Economic Development Exam 1

Consumption vs. income

Consumption is what people are able to be and do with their income. Income is how much money they are bringing in to be able to spend on consumption.

Subsistence goods

The bare minimum levels of goods that is needed to support oneself/family

State capacity

A state's capacity to maintain order, provide public services, and manage the economy.

Political liberalism

Traits related to liberalism

Sen’s capability approach

An approach to measuring overall development. It is reliant on functionings or what a person can do rather than income alone.

Beings, doings, functionings

What a person can be or do with the characteristics they are given or possess.

Development process / as freedom

Process of expanding capabilities, giving people more freedom to have more and better functionings

Well being vs. happiness

People can be poor/lack functionings but still be happy and people can be relatively rich but be unhappy

Per capita GDP vs. GNI

GDP per capita considers the output of a country while GNI is income earned by individuals within the country.

Remittances

money flows into the country from workers abroad.

Foreign Profits

Money flows from companies based abroad

Measurement issues with GDP and GNI

Self consumption, Informality, Lack of Administrative Capacity, Black Markets

Dictatorships and GDP

Dictatorships are inclined to manipulate their GDP data, especially once they have passed the threshold for receiving foreign aid.

Exchange rate method

Uses official market exchange rates to express incomes in common currency. Problem is with non-traded goods and services

PPP method

Considers per capita income between two countries and the ability to buy a basket of goods in each currency.

Balassa Samuelson effect

non-tradable goods and services are significantly cheaper in lower income countries than in high income countries. 

International Comparison Program

A survey conducted by the world bank that collects data on ~3000 goods and services. It is produced every 3-6 years and considers on the ground data in rural and urban locations. 

Limitations of PPPs

Basket Selection and Demographics, Differing Consumption Patterns, Quality Disparities, Diverse consumption weights, Non-comparable and region specific goods, Comparison resistant sectors, Data and measurement issues. 

Adjustment for worked hours

After adjusting for working hours the price of goods are relatively similar in European and US countries.

Big Mac index

A simplified way of calculating Purchasing power. Consider the price of a big mac in each country compared to the exchange rate to see if the currency is overvalued/undervalued in comparison to the USD.

Currency under/over-valuation

An undervalued currency is one where similar goods are relatively less expensive in one economy in comparison to another while controlling for exchange rates (Taiwanese Dollar). An overvalued currency is one that has less purchasing power in one economy in comparison to another (Swiss Franc)

Walk around test

A test of development where one ‘walks around’ to evaluate quality of life in a country. Not effective because countries can have equally distributed wealth or have built infrastructure in a period of high economic development.

Actual Individual Consumption

What public goods and services governments/non-profits are providing to their citizens. (Education, healthcare, etc.)

Traditional HDI

Considers income, life expectancy, and education (each weighted at ⅓). Takes life expectancy at birth and considers education as the adult literacy index and overall enrollment of citizens.

New HDI since 2010

Uses a geometric mean so components are imperfect substitutes. You must score high in all components to do well, no offsetting by doing well in one but bad in another.

GNI vs HDI rank differences and possible reasons for these

In countries like the US and Singapore they have a higher GNI rank than HDI rank. This means that they have high income levels but they are not doing as strongly in either life expectancy or education. Countries like Germany and Sweden do significantly better because they have high incomes but also invest heavily in education and public services.

Inequality-adjusted HDI

Considers inclusion of inequality terms. Consider inequality in each of the indexes. Closer to 1 more unequal

Limitations of the HDI

Still uses income as a measure, only considers life expectancy and education.

Headcount Ratio

Share of population that is below the Poverty Line. Created by using the cost of a basket of essential food and non

FGT index

Used to generalize the poverty rate measure. Exponent alpha gives a more nuanced view of poverty. Alpha = 0 = Share of population that is poor. Alpha = 1 = Measures the depth of poverty. Alpha = 2 = Measures the level of ultra poverty

MPI index: construction

Considers health, education, and standard of living. 2 health indicators (child mortality within family, adult malnourished rate). 2 education indicators (If no household member has completed 5 years of school, if any school aged child is out of school 1-8th grade). 6 Standard of living indicators (lack of electricity; insufficiently safe drinking water; inadequate sanitation; inadequate flooring; unimproved cooking fuel; lack of more than one of 5 assets – telephone, radio, TV, bicycle, and motorbike). 

