13 - 1 - Lecture 2 - Chapter 1- Incomes Around the World (16-46)

7/25/2019 13 - 1 - Lecture 2 - Chapter 1- Incomes Around the World (16-46)

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[MUSIC]Sustainable development we've seen hasthree major aspects, economic development,broad-based inclusion and environmentalsustainability,all supported by good governance.But what do we mean by economicdevelopment?I want to introduce the main concept ofhow we measure economic development.Of course, there are many differentaspectsof a true and proper understanding ofeconomic development, but we tendto use a short hand, and that is calledthe grossdomestic product of a country.The gross domestic producthas three words and three concepts in it.It means thetotal production taking place within thegeographic boundariesof a country in a given year, so the grossof the gross domestic product

means you're measuring everything that istaking place within the country.You're not taking into account inthat measurement the depreciation ofcapital andso forth which would give us a differentconcept called net domestic product.Domestic signifies the fact thatwe're talking about a geographic area, andwe're concerned with how mucheconomic activity or production takesplace within the boundaries.Of course, usually we're talking about a

country, but we couldbe talking about the production of a cityor a region.And sometimes of course, we also want totalk about the gross world product whichisadding up the domestic production acrossall of the countries of the world.And product, or production, signifies thefact that what we're interested inmeasuring is not the accumulated wealth,the wonderfulbuildings and monuments and roads and

infrastructure, the naturalbeauty, of a country, which maytremendouslyraise the quality of life.We're interested in the actual flow ofproduction in a given time period.Now, for most purposes we look at a year,though when policy makers are trying tounderstand short termdynamics of unemployment and production,


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they're interested oftenin measuring the gross domestic producteven over a quarter ofa year.We're going to look at nationalmeasurement or countries.We are going to look at the annualmeasurement.Now, one more critical point aboutmeasuring thegross domestic product.In general, we are interested in gettinga sense of the standard of living of acountry, and to do that we takethe total production in the country over agiven time period,usually the year, and divide it by thepopulation so that we'reinterested in the gross domestic productper person, or per capita.Why is that?Well, of course, larger countries producemore because there are more people.There are more workers, but if we simply

were to compare countries in terms ofthe total production, we'd find thathighly populouscountries would have higher production butwe wouldn'tlearn very much about whether the livingstandardsof those larger countries is really higherthan the living standards of a smallcountry,which may produce a little bit but quite abit for each person in the economy.So when we think about economic

development, we tend to think about thegross domestic product per person.Let me emphasize again.That's not really a comprehensive measureof economic development.We want to know whether people are healthyor not.We want to know levels of education.We want to know other indicators ofwell-being,but as a shorthand, when I want to get asense of acountry's overall level of economic

development, I startby looking at the gross domestic productper person becauseit's going to be a pretty good indicatorof where things stand.And indeed that's what the keeper of theaccounts, which is theWorld Bank, does.The World Bank keeps very systematictabulations on gross domestic product per


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person, andit classifies countries in a way that isalso extremely helpful for us.The World Bank gives three categories ofcountries, high income countries, middleincome countries andlow income countries, and it puts eachnation into one of those threebins, depending on its measured grossdomestic productper person.Roughly speaking, a low income country isa country where the domestic productionper person isat a level below a threshold of about$1,000per person per year.In other words, roughly $3per day, and a middle income country is acountrythat is in a band between $1,000 roughlyper person and about $12,000 per personper year.And the high income countries are

countries that areabove the $12,000 per person threshold.There are then refinements.The middle income group which is quite abig one, is divided between the uppermiddleincome and the lower middle income, withthedividing line of about $4,000 per personper year.The World Bank categories provide us witha, a useful depiction,a, a good map of the world, and if you

look at themap in front of you, you can see thatthose few areas that areshaded blue are the high income countries,the US and Canada, Western Europe, Japanand Korea, Australia, and New Zealand, anda few other parts of the world.Add up the population of thathigh income group, and you find that it'sabout 1billion of the roughly 7 billion people onthe planet.So it's about 1 in 7 in the world, roughly

15% of the world's population living inhigh income countries.Then take a look at this large middlegroup ofbeige colors, and you see that that coversa wide expanse of the world.And indeed 5 out of 7 in the world'spopulation, roughly 5 billion ofthe 7 billion people on the planet, are inthe middle income category.


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So that's a big middle, and that's dividedbetween an upper part and a lower part,roughly half and half.Approximately 2.5 billion people in theupper middle income category and about 2.5billion in the lower middle income.Then look at the countries shaded red.Those are the poor countries, the lowincome category, and by simple arithmetic,we can say that 7 billion minusthe one in the high income, minus the fivein the middle income.That leaves about 1 billion peopleapproximately living in the low incomecountries.We've already noted that the low incomecountries are heavily concentratedin tropical Africa and in South Asia, withthis scattering of low income countries inother parts of the world, but inour world today, the poorest countries inthe worldare concentrated in these two regions, andmost of

the world's poor people therefore live inthose regionswhere the countries are in the low incomecategory.Now, let me mention one more category.It's not a World Bank category.It's a United Nations category but alsovery important for us to remember.Even within the lowincome countries, there are distinctions.There's a subgroupwithin the low income countries that's inpretty desperate shape.

