Economic Development

• Economic growth is very uneven

• A look at a satellite photo taken makes this
very clear
• Not all area with light have same standard
of living
• Some dark areas have low population
density but not all
Why isn’t the whole world developed?

• Differences in resources
• Differences in culture
• Maybe part of the answer but not all of it
• Consider the next satellite photo of North
and South Korea, countries with similar
resources and culture
 Why do we care about economic
growth?
• Economic Growth is connected to well
being
• Correlation between GDP per capita and
life expectancy and literacy
GDP, Life Expectancy, and Literacy

Copyright©2004 South-Western
Cost of slow growth in India

• Economic growth was slow in India prior to

1981
• After economic reforms were implemented
in the 1980s, per capita growth increased
from 1.4 % per year to 2.89 in the 1980s,
4.19% in 1990s and 6.78% from 2001-
2006
• Swaminathan S. Anklesaria Aiyar
estimates that if economic reforms had
taken place 10 years earlier, 14.5 million
infant deaths could have been avoided
• In addition there would have bee 261
million fewer illiterates, and 109 million
fewer poor people.
No Easy Answers

• Will look at growth and development from

different perspectives
• Before growth can be explained it must be
measured.
• How do we measure size of economy?
Measurement Issues
• When judging whether the economy is
doing well or poorly, it is natural to look at
the total income that everyone in the
economy is earning.
• Before WWII there were no statistics to
measure the size of the whole economy
THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
• Gross domestic product (GDP) is a measure of
the income and expenditures of an economy.
• It is the total market value of all final goods and
services produced within a country in a given
period of time.
Opportunity Cost of Growth

• Resource allocation
– Consumer Goods?
– Capital Goods?
• Necessity of generating growth through
allocating resources to the sources of growth –
capital goods
• Makes population poorer as fewer consumer
goods initially available – often these consumer
goods represent the basic essentials of life
Growth and Production Possibility
Frontiers
Capital Goods

1. Economic growth
when a country is
operating below
B capacity – more of
K2 both capital and
A consumer goods are
K1 made available as the
economy moves from
point A to point B

C1 C2
Consumer Goods
Growth and Production Possibility Frontiers
Capital Goods

2. Country operating at full

B capacity but discovers new
K2 resources or find ways of
A
improving the efficiency of
K1 existing resources, for
example, education of the
population to improve the
quality of human capital.

C1 C2
Consumer Goods
Growth and Production Possibility Frontiers
Capital Goods

3. Disproportionate shift in
PPF caused by investment in
resources suitable for
producing certain types of
goods – for example,
B investment from overseas
A may generate growth in the
K2
K1 production of consumer
goods as opposed to capital
goods – is such investment
of long term benefit to a
developing country?

C1 C2
Consumer Goods
 Growth and Production Possibility
Frontiers
Capital Goods

4. Disproportionate shift in
K2 B PPF as a result of investment
in resources that favour
generation of capital goods –
K1 A may not initially seem to
have major impact on the
standard of living of the
country but may have long
term benefits in enabling
more sustainable long term
growth.

C1 C2
Consumer Goods
Measurement of GDP

• GDP is the Market Value . . .”

– Output is valued at market prices.
– Cannot add eggs to cars to oranges directly
– GDP is a weighted average
– When prices are determined in markets they
reflect the marginal value people place on
them.
Measurement of GDP
• Of All Final . . .”
– It records only the value of final goods, not
intermediate goods (the value is counted only
once).
– If a baker buys flour, it is not part of GDP, the
bread produced from it is. If you buy flour in
the supermarket it is part of GDP.
Measurement of GDP

• Goods and Services . . . “

– It includes both goods (food, clothing,
cars) and services (haircuts, doctor visits).
• Includes only those goods and services
produced in market
– Not those produced at home
• A women marries her gardener and GDP falls
• Important to remember because in developing
countries many goods may be produced
outside the market
– No illegal goods
• Prostitution is part of GDP in Nevada, not CA
• Important to remember differences in legal
structure when comparing different countries
Measurement of GDP

• “ . . . Within a Country . . .”
– It measures the value of production within the
geographic confines of a country.
• GNP is a similar measure
– total value of all final goods and services
produced by a country’s citizens regardless of
where produced.
GDP and Welfare

• GDP is the best single measure of the

economic well-being of a society.
• GDP per person tells us the income and
expenditure of the average person in the
economy.
• Higher GDP per person indicates a higher
standard of living.
• GDP is not a perfect measure of the
happiness or quality of life, however.
GDP and Welfare

• Some things that contribute to well-being

are not included in GDP.
– The value of leisure.
– The value of a clean environment.
– The value of almost all activity that takes
place outside of markets, such as the value of
the time parents spend with their children and
the value of volunteer work
Problems with GDP measurement
for developing economies
• Does not include non traded goods
– Home production
– Illegal activities
• Data may not be accurate
– Limited resources for data collection
– Difficult to count production in agricultural
area
– Incentive to under report production to avoid
taxes etc
Growth vs Development

• Growth rate of GDP may rise without

development
– Discovery of oil or other natural resources
• Development measured by increases in
literacy, health care etc.
• Most of the time they are correlated but
not always
GDP per Capita

