
diminishing importance of income with increasing GNI.
The scores for the three HDI dimension indices are then
aggregated into a composite index using geometric
mean.
• The HDI simplifies and captures only part
of what human development entails. It
does not reflect on inequalities, poverty,
human security, empowerment, etc.
• The HDR offers the other composite
indices as broader proxy on some of the key
issues of human development, inequality,
gender disparity and poverty.
Understanding the Human Development Index
(HDI)
• The Human Development Index (HDI) was established
to place emphasis on individuals, more precisely on their
opportunities to realize satisfying work and lives.
Evaluating a country's potential for individual human
development provides a supplementary metric for
evaluating a country's level of development besides
considering standard economic growth statistics, such as
gross domestic product (GDP).
• Thisindex can also be used to examine the various
policy choices of nations; if, for example, two countries
have approximately the same gross national income
(GNI) per capita, then it can help to evaluate why they
produce widely disparate human development outcomes.
Proponents of the HDI hope it can be used to stimulate
such productive public policy debate.
• How Is the HDI Measured?
• The HDI is a summary measurement of basic
achievement levels in human development. The
computed HDI of a country is an average of
indexes of each of the life aspects that are
examined: knowledge and understanding, a long
and healthy life, and an acceptable standard of
living. Each of the four components is normalized
to scale between 0 and 1, and then the geometric
mean of the three components is calculated .
• The health aspect of the HDI is measured
by the life expectancy, as calculated at the
time of birth, in each country, normalized
so that this component is equal to 0 when
life expectancy is 20 and equal to 1 when
life expectancy is 85.
• Educationis measured on two levels: the
mean years of schooling for residents of a
country and the expected years of schooling
that a child has at the average age for
starting school. These are each separately
normalized so that 15 mean years of
schooling equals one, and 18 years of
expected schooling equals one, and a
simple mean of the two is calculated.
• Educationis measured on two levels: the
mean years of schooling for residents of a
country and the expected years of schooling
that a child has at the average age for
starting school. These are each separately
normalized so that 15 mean years of
schooling equals one, and 18 years of
expected schooling equals one, and a
simple mean of the two is calculated.
• The metric chosen to represent the standard of living is
GNI per capita based on purchasing power parity (PPP),
a common metric used to reflect average income. The
standard of living is normalized so that it is equal to 1
when GNI per capita is $75,000 and equal to 0 when GNI
per capita is $100. The final Human Development Index
score for each country is calculated as a geometric mean
of the three components by taking the cube root of the
product of the normalized component scores.
 VARIOUS INDICES
OF HDR
HDR brings various indices:

• 1. HDI (Human Development Index) – introduced in

HDR 1990.

• 2. GDI (Gender Related Development Index) –

introduced in HDR 1995.

• 3. GEM (Gender Empowerment Measures) –

introduced in HDR 1995.

• 4. HPI (Human Poverty Index) – introduced in 1997.

• 5. TAI (Technology Achievement Index) – introduced

in 2001.
GENDER RELATED DEVELOPMENT
INDEX
• The Gender Related Development Index (GDI) is an index designed to
measure gender equality.
• GDI together with the Gender Empowerment Measure (GEM) were
introduced in 1995 in the Human Development Report written by the
United Nations Development Program. The aim of these measurements was
to add a gender-sensitive dimension to the Human Development Index
(HDI). The first measurement that they created as a result was the Gender-
related Development Index (GDI).
• The GDI is defined as a "distribution-sensitive
measure that accounts for the human
development impact of existing gender gaps in
the three components of the HDI.
• Distribution sensitive means that the GDI takes into
account not only the averaged or general level of well-
being and wealth within a given country, but focuses also
on how this wealth and well-being is distributed between
different groups within society. The HDI and the GDI (as
well as the GEM) were created to rival the more
traditional general income-based measures of
development such as gross domestic product (GDP) and
gross national product (GNP)
The Gender Empowerment Measure
(GEM)
• The Gender Empowerment Measure (GEM) is an index
designed to measure of gender equality. GEM is the
United Nations Development Programme's attempt to
measure the extent of gender inequality across the globe's
countries, based on estimates of women's relative
economic income, participation in high-paying positions
with economic power, and access to professional and
parliamentary positions. It was introduced at the same
time as the Gender-related Development Index (GDI) but
measures topics like empowerment that are not covered
by that index.
The Human Poverty Index (HPI)
• The Human Poverty Index (HPI) was an indication of the
poverty of community in a country, developed by the
United Nations to complement the Human Development
Index (HDI) and was first reported as part of the Human
Deprivation Report in 1997. It was considered to better
reflect the extent of deprivation in deprived countries
compared to the HDI.
• In 2010 it was supplanted by the UN's Multidimensional
Poverty Index.
• The HPI concentrates on the deprivation in the three
essential elements of human life already reflected in the
HDI: longevity, knowledge and a decent standard of
living. The HPI is derived separately for developing
countries (HPI-1) and a group of select high-income
OECD countries (HPI-2) to better reflect socio-economic
differences and also the widely different measures of
deprivation in the two groups
Multidimensional Poverty Index (MPI)

• What is the global MPI?

