Economic Development

What is the difference between economic growth and

economic development?

Economic growth means an increase in real national income / national

output.
Economic development means an improvement in the quality of life and
living standards, e.g. measures of literacy, life-expectancy and health care.
 Basis of Comparison Economic Development Economic Growth
Concept Economic development is a much broader concept Economic Growth is a narrower concept
than economic growth.Economic development = than economic development.
Economic Growth + Standard of Living
Scope Economic Development is considered as a Economic Growth is considered as a single
Multidimensional phenomenon because it focuses dimensional in nature as it only focuses on
on the income of the people and on the the income of the people of the country.
improvement of the living standards of the people of
the country.
Term Long-term process Short term process
Measurement Both Qualitative & Quantitative Terms:HDI Quantitative Terms:Increases in.
(Human Development Index), gender-related index,
Human poverty index, infant mortality, literacy rate
etc.
Related to Economic Development is related to Economic Growth is related to developed
Underdeveloped and developing countries of the countries of the world.
world.
Effect Qualitative and Quantitative Impact on the Brings a quantitative impact on the
economy. Improvement in life expectancy rate, economy. Increase in the indicators like per
infant, literacy rate, poverty rates, and mortality capita income and GDP, etc.
rate.
Process Tenor Continuous process In a certain period
 What is our Global Goal?
“The Global Goals – also known as the Sustainable Development Goals or SDGs – are a set of universal
goals and targets adopted by 193 UN member states that outline a vision for the future for people and the
planet. They replace the Millennium Development Goals (MDGs) which expired in 2015. The MDGs were
launched in 2000 to make global progress on poverty, education, health, hunger and the environment.”
(Plan International, n.d.)

“The Sustainable Development Goals (SDGs) or Global Goals are a collection of 17 interlinked global
goals designed to be a "blueprint to achieve a better and more sustainable future for all". The SDGs were
set in 2015 by the United Nations General Assembly and are intended to be achieved by the year 2030.
They are included in a UN Resolution called the 2030 Agenda or what is colloquially known as Agenda
2030.”
Price Index
Price index is a number whose movement reflects movement in the average level of prices. If
a price index rises 10%, it means the average level of price has risen 10%.

1. Laspeyres Price Index

It is computed by taking the ratio of the total cost of purchasing a specified group of commodities at current
prices to the cost of that same group at base-period prices and multiplying by 100.

2. Paasche Price Index

It applies terminal year output (from our example above is 1998) for weighting prices. It uses weights for current
period. The question it answers is how much a basket that consumers buy in the current period would have cost
in the base period

3. Fisher Price Index

It is a consumer price index (CPI) used to measure the price level of goods and services over a given period;
and to calculate inflation. It is a geometric average of the Laspeyres Price Index and Paasche Price Index. It
is called the “ideal” price index as it corrects the positive price bias in the Laspeyres Price index and the
negative price bias in the Paasche Price Index.
 1973 (base year) 2021 (observation
year)
Commodity Quantit Price Quantity Price
y Where:
Calculators 20 Php 100 Php p = price of the commodity produced
Million 400/price Million 100/price
q = quantity of the commodity produced
Rubber boots 200 Php 400 Php 200/ton o = base year
Million 100/ton Million
n = the given/observation year

Laspeyres Price Index Paasche Price Index Fisher Price Index

 Activity 1
2001 (base year) 2024 (observation year)
Commodities Quantity Price Quantity Price

Rice 40 thousand Php 300/price 30 Thousand Php 100/price

Corn 50 thousand Php 200/price 40 Thousand Php 200/price
Wheat 80 thousand Php 400/price 100 Thousand Php 500/price