• GDP per Capita is GDP per person

– GDP/population
• GDP and GDP per capita can be different
– China vs. Switzerland
• Which measure is best depends on the
problem
– Marketing Rolex watches vs. KFC
Example Ghana

year GDP (PPP) GDP per capita

(billion dollars) (PPP) dollars
2007 32.56 1400

2008 34.94 1500

2009 36.58 1500

Real Vs. Nominal

• Nominal GDP values the production of

goods and services at current prices.
• Real GDP values the production of goods
and services at constant prices
Real vs. Nominal

• An accurate view of the economy requires

adjusting nominal to real GDP by using a
measure of inflation like the GDP deflator
or the CPI.
Nominal to Real GDP

• Converting Nominal GDP to Real GDP

– Nominal GDP is converted to real GDP as
follows:

Nominal GDP20XX
Real GDP20XX   100
GDP deflator20XX
Or CPI20xx
• CPI is calculated by finding how the cost
of purchasing a fixed basket of goods
changes over time
• Problems to be aware of include
– Substitution bias (If relative prices change the
composition of the basket shifts)
– Quality changes
• How do we compare GDP between
different countries with different
currencies?
• Exchange rates
– How much one currency trades for another
– Determined by the supply and demand for
currency which depends on traded goods only
– Fluctuate daily
• Many goods, like Big Macs are not traded
between countries.
– Services like haircuts, rents etc,
• These tend to be much cheaper in poor
countries than developed countries
Purchasing Power Parity

• If exchange rates are used to compare the

size if these countries to developed
countries will make them seem smaller
than the really are.
• Should use PPP to compare size of
economies across countries
– Calculated by taking a basket of goods and
finding how much it costs in different countries
How much difference does it
make?
• For Ghana in 2009
• GDP in official exchange rate was 14.76
billion dollars
• GDP in PPP was 36.58 billion dollars
Alternate Measures

• Life expectancy, infant mortality, height by

age can all be used to judge standard of
living
Growth Calculations

• Growth rate for a year is calculated by

(GDPt+1 –GDPt )/GDPt

• Growth rate over N years is calculated by

GDPt+N=GDPt(1+g)N
Examples

• Nominal GDP for Ghana was 16.7 billion

dollars in 2008 and 14.9 billion in 2007.
What was the rate of growth?
• (16.7-14.9) /14.9 = .12 or 12%
• Do you think these numbers are using
exchange rates or PPP?
• Real GDP growth in Ghana was 7.3%,
what was happening to prices?
• Prices were Rising
Examples

• If the GDP of Ghana is 16.7 billion dollars

in 2008 and growth rate of GDP is 5% for
10 years, how much will GDP be in 2018?
• GDP 2018=16.7(1+.05)10=27.2
Economic Growth
Economic Growth
Benefits

• Increases in economic growth should enable more of

everything to be produced
• Increases possibility of providing consumer goods for
all
• More consumer goods, etc. could be equated with an
increase in living standards
• Wealth generated may eventually ‘trickle down’ to
those who are poor by means of income distribution –
taxes and benefits, etc.
 Benefits

• Improved standards of living

associated with increase in the
availability of luxury goods:
– TVs
– Fridges and freezers
– Swimming pools, etc .
• In addition:
– Infrastructure – roads, rail, energy,
water, communication networks
– Health and education provision
• All associated with a ‘decent’
standard of living.
We tend to associate improved living standards with the
availability of consumer goods and essential services.
Copyright: Anne-Marie Labbate,
http://www.sxc.hu/index.phtml
Improvement in Welfare

• Welfare associated with well-being:

• Welfare is improved by the provision of support services for
those not necessarily able to help themselves – often on the
margins of society. Welfare includes:
– Pensions
– Benefits – sickness, disability, etc.
– Support – maternity, holidays,
– Housing
– Infrastructure – homes for the elderly
• Such welfare provision often funded through income
redistribution - taxes
Welfare

• Providing support for

the elderly, homeless,
orphaned and
disadvantaged is
something only wealthy
countries can afford to
any great extent.

Copyright: Mexikids, http://www.sxc.hu/index.phtml

Costs
Costs
• Economic growth can bring with it costs:
– Not all income distributed equally
– Wealth often in the hands of a few
– ‘Trickle down’ does not always seem
to work in practice
– Corruption may reduce redistribution effects
– Growth funded in part by spending
on weapons which do not benefit
the population as a whole
 Costs

• Environmental problems
– Expansion and growth brings with
it the problems of pollution – often
developing countries do not have
the infrastructure to cope with the
waste generated nor
the legislation or regulation
to influence those
who produce it.

Expansion generates waste products as does increased

consumption – with subsequent costs to society.
Copyright: Marzie, http://www.sxc.hu/index.phtml
 Environmental Impact
• Negative Externalities
• Pollution – dumping
of hazardous waste
• Environmental degradation –
over farming reduces
productivity of the soil,
deforestation, damage
to eco-systems and
reduction in biodiversity
• Non-renewable resources –
The destruction of the rain forests in Brazil and elsewhere highlight
the problems of growth in developing countries.
finite resources
Title: Rain forests in Brazil are cleared and burned by settlers for
farmland. Copyright: Getty Images, available from Education Image
Gallery (http://eig.edina.ac.uk)