Not only are they poor, but the humanconditions of disease,of education levels, of socialinstability,are very bad.And moreover thissubset of countries is highly vulnerableto droughts, to floods, to conflict,to, to violence.So these are a group of highlyvulnerable, very poor countries, and theUN has classifiedthem as the least developed countries.

Thereare about 50.Right now the list is48 but it goes up and down depending onhow countries are performing.Among the least developed countries, thepoorest of those are again heavilyconcentrated.You see that in tropical Africa there's alarge number of least developed countries.


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There are several in Asia, and if you lookcloselyat the map, you'll notice something verytelling for us.Afghanistan, Nepal, Bhutan, Laos,landlocked countries.This is not by accident.We're going to see thateconomic development depends oninternational trade.Being landlocked is a problem.You'll also notice a number of smallisland economies in the Pacific, and alsoHaiti.Small island economiesalso can be quite vulnerable and part ofthe least developed countries.We know what these categories look like.Intuitively it's good toremember London and my own hometown NewYork Cityamong the high income countries.Middle income countries,Rio or San Paulo in Brazil, where you have

a tremendous amount of development andwealth,but you also have the [FOREIGN], theslums.Countries that are in the middle of thepack often doing very well in raisingincome levels.China, another major world economy that isa middle income country.The poor countries, we know what they looklike also because they're more rural.Small holder farmers.Peasant farmers scratching

out a living and hardly making ends meet.And for the least developed countries,Somalia, unfortunately in its tragedy inrecent decades really a clear example ofwhat it means to be amongthe poorest of the poor and not onlydesperate poverty, hunger, lackof education, low life expectancy, butlots of violence and lots of politicalinstability as well.Let me mention one more important detailfor us in terms of measurement.For everything that I've said so far in

measuring thegross domestic product, the totalproduction is added up anddivided by population to get the grossdomestic product per person,and since countries have their owncurrencies, theyhave to be converted to a common standard.And so the exchange rate is usedto convert the national currency into a


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common,typically U.S. dollar standard, and that'showwe make the comparisons in a commoncurrency.But there's another translation that canalso be useful.I want you to be aware of it because wewill be referring to it manytimes, and that is to make one moreadjustmentfor the difference of costs or prices indifferent countries.If you buy an automobile or a televisionset almostanywhere in the world, price will befairly similar because theseare goods that are traded internationally,and they have a similarprice when expressed in dollars in anypart of the world.But if you goto rent an apartment or get a haircut orgo to a movie or park a

vehicle in the center of town, you'll findthe difference in costs extraordinary.In London or in New York or Tokyo orParis, the prices would be sky high, butin a poor setting in Mogadishu or in Akrahorin, Bamako, Mali, the price of a haircutmight be a20th or a 50th what you'd, pay in a salonin Paris.So one has to take into account thatsimply measuring theoutput and converting to dollars might not

give a full comparison becausethe purchasing power in a poor countrymight be a little bit higher thanis indicated, so we often make one moreadjustment called purchasing poweradjustment, or purchasing power parity totake into account the relative pricelevels.When you do that you find that poorcountries are stillquite poor, but they're not quite as pooras they look.Take a case of a country like Malawi, a

poor countrylandlocked in tropical Africa.Measuredin the market prices and market exchangerate, itsper capita income is around $250 perpersonper year compared with $50,000 per personper year in the United States.Malawi's extraordinarily poor.


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Adjust for the lower costs ofliving in Malawi, and you find thatMalawi's still very poor, butmaybe the income with the purchasing poweradjustmentshould be around $900 to $1,000, roughly 4times higherthan simply using the market prices.So thats a system calledpurchasing power parity, measures ofgross domestic product per person.It's a lot of words.It's a lot of concepts.The main point that I am stressing is thatwe measure economicdevelopment in short hand by the grossdomestic product per person.We adjust obviously for population.We adjust for currency, and very often wewant to adjust for the differentprice levels.Then, we can classify countries, and wecan studythe question, why are countries at

different levels of development?How do those different levels ofdevelopment relate toother things that matter a lot for people,theirhealth, their well-being, their happiness,and what can countriesdo that are at the low end of thiscurve, the least developed countries andthelow income countries, to raise theirlivingstandard to achieve economic growth, that

isa rise of gross domestic product perperson?Fast enough to narrow the gapsignificantlywith the wealthier and the higher incomecountries.That of course is one of the keychallenges of sustainable development.[MUSIC][BLANK_AUDIO]

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13 - 1 - Lecture 2 - Chapter 1- Incomes Around the World (16-46)