Development Econ Quiz #1 1

Income index for HDI

ln (country's income) - ln (min) / ln (max) - ln (min) • Uses natural log because higher income has a declining contribution to human development. o Utility of income is much greater at a lower income and they capture it through a logarithmic equation o Utility: benefit or satisfaction that somebody get from something

What graph to illustrate economic growth

Production possibility frontier (PPF) graph

When was the HDI first developed? Where is it published?

• HDI was first developed in 1990 by the UN. It is published in the human development reports by UNDP

What are the three related indexes to the HDI?

• Health • Education • Standard of living

What causes increase in economic growth

• Increase in technology • Increase in quantity of labor • Increase in human capital (quality of labor and resources) • Increase of quantity of other resources

Disadvantages? #1

• It is not a direct indicator for well-being. Having an increasing GNP or GDP doesn't necessarily mean that people's standards of living are increasing. o Doesn't tell u distribution of income between poor and rich. Maybe growth is going to rich. • Only focusing on economic aspect. • Although economists have resolved the distorted image of the exaggeration of gap between rich and poor countries by using PPP estimates of real GNP per capita instead of just GNP per capita, this still doesn't tell us anything about the distribution of income. • The data used for this source might be very unreliable for many developing countries as it is not updated frequently. • Does not capture how the distribution of regions within a country.

Why is the HDI considered a better measure of development than per capita GDP or per capita GNI?

• It recognizes that having economic wealth / "stuff" does influence your standard of living but it is not the only thing. Does not assume that economic growth will necessarily lead to human growth. It has a broader sense of standard of living and focus on improving people's lives.

Standard of Living index:

• Measured by GNI per capita international dollars with PPP exchange rate o Min: 100; Max: 75,000

Health index:

• Measured by life expectancy because if people are healthier they will generally live longer o Min: 20 Because no country has average lower than 20 o Max: 85 85 is a bit higher than the best country.

Education index:

• Measured by mean years of schooling for adults 25+ AND expected years of schooling for children o Weighting: 50-50 for both o Min: 0 years; Max: 18years

What is the difference between GDP and GNP?

• GDP (Gross Domestic Product): measure of national income produced in a particular country o Measures production inside of a country, no matter who makes it • GNP (Gross National Product): GDP + net factor (payments / receipts) from abroad. This net income from abroad includes dividends, interest, and profit o Value of all finished goods and services made by a country's residents & businesses, regardless of production location.

3 types of resources:

1. Land a. Natural resources (e.g. timber, crop) 2. Labor a. Human resources, human capital (skill level of labor) 3. Capital a. Plant and equipment (e.g. Machines)

Difference between plant and equipment

1. Plant: buildings (e.g. humanities building) 2. Equipment: tools, materials (e.g. projector)

Why does standard of living index use GNI

Measuring people's income rather than production because it want to exclude production within a country earned by foreigners because it is not spent by people within the country.

Economic growth

increase economies' ability to produce goods and services. • The same as Potential Output

Production function

y = f (L, K, T) • Output: production (Y) • Input: Land (usually fixed), labor (L), capital (K), technology (T)

When were measures of GDP and GNP first developed?

• 1930s by economists such as Nobel Laureates Simon Kuznets and Richard Stone

What is the weighting among the three components?

• All 3 components are weighted the same

Author of first definition:

• Brian Snowdon, teaches at Durham University

Advantages? #2

• Captures how well-rounded the country is. Especially with using a geometric mean of the 3-dimension indices instead of an arithmetic mean so that poor performance in any one is reflected and there is no perfect substitutability. • Does not assume that economic growth will necessarily lead to human growth. Broder sense of standard of living.

What's the definition? #1

• Economic development = economic growth • Economic growth is increase in economy's ability to produce goods and services.

What's the definition? #2

• Economic development = human development / improvement in standard of living

How is it measured? #1

• GDP or GNP per capita increases in international dollars with PPP exchange rates

Example of difference between GDP and GNP:

• GNP: measure of production of all Americans regardless of where production occurs. o Add income earned by Americans abroad and subtract income earned by foreigners in the States. • GDP: Only capture production of US o E.g. American production in India is going to be added to America GNP. Japan Toyota in America is going to be subtracted from America GNP.

Advantages? #1

• Good for comparing performance of a country over historical periods of time • Good for comparing different economies. • Easy to get a picture of level of development since GDP data is available.

What are the components of the HDI? Why were the specific statistics chosen to measure these three components?

• HDI 3 measurements/dimensions (4 indicators): 1. Long and healthy life a. Indicators: Measured by life expectancy at birth 2. Being knowledgeable a. Indicators: i. Measured by mean of years of schooling for adults 25+ ii. Measure by expected years of schooling for children b. Dimension index: education index 3. Have a decent standard of living a. Indicators: Measured by gross national income per capita (GNI per capita PPP $)

Disadvantages? #2

• HDI does not show how well each region of the country is doing and there is often wide divergence within a country. For example, although China might have a rather higher HDI score, some regions of it is much poorer than other parts. o Same for first one. • GNI used for measuring the standard of living component only reflect on spending rather than increase on economic welfare. For example, if a country has a high GNI, but that's because the government spends a lot on military spending, that doesn't improve standard of living for the people.

What is the range of possible values for the HDI? Why was the HDI developed to be measured along this scale?

• HDI is on a scale of 0 to 1. It uses a geometric mean to combine the 3 indexes numbers.

How is it measured? #2

• Measured by the HDI index o Health: life expectancy o Education: Mean years of schooling for adults 25+ Expected years of schooling for children. o Availability of goods and services / standard of living Gross national income (GNI) per capita PPP (In dollars)

Why do measures of GNP per capita compared in U.S. dollar terms give a distorted view in making comparisons of the standard of living between countries? What can be done to reduce this distortion?

• This is because the purchasing power of a US dollar varies across countries. For example, since the purchasing power of a dollar is much higher in developing countries, it will lead to an exaggeration of the gap between the incomes between rich and poor countries. Disparity is going to look bigger than it actually is. • To reduce this distortion, economist use PPP exchange rates, which put 2 currencies in equilibrium of each other by taking into account the exchange rates of different countries.

How is the HDI calculated from these component statistics?

• You first create the dimension indices for each of the components by setting up max and min value to express indicators into indices on a scale of 0 to 1. o Dimension index = (Actual value - minimum value) / (Maximum value - minimum value) • Then you aggregate the dimension indices by using a geometric mean.