Chapter 1

Introduction: Concept and Measurement of Development

INTRODUCTION

This chapter discusses the meaning, calculation, and basic indicators of economic growth and

development; the classification of rich and poor countries; the price-index problem; the distortion in

comparing income per head between rich and poor countries; adjustments to income figures for

purchasing power; alternative measures and concepts of the level of economic development besides

income per head; the problems of alternative measures; and the costs and benefits of economic

development.

INTENDED LEARNING OUTCOMES

After studying this module, the students will be able to:

• 1. Define Development;

• 2. Explain the difference between Economic Development and Economic Growth;

• 3. Discuss the basic indicators of development;

• 4. Explain and discuss human development index and cite an examples; and

• 5. Discuss the characteristics of developing world.

Growth and Development

A major goal of poor countries is economic development or economic growth. The two terms are not

identical. Growth may be necessary but not sufficient for development.

Economic growth refers to increases in a country's production or income per capita. Production is usually

measured by gross national product (GNP) or gross national income (GNI), used interchangeably, an

economy's total output of goods and services.

Economic development refers to economic growth accompanied by changes in output distribution and

economic structure. These changes may include an improvement in the material well-being of the poorer

half of the population; a decline in agriculture's share of GNP and a corresponding increase in the GNP

share of industry and services; an increase in the education and skills of the labor force; and substantial

technical advances originating within the country. As with children, growth involves a stress on

quantitative measures (height or GNP), whereas development draws attention to changes in capacities

(such as physical coordination and learning ability, or the economy's ability to adapt to shifts in tastes and

technology).

Economic development is a broader concept than economic growth. Development reflects social and

economic progress and requires economic growth. Growth is a vital and necessary condition for

development, but it is not a sufficient condition as it cannot guarantee development.

One of the most compelling definitions of development is that proposed by Amartya Sen.
According to Sen, development is about creating freedom for people and removing obstacles to greater

freedom. Greater freedom enables people to choose their own destiny. Obstacles to freedom, and hence

to development, include poverty, lack of economic opportunities, corruption, poor governance, lack of

education and lack of health.

Gross Domestic Product (GDP), Net National Product (NNP), Gross National Product (GNP), personal

income, and disposable income are the important metrics determined by national income accounting.

However, the most commonly used measure of the economy is GDP. It is the cumulative value of products

and services generated in an economy over a given period of time. Only the goods produced in the home

country are included in the GDP, regardless of the nationality status of the company owners.

The gross domestic product figure may not represent the correct value, as some goods may not even

make it to the market, which makes it difficult to determine the true value of the market. Nevertheless,

GDP reasonably represents the national output. The other economic measures can be derived from GDP.

Measures of national income and output

A variety of measures of national income and output are used in economics to estimate total economic

activity in a country or region, including gross domestic product (GDP), gross national product (GNP), net

national income (NNI), and adjusted national income (NNI adjusted for natural resource depletion – also

called as NNI at factor cost). All are especially concerned with counting the total amount of goods and

services produced within the economy and by various sectors. The boundary is usually defined by

geography or citizenship, and it is also defined as the total income of the nation and also restrict the goods

and services that are counted. For instance, some measures count only goods & services that are
exchanged for money, excluding bartered goods, while other measures may attempt to include bartered

goods by imputing monetary values to them.

Market value

In order to count a good or service, it is necessary to assign value to it. The value that the measures of

national income and output assign to a good or service is its market value – the price it fetches when

bought or sold. The actual usefulness of a product (its use-value) is not measured – assuming the use-

value to be any different from its market value.

Three strategies have been used to obtain the market values of all the goods and services produced: the

product (or output) method, the expenditure method, and the income method. The product method

looks at the economy on an industry-by-industry basis. The total output of the economy is the sum of the

outputs of every industry. However, since an output of one industry may be used by another industry and

become part of the output of that second industry, to avoid counting the item twice we use not the value

output by each industry, but the value-added; that is, the difference between the value of what it puts

out and what it takes in. The total value produced by the economy is the sum of the values-added by

every industry.

The expenditure method is based on the idea that all products are bought by somebody or some

organisation. Therefore, we sum up the total amount of money people and organisations spend in buying

things. This amount must equal the value of everything produced. Usually, expenditures by private

individuals, expenditures by businesses, and expenditures by government are calculated separately and

then summed to give the total expenditure. Also, a correction term must be introduced to account for

imports and exports outside the boundary.

they are paid is just the market value of their product, their total income must be the total value of the

product. Wages, proprietor's incomes, and corporate profits are the major subdivisions of income.

Methods of measuring national income

Output

The output approach focuses on finding the total output of a nation by directly finding the total value of

all goods and services a nation produces.

Because of the complication of the multiple stages in the production of a good or service, only the final

value of a good or service is included in the total output. This avoids an issue often called 'double

counting', wherein the total value of a good is included several times in national output, by counting it

repeatedly in several stages of production. In the example of meat production, the value of the good from

the farm may be $10, then $30 from the butchers, and then $60 from the supermarket. The value that

should be included in final national output should be $60, not the sum of all those numbers, $100. The

values added at each stage of production over the previous stage are respectively $10, $20, and $30. Their

sum gives an alternative way of calculating the value of final output.

