Chapter 50, Economic development

• How are economies basically classified?

  As Developed and developing countries.
• How does the world bank classify countries?

  1. By the level of development they have currently reached, based on HDI
  2. According to income per head.
• Define economic develooment?

  Growth in GDP and the development of social and cultural aspects of countries such as health, education and welfare.
• What are the 2 types of indicators used to measure economic development?

  1. Single indicators
  2. Composite indicators
• What are the 2 types of single indicators used when measuring economic development?

  1. Income indicators
  2. Other indicators
• What are the 3 ways that economics and international organizations classify countries as?

  1. GDP per capita
  2. GNI per capita
  3. NNI per capita
• How does the world bank divide countries based on their income levels?

  1. High income
  2. Upper middle income
  3. Lower middle income
  4. Low income
• What are some advantages of classifying economies according to income?

  1. Method is straightforward
  2. Can help identify countries in need of assistance from aid providers
• What are some disadvantages of classifying countries according to income?

  1. Indicators can be misleading as some high income countries may be contracting and some low income countries may be growing.
  2. Income does not capture all influences on development.
• What are 2 examples for poverty traps?

  1. Low income leads to Low savings leads to Low investments leads to Low productivity
  2. Low income leads to Low education and health leads to Low human capital leads to Low economic growth
• What are the other indicators of economic development (under single indicators)?

  1. Measured in monetary terms. For example: GDP, GNI, NNI, PPP
  2. Measured in non monetary terms. For example: Mortality, doctor to patient ratio
• What are composite indicators?

  A combined measure that combines multiple individual measurements into a single value. Each indicator gives the same or different weight.

  Examples: HDI
• What is the human development index?

  A measure of a country's overall well-being, including factors such as life expectancy, education, and income.

  Shows the distance a country has to cover to reach the maximum value of 1.
• What are the 3 indicators included in HDI?

  1. Income (through GNI per head)
  2. Education (through mean years of schooling and expected years of schooling)
  3. Healthcare (through mortality rate)
• What is mean years of schooling and expected years of schooling?

  Mean years: Average number of years of education recieved by people aged 25 and above.

  Expected years: Years of schooling a child of school entrance age can expect to recieve.
• Why is HDI Measured by income, education and healthcare?

  Welfare of people is influenced by the ability to lead a long and healthy life and acquire knowledge.
• According to HDI, how are countries classified?

  1. Very high human development
  2. High human development
  3. Medium human development
  4. Low human development
• Who developed "measurable economic welfare"?

  Willion Nordhaus and Tobin.
• What is measurable economic welfare?

  The measure includes GDP figures and factors that improve living standards and factors that reduce living standards.

  1. Factors that improve living standards (added): Increased leisure time
  2. Factors that reduce living standards (deducted): Environmental damage
• What is one disadvantage of using measurable economic welfare?

  The measure is difficult and expensive to measure as it includes non marketed goods and services.
• What does the multidimensional poverty index include?

  1. Measures of living standards (sanitation, drinking water, electricity and housing)
  2. Education (years of schooling, attendance)
  3. Health (child mortality and nourishment)

  Each indicator is given 33% of weighting. A household is considered multidimensionally poor if they are deprived in at least 33% of the weighted indicators.
• What are some advantages of multidimensional poverty index?

  1. Helps countries to understand why people are poor and why some stay poor even when income increases.
  2. Helps governments and international organizations target the poorest groups.
  3. Assess and coordinate national development plans.
• What is the Kuznets curve?

  An inverted U shaped curve presented by Simon Kuznets. Shows the relationship between economic development and income inequality over time. It shows that the relationship takes an inverted shape.
• What does the kuznets curve conclude?

  In early stages of development, income inequality tends to increase.

  This is because when an economy develops, industrialization and urbanization increases. This increases the wages of low skilled labour in agricultural jobs. This causes income inequality to increase.

  However after a certain level of development income inequality starts to decline.

  This is because it imrpoves the quality of education, advances technology. These increase income of the poor decreasing income inequality.
• What are the 2 methods economic growth can be compared?

  1. Growth rates between countries
  2. Growth rates of a country over a period of time
• What are some limitations of Real GDP per head when comparing over time?

  1. Due to shadow economic activity. Figures may understate the true changes in output due to the existence of the shadow economy.
  2. Due to low levels of literacy. When literacy is low, government finds it difficult to gather information about all economic activity.
  3. Unrecorded transactions of non marketed goods and services. GDP only includes marketed goods and services. Goods that are not traded are not recorded.
  4. The nature of economic growth is not considered.
• How are living standards calculated?

  Real gdp/size of population
• Comparing GDP per head between countries.

  It is rather complicated because of exchange rate. To avoid distrotions, GDP per head is adjusted by Purchasing Power Parity.

  PPP: Price index or the value of a basket of goods in country A / Price index or the value of a basket of goods in country B
• What are some limitations of real GDP adjusted to PPP?

  1. Higher PPP adjusted does not mean population enjoys the higher living standards.
  2. When assesssing living standards, factors that are not measured in real GDP per head should be considered.