MPI index: benefits

It is able to measure multiplicative harm, harder to manipulate by governments, only considers as substitutes to a point then considers complements, Does not require PPP income data.

Happiness/life satisfaction (LS)

Average life satisfaction increases with country income.

Determinants of happiness

income but also family relationships, work, community and friends, health, personal freedom, personal values, society and climate (temperature, luminosity)

Limitations of LS measures

Culture. French paradox: high level of development but lower LS and higher suicide rates. Happiness can be affected by how a country’s education system grades exams. People in autocratic countries have less of an incentive to honestly report their happiness levels.

Historical & regional patterns of economic development.

Decolonization has led countries such as Japan, China to start to catch up. Asian countries have seen sustained periods of economic growth while other regions have remained relatively stagnant. Currently growth is slowing again.

Role of commodity prices

High prices can lead to rapid growth. Low prices can lead to significant debt in countries where commodities are the main export. Has led to inflation and corruption that placed some countries into the resource curse. Also countries increased their levels of public debt causing them to become unstable.

Lost decade of development

1980s. Asia, LA and Africa were getting poorer or experiencing very slow levels of economic growth.

Structural adjustment programs

Programs implemented by the IMF that required countries to change their economic structure: They encouraged them to cut back spending on things like social programs and implement good governance policies.

Recent patterns: similarities and differences wrt to the past

Growth is slowing in emerging markets, progress against poverty has stalled since the 2010s, Debt/GDP ratio is increasing, global conflicts and climate change, developed economies less willing to help, world becoming more illiberal.

Classification of developing economies: World Bank

Low-income: GNI < $1,135,

Lower middle-income economies:  GNI $1,136-$4,465,

Upper Middle-income economies: GNI $4,466 - $13,845,

high-income economies: GNI above $13,845

Classification of Developing economies: UN

 Very high Human development: HDI > 0.8,

High Human Development: HDI .7-.799,

Medium Human development: .550-.699,

low human development: HDI <.550

Income vs. HDI patterns

Income patterns show stagnation in LAC and SSA but HDI shows improvements

Developing World

Africa, Asia, Latin America

Newly Industrializing Countries

Countries that have achieved relatively advanced manufacturing sectors

Least Developed Countries

Low income + Low human Capital + High vulnerability

Emerging Markets

NICs. Widely used in financial press to suggest the presence of active stocks and bond markets

EMDE

Emerging markets and developing economies

HIPC

Highly indebted poor countries

MDGs. vs. SDGs and limitations.

Not ambitious enough, goals not prioritized, no emphasis on complementarity, 2015 end date discourages aid if targets not met, 15 years too long to gauge accountability of leaders, measures poverty line by income. SDGs have 17 goals with 169 targets and are on track not to be met by 2030

After the SDGs.

Post 2030 agenda expected to focus on climate adaptation, biodiversity collapse, planetary boundaries, and AI governance.

Convergence hypothesis

The idea that countries all converge to a certain point. Or that countries diverge to a point (divergence)

Convergence (catch-up growth) vs divergence

In convergence per capita income grows slower in high income economies than in low income economies, causing the international income gap to narrow over time. In divergence the higher income countries grow faster than lower income countries causing the international income gap to widen over time. 

Unconditional Convergence/divergence

All countries are grouped together and their convergence/divergence is measured as one.

Conditional (clubs of convergence)

Shared societal traits determine where the country will converge to. Once a country converges to a certain ‘clubs’ point they move on to the next club

Population-weighted convergence

Convergence that considers the population of each country in the convergence calculation. Countries with larger populations have more influence on the model. 

World-as-one-country convergence

 rather than considering each country’s GDP this approach considers if convergence happens across individuals. 

Role of China and India in convergence

China and India with rapid growth and large populations distort traditional convergence models. When considered in conditional convergence as part of the club they are on the lower end of the highest club.

Percentage growth vs absolute growth

While percentage growth shows how much a country is growing over time a large number, however, could still be a low absolute growth. Countries like the US have lower percentage growth rates but significantly higher absolute growth rates than other countries.