Key formulae are:

GDP (gross domestic product) at market price = value of output in an economy in the particular year minus

intermediate consumption

GDP at factor cost = GDP at market price minus depreciation plus NFIA (net factor income from abroad)

minus net indirect taxes (GNP)

of incorporated and unincorporated NDP at factor cost

The world population

By 2017, the world population had grown to 7,500 million (7.5bn) (Source: world meters. According to

the Population Reference Bureau it took just 12 years for the global population to increase from 6 to 7bn.

Of this number, only 15% will achieve a standard of living of at least 50% of that achieved in the USA.

According to the World Bank over 20% of the world’s population live on less than $1 a day. In fact, the

majority subsist at a standard of living similar to, or lower than, that typically achieved 10,000 years ago.

During the next 50 years the world population is predicted to grow to 9,000 million, and at this rate, the

proportion of those impoverished is likely to increase.

Indicators of development

The extent to which a country has developed may be assessed by considering a range of narrow and broad

indicators, including per capita income, life expectancy, education, and the extent of poverty.

The Human Development Index (HDI)

The HDI was introduced in 1990 as part of the United Nations Development Programme (UNDP) to

provide a means of measuring economic development in three broad areas – per capita income, health

and education. The HDI tracks changes in the level of development of countries over time.

Each year, the UNDP produces a development report, which provides an update of changes during the

year, along with a report on a special theme, such as global warming and development, and migration

and development.
The HDI has two main features:

A scale from 0 (no development) to 1 (complete development).

An index, which is based on three equally weighted components:

1. Longevity, measured by life expectancy at birth

2. Knowledge, measured by adult literacy and number of years children are enrolled at school

3. Standard of living, measured by real GDP per capita at purchasing power parity

What the figures mean:

An index of 0 – 0.49 means low development – for example, Nigeria was 0.42 in 2010.

An index of 0.5 – 0.69 means medium development – for example, Indonesia was 0.6. 3.

An index of 0.7 to 0.79 means high development – for example, Romania was 0.76. 4.

Above 0.8 means very high development – Finland was 0.87 in 2010.

The HDI is a very useful means of comparing the level of development of countries. GDP per capita alone

is clearly too narrow an indicator of economic development and fails to indicate other aspects of

development, such as enrolment in school and longevity. Hence, the HDI is a broader and more

encompassing indicator of development than GDP, though GDP still provides one third of the index.
HDI figures for selected countries

Very high ranked countries HDI - Very High (> 0.8)

Selected countries Source: United Nations Development Reportwww.economicsonline.co.uk

Norway

Australia

Switzerland

Denmark

Netherlands

Germany

Ireland

United States

Canada

New Zealand

Singapore

Hong Kong

Liechtenstein

Sweden

United Kingdom
Iceland

High

HDI - High (0.7 - 0.79) Selected countries

Source: United Nations Development Reportwww.economicsonline.co.uk

Russia

Kazakhstan

Cuba

Iran

Venezuela

Turkey

Mexico

Brazil

Azerbaijan

Ukraine

Albania

China

Colombia
Medium

HDI - Medium (0.55 - 0.69) Selected countries

Source: United Nations Development Reportwww.economicsonline.co.uk

Botswana

Egypt

Indonesia

Paraguay

South Africa

Bolivia

Kyrgyzstan

Iraq

Morocco

Namibia

India

Low

HDI - Low (< 0.69)

Source: United Nations Development Reportwww.economicsonline.co.uk

Pakistan

Nigeria

Cameroon

Zimbabwe

Yemen

Haiti

Rwanda

Uganda

Sudan

Afghanistan

Ethiopia

Gambia

Eritrea

Niger

Life expectancy
A variety of factors may contribute to differences in life expectancy, including:

1. The stability of food supplies

2. War

3. The incidence of disease and natural disasters

According to World Bank figures, life expectancy at birth in developing countries over the past 40 years

has increased by 20 years. However, these increases were not evenly distributed. Indeed, in many

countries in sub-Saharan Africa, life expectancy is falling due to the AIDS epidemic.

Adult literacy

The percentage of those aged 15 and above who are able to read and write a simple statement on their

everyday life.

More extensive definitions of literacy include those based on the International Adult Literacy Survey.

This survey tests the ability to understand text, interpret documents and perform basic arithmetic.

GDP per capita

GDP per capita is the commonest indicator of material standards of living, and hence is included in the

index of development. GDP per capita It is found by measuring Gross Domestic Product in a year, and

dividing it by the population.

Evaluation of the HDI

Despite the widespread use of the HDI there are a number of criticisms that can be made, including:
1. The HDI index is for a single country, and as such does not distinguish between different rates of

development within a country, such as between urban and traditional rural communities.

2. Critics argue that the equal weighting between the three main components is rather arbitrary.

3. Development is largely about freedom, but the index does not directly measures this. For example,

access to the internet might be regarded by many as a freedom which improves the quality of people's

lives.

4. As with the narrow measure of living standards, GDP per capita, there is no indication of the distribution

of income.

5. In addition, the HDI excludes many aspects of economic and social life that could be regarded as

contributing to or constraining development, such as crime, corruption, poverty, deprivation, and

negative externalities.

6. GDP is calculated in terms of purchasing power parity, and the value can change.