ECON 450 Development Economics - publish.illinois.edupublish.illinois.edu/henriqueveras/files/2016/01/Lecture2.pdf · economic well-being of people in different nations. ... Henrique

Defining the Developing WorldBasic Indicators of Development

ECON 450Development Economics

Comparative Economic Development

University of Illinois at Urbana-Champaign

Summer 2017

Henrique Veras de Paiva Fonseca ECON 450 Development Economics


Outline

1 Defining the Developing World

2 Basic Indicators of DevelopmentPurchasing Power ParityIndicators of Health and EducationThe New Human Development Index (NHDI)



World Bank Classification

In the World Bank’s classification system, 210 economies with apopulation of at least 30,000 are ranked by their levels of grossnational income (GNI) per capita.

These economies are then classified as low-income countries(LICs), lower-middle-income countries (LMCs),upper-middle-income countries (UMCs), high-income OECDcountries, and other high-income countries.



World Bank Classification

As of 1 July 2016, LICs are defined as those with a GNI percapita of $1,025 or less in 2015;Middle-income economies (LMCs and UMCs) are those with aGNI per capita of more than $1,025 but less than $12,475;

LMCs are are defined as those with a GNI per capita of more than$1,025 but less than $4,035;UMCs are are defined as those with a GNI per capita of more than$4,035 but less than $12,475;

High-income economies are those with a GNI per capita of$12,476 or more.



Classification of Economies by Region and Income(2013)







Figure: Source: Data from Atlas of Global Development, 4th ed., pp. 16-17: World Bank and Collins. 2013. ATLAS OF GLOBALDEVELOPMENT: A VISUAL GUIDE TO THE WORLD’S GREATEST CHALLENGES, FOURTH EDITION. Washington, DC and Glasgow:World Bank and Collins. doi: 10.1596/978-0-8213-9757-2. License: Creative Commons Attribution CC BY 3.0



Income per capita in Selected Countries (2011)



Classification of Economies

We can use the World Bank’s classification to divide the world intwo main groups:

1 Developing Countries2 Developed Countries

With a number of important exceptions, the developing countriesare those with low-, lower-middle, or upper-middle incomes.



Classification of Economies (Generalization)

Developing worldSub-Saharan AfricaNorth AfricaMiddle EastAsia (except Japan and South Korea)Latin America and Caribbean"Transition countries" in eastern Europe and Central Asia

Developed worldWestern EuropeNorth AmericaJapanSouth KoreaAustraliaNew Zealand



Purchasing Power ParityHealth and EducationThe Human Development Index

Outline

1 Defining the Developing World

2 Basic Indicators of DevelopmentPurchasing Power ParityIndicators of Health and EducationThe New Human Development Index (NHDI)




Basic Indicators of Development

In this section, we examine basic indicators of three facets ofdevelopment:

1 Income per capita2 Health

Life expectancyUndernourishmentChild mortality

3 Educational attainmentLiteracySchooling




Gross National Income (GNI) vs. Gross DomesticProduct (GDP)

GNI measures the total domestic and foreign output claimed byresidents of a country, consisting of gross domestic product(GDP) plus factor incomes earned by foreign residents, minusincome earned in the domestic economy by nonresidents.





GDP measures the total final output of goods and servicesproduced by the country’s economy within the country’s territoryby residents and nonresidents, regardless of its allocationbetween domestic and foreign claims.





Thus GNI comprises GDP plus the difference between theincome residents receive from abroad for factor services (laborand capital) less payments made to nonresidents who contributeto the domestic economy.





For example, a large number of Filipinos have found work inMalaysia, where there are abundant opportunities for low-skilledworkers.

The value of the output produced by these workers count as part ofthe Philippines’ GNI but not its GDP.By contrast, the value of this work counts as part of Malaysia’sGDP but not its GNI.





GNI per capita is often used as a summary index of the relativeeconomic well-being of people in different nations.

World Bank’s income-based country classification scheme.

How to compare GNI for different countries?

Exchange rate as conversion factor?




























I’ll open my own hotel!!

https://www.youtube.com/watch?v=B5NuuJQT8ZM


https://www.youtube.com/watch?v=B5NuuJQT8ZM



Purchasing Power Parity

Do you think most things in less-developed countries are asexpensive as they are in developed countries?Let’s see! https://www.numbeo.com/cost-of-living/


https://www.numbeo.com/cost-of-living/




Do you think most things in less-developed countries are asexpensive as they are in developed countries?Let’s see! https://www.numbeo.com/cost-of-living/


https://www.numbeo.com/cost-of-living/




PPP is calculated using a common set of international prices forall goods and services.In a simple version, purchasing power parity is defined as thenumber of units of a foreign country’s currency required topurchase the identical quantity of goods and services in the localdeveloping country market as $1 would buy in the United States.