1. Laspeyres Price Index

2. Paasche Price Index

3. Fisher Price Index

Problems in Comparing Developed and Developing
Countries’ GNP
• National statistical agencies often use different concepts
and methods of data collection.
• Income differences between developed and developing
countries are very much overstated.
The major sources of error and imprecision in comparing GNP
figures for developed and developing countries are as follows:
1.GNP is understated for developing countries, because a greater
proportion of their goods and services are produced within the home
by family members for their own use rather than for sale in the
marketplace.
2.GNP may be understated for developing countries, where
household size is substantially larger than that in developed
countries, resulting in household scale economies.
3.GNP may be overstated for developed countries, because a
number of items included in their national incomes are intermediate
goods, reflecting the costs of producing or guarding income.
4.GNP is understated for developing countries because
many of their cheap, labor-intensive, unstandardized goods
and services have no impact on the exchange rate, as they
are not traded.
5.GNP is overstated for countries (usually developing
countries) where the price of foreign exchange is less than
a market-clearing price.
When countries are using different currencies, how are
we going to make an apple-to-apple comparison?

The Need for Purchasing-Power Parity (PPP)

The International Comparison Project (ICP) of the U.N.
Statistical Office and the University of Pennsylvania
converts a country’s GNP in its own currency into
purchasing-power parity (or international) dollars (PPP$) by
measuring the country’s purchasing power relative to all
other countries rather than using the exchange rate.
“Purchasing power parity (PPP) is a popular metric used
by macroeconomic analysts that compares different
countries' currencies through a "basket of goods" approach.
It allows for economists to compare economic productivity
and standards of living between countries.” (Investopedia,
2020).
Exchange rate: Php50 = $1

To make an apples-to-apples comparison, we must first convert the Php190.00 into U.S. dollars.
• In other words, for every $1.00 spent on burger in the
U.S., it takes $1.27 to buy the same burger in the
Philippines when buying it with the peso.
• Purchasing power parity is based on an economic theory
that states the prices of goods and services
should equalize among countries over time.
 Activity 1

USA = 5 dollars Philippines= 88 pesos

Exchange rate: Php55 = $1

Government agencies use PPP to compare the output of countries
that use different exchange rates. The purchasing power parity
calculation tells you how much things would cost if all countries
used the U.S. dollar.

Purchasing power parity finds its greatest use in macroeconomic

studies as you compare GDP. Because all countries don't use the
U.S. dollar, values can be skewed.

For example, China produced 94.8 trillion yuan's worth of goods and
services in 2018. Using an exchange rate of 6.97 yuan per dollar,
that's $13.61 trillion U.S. dollars.
 Activity 2
What are the downsides of PPP?

Make research and identify the criticism of PPP.

What are the downsides of PPP in making cross-country
comparison?
 The Human Development Index
The Human Development Index (HDI) is a summary
measure of achievements in three key dimensions of
human development: (i) a long and healthy life
(longevity), (ii) access to knowledge (education), and
(iii) a decent standard of living (per capita income). The
HDI is the geometric mean of normalized indices for each of
the three dimensions.
Educational attainment is a composite of two variables: a
two-thirds weight based on the adult literacy rate (in
percentage) and a one-third weight on the combined
primary, secondary, and tertiary gross enrollment rate (in
percentage)
Longevity is measured by average life expectancy (in years)
at birth, computed by assuming that babies born in a given
year will experience the current death rate of each age cohort
(the first year, second year, third year, and so forth through the
nth year) throughout their lifetime. Life expectancy is
calculated by using the mortality rates for a specific group of
people and finding the average age of death.
 The indicator for living standards is based on the logarithm of
per capita GDP in PPP dollars.

How to calculate the HDI?