• The global Multidimensional Poverty Index (MPI) is an
international measure of acute multidimensional poverty
covering over 100 developing countries. It complements
traditional monetary poverty measures by capturing the
acute deprivations in health, education, and living
standards that a person faces simultaneously.
• The MPI assesses poverty at the individual
level. If a person is deprived in a third or
more of ten (weighted) indicators, the
global MPI identifies them as ‘MPI poor’.
The extent – or intensity – of their poverty
is also measured through the percentage of
deprivations they are experiencing.
• The global MPI shows who is poor and how they are poor
and can be used to create a comprehensive picture of
people living in poverty. It permits comparisons both
across countries and world regions, and within countries
by ethnic group, urban/rural area, subnational region,
and age group, as well as other key household and
community characteristics. For each group and for
countries as a whole, the composition of MPI by each of
the 10 indicators shows how people are poor.
• This makes the MPI and its linked
information platform invaluable as an
analytical tool to identify the most
vulnerable people – the poorest among the
poor, revealing poverty patterns within
countries and over time, enabling policy
makers to target resources and design
policies more effectively.
Technology Achievement Index
• Technology Achievement Index is used by United Nations
Development Programme to compute how well a country
is generating & diffusing technology & structuring a
human skill base, reflecting capability to partake in the
technological improvements of the network age.
• The Technology Achievement Index focuses on 4
dimensions of technological capacity:
• • Creation of technology
• • Diffusion of recent innovations
• • Diffusion of old innovations
• • Human skills
Limitations of the Index
• The HDI is a simplification and an admittedly limited
evaluation of human development. The HDI does not
specifically reflect quality-of-life factors, such as
empowerment movements or overall feelings of security.
In recognition of these facts, the Human Development
Report Office (HDRO) provides additional composite
indices to evaluate other life aspects, including inequality
issues such as gender disparity or racial inequality..
• Examination and evaluation of a country's
HDI are best done in concert with
examining these and other factors, such as
the country's rate of economic growth,
expansion of employment opportunities,
and the success of initiatives undertaken
to improve the overall quality of life within
a country
History Of Planning in India & Origin of Five
Year Plans

• Though the planned economic

development in India began in 1951
with the inception of First Five Year
Plan , theoretical efforts had begun
much earlier , even prior to the
independence.
Father of Planning Commission
• It
all started in 1934. Known more for
creating engineering marvels, Sir M
Visvesvaraya was also a great believer in
economic planning. In 1934, he authored a
book titled 'A Planned Economy for India',
which would make him the father of the
Planning Commission as well. He
published numerous others on village
industrialisation, nation building and
unemployment.
• Settingup of National Planning
Committee by Indian National Congress in
1938 , The Bombay Plan & Gandhian Plan
in 1944, Peoples Plan in 1945 (by post war
reconstruction Committee of Indian Trade
Union), Sarvodaya Plan in 1950 by
Jaiprakash Narayan were steps in this
direction.
• Planning Commission, agency of the
government of India established in 1950 to
oversee the country’s economic and social
development, chiefly through the
formulation of five-year plans. The
commission’s original mandate was to raise
the standard of living of ordinary Indians
by efficiently exploiting the country’s
material and human resources, boosting
production, and creating employment
opportunities for all.
• Withthe Partition as backdrop, the
country reeling with the influx of refugees,
severe food shortage and mounting
inflation, the First Five-Year Plan was
introduced in 1951. It focused primarily on
the development of the primary sector,
specifically agriculture and irrigation.
• Five-Year Plans were a formal model of planning adopted
by the Indian government after Independence, for an
effective and balanced utilisation of resources.
• They were formulated by the Planning Commission of
India, which was established on 15 March 1950. Since it
was not a constitutional body, the Commission reported
directly to the Prime Minister and its first Chairman was
Nehru himself.
• TheFirst Five-year Plan was launched in
1951 which mainly focused in the
development of the primary sector. The
First Five-Year Plan was based on the
Harrod–Domar model with few
modifications.
• The Harod-Domar model provides structure for economic
development. It has been an vital tool in influencing
government strategies, such as India's Five Year Plan, which
was from 1951 to 1956. As a matter of a fact, India is one of
the few countries in which growth models have been used in
actual planning work.
• TheHarrod–Domar model is a Keynesian model of
economic growth. It is used in development economics to
explain an economy's growth rate in terms of the level of
saving and of capital.
• It
suggests that there is no natural reason for an
economy to have balanced growth.
• Themodel was developed independently by Roy F.
Harrod in 1939, and Evsey Domar in 1946, although a
similar model had been proposed by Gustav Cassel in
1924.
• TheHarrod–Domar model was the precursor to the
exogenous growth model.
• The exogenous growth theory states that economic growth
arises due to influences outside the economy. ... The
exogenous growth model factors in production,
diminishing returns of capital, savings rates, and
technological variables to determine economic growth.