IB Economics/Macroeconomics/Introduction to Development

Introduction to development

• Definitions of economic growth and economic development
• Differences in the definitions of the two concepts
• Gross Domestic Product (GDP) versus Gross National Product (GNP) as measures of growth:

GDP, as said earlier, is the sum value of all goods and services produced within a country. GNP narrows this definition a bit: it is the sum value of all goods and services produced by permanent residents of a country regardless of their location.

• Limitations of using GDP as a measure to compare welfare between countries: It is very difficult to use GDP as a measure of welfare for various reasons.

Comparing GDP in a single country over time

• Money values and population changes
• Quality and substitution bias
• Errors and / or changes in accounting methods

Comparing GDP between countries

• Composition of output
• Composition of expenditure
• Distribution of income
• Unaccounted for activity
• Exchange rate distortions
• Externalities and environmental damage

• Allowance for differences in purchasing power when comparing welfare between countries: A better measure than GDP pc is GDP at PPP or purchasing power parity. It is a measure which takes into account how much you can purchase a basket of goods in one country in comparison with another. For example, in Austria it costs 20 Euro for a haircut, however- with 20 Euro one can purchase 5-6 haircuts in Brazil.

• Alternative methods of measurement
• Problems of measuring development

Economic growth

Economic Growth is defined as an increase in output in an economy measured by an increase in real GDP over a period of time. An increase in a society's potential output is achieved by a change in a country's quantity and quality of resources.

Benefits

• Increased living standard
• Improved lifestyle
• Lower poverty rates
• Higher life expectancy

Limitations

• More inequality
• Pollution increases
• Breakdown of family values
• Social problems (overcrowding, suicide, divorce, traffic...)

Reasons for Economic Growth

• increase in investment (more tools, machines, factories)
• Innovation (new tools, new robots, new techniques)
• Improvements of quality of workforce (instead of quantity)
• Infrastructure (telephones, roads...)
• Social and legal institutions (ownership of land)
• Available resources (oil..)

Economic Development

• Economic Development: is defined as a qualitative measure of a country's standard of living. This takes into account things such as health, education, and GDP at PPP.

Note: Sustainable economic growth is an increase in real output but at the same time not using up all the available resources . Leaving some or replacing those used up so that future generations can still grow economically.

'Development is an innovative process leading to the structural transformation of social system'. FRIEDMAN'S DEFINITION

Measuring Growth (GDP vs GNP)

• It is quite difficult to measure an increase in economic growth because of GNP. If Ford's sales increase, then that doesn't mean that employees in the US benefits, if they have in fact been outsourced to say China. The government does take in a bit of revenue, but to say that the rest of the country has benefited is an overstatement.

Purchasing Power

Is the aggregate power which is commanded by the general public

Alternative Measurements of Development

HDI (Human Development Index), gender- related index (GDI), Human poverty index (HPI), infant mortality, literacy rate. among others

Problems of measuring Development

While GDP provides a somewhat limited measure of economic growth and living standards, it does have the advantage of being fairly easily obtained and is based on three variables only - income, expenditure and output. 

In contrast to this, as can be seen from the HDI, HPI, MEW （Measure of economic welfare） and ISEW (Index of sustainable economic welfare), development is a multi-dimensional, complex process which can only be judged against a variety of criteria, using composite indices. 

This may give rise to various problems involving subjective, value judgments on behalf of the statisticians who construct the indices. For example, how should factors such as life expectancy and literacy be weighted within an index? Which factors should be included and which should be excluded?

So while the HDI, for example, may provide a fairly sophisticated indicator of living standards, it omits some very important components, such as environmental quality