2.3 - Measuring Economic Developmnt
The difference between economic growth and development
Economic growth and economic development are related but distinct concepts. While growth focuses on expanding the size of an economy, development encompasses broader improvements in people's lives.
Economic growth
Economic growth refers to an expansion in the total output of goods and services produced in an economy, typically measured by an increase in gross domestic product (GDP).
Economic development
Economic development is a broader, normative concept that assesses improvements in living standards and overall welfare over time. It considers not just the quantity of economic output but also its quality, such as how growth affects social and human well-being.
Key distinctions between growth and development
- Scope of measurement - Growth relies on indicators like GDP or gross national income (GNI) per capita, which show average income levels but ignore aspects like quality of life, environmental impact, or distribution of wealth.
- Quality considerations - Development evaluates whether growth enhances welfare, for example, growth with minimal pollution is preferable to growth causing high environmental damage.
- Distribution of benefits - Development prioritises growth that improves conditions for the wider population, rather than benefiting only a small wealthy group.
- Additional factors - Development requires indicators beyond growth, inflation, and unemployment, such as access to health, education, and clean water, to provide a fuller picture of progress.
National income measures like GDP or GNI per capita can indicate living standards but often overlook non-monetary elements of welfare.
Purchasing power parity (PPP)
Purchasing power parity (PPP) adjusts national income figures to reflect differences in the cost of living across countries, showing what a currency can actually buy in real terms.
Genuine progress indicator (GPI)
The genuine progress indicator (GPI) builds on GDP by adding positive non-market factors (e.g., volunteer work) and subtracting negative effects (e.g., pollution costs), offering a more holistic view of welfare.
The Human Development Index (HDI) as a measure of development
The Human Development Index (HDI) is a composite measure created by the United Nations to evaluate and compare countries' social and economic progress.
Components of HDI
HDI combines three equally weighted dimensions:
- Health - Measured by average life expectancy at birth.
- Education - Assessed by the mean years of schooling for adults and expected years of schooling for children.
- Standard of living - Represented by real GNI per capita, adjusted for purchasing power parity (PPP).
These components are standardised to create a score between 0 and 1.
Interpreting HDI scores
- Scores above 0.8 indicate high human development.
- Scores between 0.5 and 0.8 suggest medium human development.
- Scores below 0.5 reflect low human development.
HDI allows for tracking changes in a country's development over time or comparing levels between nations. Data for HDI is relatively straightforward to gather and standardise globally.
Limitations of HDI and alternative indicators
While HDI provides a useful overview, it has several shortcomings and does not capture all aspects of development. Alternative indicators can offer additional insights.
Limitations of HDI
- Health dimension - A long life expectancy does not guarantee a high quality of life, as it ignores factors like health conditions or access to care.
- Education dimension - Years in school measure quantity but not the quality of education received.
- Standard of living dimension - GNI per capita excludes informal economic activities, which are more significant in less developed countries, and fails to account for income inequality.
- Overall gaps - HDI overlooks environmental sustainability, political freedoms, and other social factors.
Alternative indicators of development
Alternative measures address some HDI limitations by focusing on specific aspects of welfare:
| Indicator | Description |
|---|---|
| Percentage of labour in agriculture | High levels often indicate low development, as economies shift away from primary activities. |
| Mobile phones per thousand people | Reflects access to technology and communication infrastructure. |
| Disease and malnutrition rates | Highlights health challenges and nutritional security. |
| Newspaper circulation | Indicates literacy levels and access to information. |
| Energy consumption | Shows industrial activity but can also reveal environmental impacts. |
| Political freedom | Measures democratic rights and governance quality. |
| Environmental sustainability | Assesses resource use and pollution levels. |
| Access to clean water | Indicates basic infrastructure and health standards. |
Economic structure and sectoral changes in development
An economy's structure is divided into three main sectors, and the balance between them shifts as development progresses, influencing resource use and environmental outcomes.
The three economic sectors
- Primary sector - Involves extracting raw materials, such as mining, agriculture, and fishing.
- Secondary sector - Focuses on transforming raw materials into goods, including manufacturing and construction.
- Tertiary sector - Provides services, such as teaching, banking, and tourism.
Sectoral shifts during development
- Early stages - Less developed economies rely heavily on the primary sector for employment and output.
- Mid stages - As development advances, the secondary sector grows, increasing industrial activity, resource consumption, and pollution.
- Advanced stages - Highly developed economies see the tertiary sector dominate, which may reduce local pollution but can displace it to other countries through imported goods.
These changes reflect broader development patterns, where industrial growth drives economic expansion but raises environmental concerns.
Inequality in development and its measurement
Inequality can hinder development even in growing economies, affecting access to opportunities and economic stability.
Impacts of inequality on development
- In developing countries - Low-income groups are highly vulnerable to economic shocks, limiting overall progress.
- In developed countries - Issues like relative poverty and social exclusion persist, despite high average incomes.
- Broader effects - High inequality can slow development by restricting credit access for the poor, discouraging business startups, and leading the wealthy to invest abroad or import goods, reducing domestic economic circulation.
Tools for measuring inequality
Inequality is often analysed using graphical and numerical methods.
Lorenz curve
The Lorenz curve is a graph showing the distribution of income or wealth. The further the curve bows away from the line of perfect equality, the greater the inequality.
Gini coefficient
The Gini coefficient quantifies inequality on a scale from 0 (perfect equality) to 1 (perfect inequality).
Where:
- A = Area representing inequality (between the Lorenz curve and the line of equality)
- B = Area representing equality (below the Lorenz curve)
Factors influencing inequality
- Wage and tax levels - Low wages or regressive taxes can widen gaps.
- Unemployment rates - High joblessness disproportionately affects lower-income groups.
- Education levels - Limited access to education perpetuates poverty cycles.
- Property ownership and inheritance laws - These can concentrate wealth in few hands.
- Government benefits - Social welfare systems can reduce inequality by supporting the vulnerable.
Collateral, such as assets pledged against loans, can also affect inequality, as those without assets struggle to access finance for business or personal development.