Economic Development Reviewer - Chapter 2 - Todaro and Smith
Economic Development Reviewer - Chapter 2 - Todaro and Smith
Educational Attainments:
1. real income per capita adjusted for purchasing power
2. health as measured by life expectancy, Literacy - fraction of adults reported or estimated to
undernourishment, and child mortality have basic abilities to read and write
3. educational attainments as measured by literacy and
schooling
Holistic Measures of Living Levels and Capabilities
Purchasing Power Parity
The New Human Development Index
Gross National Income (GNI) per capita
Human Development Index (HDI)
- most common measure of the overall level of
economic activity - index measuring national socioeconomic
- often used as a summary index of the relative development, based on combining measures of
economic well-being of people in different nations education, health, and adjusted real income per capita
- Calculation: total domestic and foreign value added - Ranks each country on a scale of:
claimed by a country’s residents without making 0 = lowest human development
deductions for depreciation of the domestic capital 1= highest human development
stock.
Based on three goals or end products of development:
Value added - portion of a product’s final value that is added 1. a long and healthy life as measured by life
at each stage of production expectancy at birth
2. knowledge as measured by a combination of
Depreciation (of the capital stock) - wearing out of
average schooling attained by adults and expected
equipment, buildings, infrastructure, and other forms of
years of schooling for school-age children
capital, reflected in write-offs to the value of the capital
3. decent standard of living as measured by real per
stock.
capita gross domestic product adjusted for the
Capital stock - total amount of physical goods existing at a differing purchasing power parity of each
particular time that have been produced for use in the country’s currency to reflect cost of living and for
production of other goods and services the assumption of diminishing marginal utility of
income
Conversion of national currency figures into U.S. dollars does
not measure the relative domestic purchasing power of Diminishing Marginal Utility - the subjective value of
different currencies. additional consumption lessens as total consumption
becomes higher
Purchasing power parity (PPP)
Two steps in calculating the New HDI:
- calculation of GNI using a common set of international
prices for all goods and services, to provide more 1. Creating the three “dimension indices”
accurate comparisons of living standards 2. Aggregating the resulting indices to produce the
- defined as the number of units of a foreign country’s overall New Human Development Index (NHDI)
currency required to purchase the identical quantity of
In the New HDI, instead of adding up the health, education,
goods and services in the local developing country
and income indexes and dividing by 3, the New HDI is
market as $1 would buy in the United States 1 3 1 31 3
calculated with the geometric mean: NHDI = H / E / I /
Indicators of Health and Education H = health index, E = education index, I = income index
Health:
Life Expectancy - average number of years newborn
children would live if subjected to the mortality risks
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The wide range of income, health, education, and HDI A major implication of high birth rates: active labor force has
indicators already reviewed is sometimes called a “ladder of to support proportionally almost twice as many children as it
development.” does in richer countries
Developing world has lagged in its average levels of nutrition, Shift from agriculture to manufacturing and services
health, and education.
Although modernizing in many regions, rural areas are poorer
There are strong synergies (complementarities) between and tend to suffer from missing markets, limited information,
progress in health and education = under-5 mortality rates and social stratification.
improve (lesser deaths) as mothers’ education levels rise
A massive population shift from rural to urban areas, fueling
Higher Levels of Inequality and Absolute Poverty rapid urbanization.
Very high levels of inequality (gap between rich and poor Lower Levels of Industrialization and Manufactured
within individual developing countries) are found in many Exports
middle-income countries.
Industrialization - associated with high productivity and
Extreme poverty is due in part to low human capital but also incomes and has been a hallmark of modernization and
to social and political exclusion and other deprivations. national economic power
Development economists use the concept of absolute Developing nations tended to have a higher dependence on
poverty to represent a specific minimum level of income primary exports. Most developing countries have diversified
needed to satisfy the basic physical needs of food, clothing, away from agricultural and mineral exports to some degree.
and shelter in order to ensure continued survival = problem The low-income countries remain highly dependent on a
arises when these minimum subsistence levels vary from relatively small number of agricultural and mineral exports.
country to country and region to region
Adverse Geography
Higher Population Growth Rates
Geography must play some role in problems of agriculture,
Crude Birth Rate – number of children born alive each year public health, and comparative development more generally.
per 1,000 population
Developing countries are primarily tropical or subtropical,
and this has meant that they suffer more from tropical pests
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and parasites, endemic diseases such as malaria, water smaller segment of society has been able to gain access to
resource constraints, and extremes of heat. and take advantage of economic opportunities. Problems
with governance and public administration, as well as poorly
Resource endowment - nation’s supply of usable factors of performing markets, often stem from poor institutions.
production, including mineral deposits, raw materials, and
labor
High mineral wealth is no guarantee of development success. Property rights - acknowledged right to use and benefit from
Conflict over the profits from these industries has often led a tangible (land) or intangible (intellectual) entity that may
to distribution of wealth, social strife, undemocratic include owning, using, deriving income from, selling, and
governance, high inequality, and even armed conflict, in what disposing
is called the “curse of natural resources.”
Underdeveloped Markets
External Dependence:
Market underdevelopment lacks:
Developing nations have weaker bargaining positions than
1. a legal system that enforces contracts and validates developed nations in international economic relations
property rights
Developing nations often also voice great concern over
2. a stable and trustworthy currency
various forms of cultural dependence
3. an infrastructure of roads and utilities that results in low
transport and communication costs Developing nations are dependent on the developed world
4. a well-developed and efficiently regulated system of for environmental preservation, on which hopes for
banking and insurance sustainable development depend. Of greatest concern, global
5. substantial market information for consumers and warming is projected to harm developing regions more than
producers about prices, quantities, and qualities of developed ones; yet both accumulated and current
products and resources greenhouse gas emissions still largely originate in the high-
6. social norms that facilitate successful long-term business income countries.
relationships
Developing world endures what may be called environmental
Infrastructure – facilities enabling economic activity and dependence, in which it must rely on the developed world to
markets, such as transportation, communication and cease aggravating the problem and to develop solutions,
distribution networks, utilities, water, sewer, and energy including mitigation at home and assistance in developing
supply systems countries
Incomplete information – absence of information that 1. Physical and Human Resource Endowments
producers and consumers need to make efficient decisions 2. Relative Levels of Per Capita Income and GDP
resulting in underperforming markets 3. Climatic Differences
4. Population Size, Distribution, and Growth
Lingering Colonial Impacts and Unequal International
5. The Historical Role of International Migration
Relations Brain drain - emigration of highly educated and
skilled professionals and technicians from the
Colonial Legacy:
developing countries to the developed world
Despite important variations that proved consequential, 6. The Growth Stimulus of International Trade
colonial era institutions often favored extractors of wealth Free trade = “engine of growth. “ Trade in which
rather than creators of wealth, harming development then goods can be imported and exported without any
and now. barriers in the forms of tariffs, quotas, or other
restrictions
Developing countries have more often lacked institutions and Terms of trade - ratio of a country’s average export
formal organizations of the type that have benefited the price to its average import price.
developed world: Domestically, property rights have been
7. Basic Scientific and Technological Research and
less secure, constraints on elites have been weak, and a Development Capabilities
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Research and development (R&D) Scientific - take into account changes in inequality within
investigation with a view toward improving the countries as well as between them
existing quality of human life, products, profits,
factors of production, or knowledge Sectoral Convergence
8. Efficacy of Domestic Institutions - convergence in manufacturing = failure to find overall
Are Living Standards of Developing and Developed Nations convergence across countries is due to the small share
and slow growth of manufacturing employment in
Converging?
low-income countries
Divergence
Conditional Convergence
World-as-One-Country Convergence