The ratio of PPP conversion factor to market exchange rate is theresult obtained by dividing the PPP conversion factor by themarket exchange rate.The ratio, also referred to as the national price level, makes itpossible to compare the cost of the bundle of goods that makeup gross domestic product (GDP) across countries.





Clearly, if domestic prices are lower, PPP measures of GNI percapita will be higher than estimates using foreign-exchange ratesas the conversion factor.




Comparison of Per Capita GNI in Selected Countries




Classification of Economies by Region and Income

Most recent World Bank’s ranking: http://databank.worldbank.org/data/download/GNIPC.pdf


http://databank.worldbank.org/data/download/GNIPC.pdf

http://databank.worldbank.org/data/download/GNIPC.pdf



The Economist’s Big Mac Index

"...After all, it is sold in 41 countries, with only the most trivialchanges of recipe. That ought to say something aboutcomparative prices."





Let’s see how to use the big mac price as a PPP measure.The next table (taken from World Bank’s website) presents anexample.









The PPP between Australia and the United States for a Big Macis the price paid in Australia in its national currency divided by theprice paid in the United States (4.56/4.07 = 1.12).This means a consumer pays $A 1.12 to make a purchase inAustralia that would cost $1.00 in the United States.Column (3) provides the PPPs for the other countries to theUnited States.









When the cost of a Big Mac in Brazil is divided by the exchangerate, the result is how many U.S. dollars are needed to purchasea Big Mac in Brazil (9.5/1.54 = $6.17).Big Macs, then, are more expensive in Brazil than they are in theUnited States ($4.07).The same column shows they are much cheaper in China ($2.28)and South Africa ($2.87) than they are in the United States.





These price level differences are measured by a price levelindex, which can be computed in two ways:

One is simply the ratio of the PPP to the exchange rate, which forChina is 3.61/6.45 = .56.The other is the ratio of the cost in U.S. dollars of purchasing a BigMac in China to the cost in the United States, or 2.28/4.07 = .56.




Indicators of Health and Education

Despite its importance, income alone does not provide the fullpicture of a nation’s level of development.Besides average incomes, it is necessary to evaluate a nation’saverage health and educational attainments, which reflect corecapabilities.




Indicators of Health and Education

Life expectancyThe average number of years newborn children would live ifsubjected to the mortality risks prevailing for their cohort at the timeof their birth.

UndernourishmentConsuming too little food to maintain normal levels of activity

Birth rateThe ratio of total live births to total population in a specifiedcommunity or area over a specified period of time.

LiteracyThe fraction of adult males and females reported or estimated tohave basic abilities to read and write.




Some Basic Indicators




The Human Development Index

HDI is a holistic measure of living levels.It’s the most widely used measure of the comparative status ofsocioeconomic development.The HDI attempts to rank all countries on a scale of 0 (lowesthuman development) to 1 (highest human development) basedon three goals or end products of development:

income;health;education.




The Human Development Index

It is computed as the geometric average

NHDI = H1/3E1/3I1/3

HDI can be calculated for groups and regions in a countryHDI varies among groups within countriesHDI varies across regions in a countryHDI varies between rural and urban areas




2013 New Human Development Index and itsComponents for Selected Countries




Questions

1 Which measure uses a common set of international prices for allgoods and services produced?

1 purchasing power parity income levels2 GNI price deflators3 foreign exchange rate conversions to U.S. dollars4 the exchange rate




Questions

1 Which measure uses a common set of international prices for allgoods and services produced?

1 purchasing power parity income levels2 GNI price deflators3 foreign exchange rate conversions to U.S. dollars4 the exchange rate




Questions

2 The number of units of developing country currency required topurchase a basket of goods and services in a developing countrythat costs one dollar in the U.S. is given by

1 GNI price deflator.2 Human Development Index ranking.3 purchasing power parity.4 the exchange rate.




Questions

2 The number of units of developing country currency required topurchase a basket of goods and services in a developing countrythat costs one dollar in the U.S. is given by

1 GNI price deflator.2 Human Development Index ranking.3 purchasing power parity.4 the exchange rate.




Questions

3 One of the components of the human development index is1 the percentage of the population who are high school graduates.2 the average daily intake of protein.3 life expectancy at birth.4 the number of doctors per hundred people in the population.




Questions

3 One of the components of the human development index is1 the percentage of the population who are high school graduates.2 the average daily intake of protein.3 life expectancy at birth.4 the number of doctors per hundred people in the population.


Documents

ECON 450 Development Economics - publish.illinois.edupublish.illinois.edu/henriqueveras/files/2016/01/Lecture2.pdf · economic well-being of people in different nations. ... Henrique