To construct a composite index, you determine the maximum and minimum
values for each of the three variables. Based on the 2018 Human Development
Index Statistical Update, the minimum and maximum values on the three
dimensions are:
  Maximum life expectancy is
 The justification for placing the
set at 85, a realistic
natural zero for life expectancy
aspirational target for many
at 20 years is based on
countries over the last 30
historical evidence that no
years. Due to constantly
country in the 20th century
improving living conditions and
had a life expectancy of less
medical advances, life
than 20 years
expectancy has already come
very close to 85 years in
several economies: Hong
Kong, China (Special
Administrative Region) (84.1
years) and Japan (83.9 years).
 The maximum for expected years of schooling, 18, is
equivalent to achieving a master’s degree in most
countries. The maximum for mean years of schooling,
15, is the projected maximum of this indicator for
2025.
 The low minimum value for gross national income (GNI) per
capita, $100, is justified by the considerable amount of
unmeasured subsistence and nonmarket production in
economies close to the minimum, which is not captured in
the official data. The maximum is set at $75,000 per capita.
Kahneman and Deaton (2010) have shown that there is
virtually no gain in human development and well-being from
annual income per capita above $75,000. Currently, only
four countries (Brunei Darussalam, Liechtenstein, Qatar and
Singapore) exceed the $75,000 income per capita ceiling.
(UNDP, n.d.)
Having defined the minimum
and maximum values, the
dimension indices are
calculated as:
Health Index
Education Index
For the education dimension, the dimension index formula is
applied to the mean years of schooling and expected years of
schooling index. Then, the arithmetic mean of the two resulting
indices is taken.
Income Index
For the income index, the natural logarithm of the actual, minimum and maximum
values is used.

Human Development Index

The HDI is the geometric mean of the three-dimensional indices:
4 Rankings of country according to HDI

1.Low Human Development (< 0.550)

2.Medium Human Development (0.550 to 0.699)
3.High Human Development (0.700 to 0.799)
4.Very High Human Development (0.80 to 1.0)
Most developed countries have an HDI score of 0.8 or
above (in the very high human development tier).
These countries have stable governments, widespread
education, healthcare, high life expectancies, and
growing, powerful economies.
The least developed countries (LDCs) in the world have HDI scores in the low human
development tiers with HDI scores below 0.55. LDCs face unstable governments,
widespread poverty, lack of access to healthcare, and poor education. Additionally, these
countries have low income and low life expectancies, coupled with high birth rates. The
HDI helps the United Nations determine which countries need assistance, specifically
LDCs. The UN has held four conferences to assess LDCs and develop strategies to boost
them out of the category. (www.worldpopulationreview.com, n.d.)
 Activity 3
HDI
Now, try to determine the Human Development Index of China and Thailand. In terms
of GNI, the size of China’s economy (13.72 Trillion) is significantly huge compared to
Thailand (890.8 Billion). Does this mean that China has a higher HDI? Please show
your solution.

GNI in 2011 Life expectancy Mean years of Expected years GNI per capita
Country HDI
(PPP $) at birth (Years) schooling of schooling (2011 PPP$)
China 13.72 Trillion 76.4 7.8 13.8 15,270.00
Thailand 890.8 Billion 75.5 7.6 14.7 15,516.00
Source: UNDP Human Development Indices and Indicators, 2018 Statistical Update
 Stages of Economic Development

The key stages of development are related to three different

transitions: a) a structural transformation of the economy, b) a
demographic transition, and c) a process of urbanization.
Breaking Down the Key Economic Development Stages

1.The structural transformation refers to a • 2.The demographic transition is

change in the composition of GDP. Initially, determined mostly by changes in the
economic activities and jobs are based in the fertility rates (i.e., the number of children
agricultural sector. With development, the per woman) and changes in life
share of agriculture in GDP decreases as expectancy. Initially, fertility rates are high,
economic activities and jobs shift towards the but due to relatively high death rates
industrial sector, especially manufacturing. (especially high infant mortality rates),
After some decades of industrialization, the population growth is limited. In the next
service sector will slowly overtake the share stage, both fertility rates and life
of industry, while the share of agriculture expectancy are increasing, causing a
continues to decrease. In other words, at the sharp increase in the size of population.
final stage of development, we typically have With continuous development, life
an economy in which people earn their expectancy continues to increase, but
livelihood predominantly from the service sharply declining fertility rates will limit
sector and a still important but diminished population growth.
industry sector.
3.The main factors leading to the process of urbanization is the
migration of people from rural areas seeking jobs in the emerging
urban centers, the transformation of originally semi-urban suburbs
into fully urban centers, and differences in population dynamics
between rural and urban areas.