Topic 1: Measuring Development

What are some traditional measures of measuring development?

• Income

  • GDP

  • GNI

    • Used by World Bank: income produced by residents of that country, e.g. remittances.

What are some wider measures of development?

• GDP + Reduction of poverty, inequality and unemployment

•  Improvement in wellbeing, more broadly understood

What are some problems with comparing exchange rates across countries?

• Official exchange rates may be too volatile (and subject to manipulation)

  • May be drastically different to market exchange rate, so prone to arbitrage.

  • Low income countries tend to 

  • have managed exchange rates whereas high income countries tend to have free floating.

What are methods of adjusting income (GDP, GNI) figures across countries?

• Atlas Method

  • World Bank categorises countries based on income: LIC, LMC, UMC, HIC

  • Average of exchange rates over 3 years, adjusted for inflation.

• Purchasing Power Parity

  • Foreign currency required to buy $1 of a standard basket of goods.

    • Homogeneity.

• The Atlas Method and PPP don’t line up very well across countries.

Is income (GDP, GNI) a good measure of development?

• Doesn’t say anything about inequality.

• Doesn’t show the relative utility of that income.

  • Sen’s ‘Capability’ approach.

    • Focusing on what capabilities and freedoms people can access rather than purely income.

      • e.g. a bike is useful for travel, increasing a person's capability. But this is not reflected in its income value. The value of a bike in income does not reflect the opportunity it brings.

What are methods of measuring development?

• HDI: United Nations Human Development Index

  • Scores development at the country level.

• MPI: Multidimensional Poverty Index

  • Scores development at the individual level, e.g. a person is classed as poor if…

  • Uses micro-level survey data which is infrequent, so perhaps not accurate.

• Sen’s Capability Approach

  • Focusing on what capabilities and freedoms people can access rather than purely income.

    • e.g. a bike is useful for travel, increasing a person's capability. But this is not reflected in its income value. The value of a bike in income does not reflect the opportunity it brings.

What is convergence?

• Convergence considers growth rates of countries based on their income status.

• Small differences in growth rates lead to large differences over time (compounding).

What are the two types of convergence?

• Unconditional convergence

  • Low income countries grow faster and high income countries grow slower.

    • Catching up over time.

  • Very weak evidence for this.

• Conditional converge

  • Convergence to a country-specific level based on savings rates, population growth rates, e.g. Solow model steady state.

  • There is evidence of conditional convergence within specific income groups.