GD

TOPIC 3: Comparing Countries: Development Measures and Classifications

Comparing Countries: Development Measures and Challenges

Overview of Today's Goals

  • Challenges of creating comparable development measures to facilitate comparing countries.
    • Focus on three goals for each measure: Current Conditions (Accurate, Representative), Intertemporal Comparison (Same things measured at different points in time), and Cross-Country Comparison (Same things measured in different countries).
  • Two examples of development measures:
    • Macro measures: Gross Domestic Product (GDP) and Gross National Income (GNI).
    • Human Capital: Child Mortality.
  • Two applications of these measures:
    • Human Development Index (HDI).
    • Country classification systems.

Measuring Development: Goals and Requirements

  • Operationalizing Development Characteristics: The abstract characteristics of development (discussed in previous classes) need to be measurable.
  • Reasons for Measurement:
    • To describe current conditions within a country.
    • To describe changes within a country over time.
    • To enable comparisons across countries.
  • Requirements for Measurements (Three Goals):
    • Current Conditions:
      • Accuracy: The measure must reflect the truth.
      • Representativeness: The measure must capture the relevant aspects.
    • Intertemporal Comparison: Requires ensuring that the same things are being measured consistently at different points in time.
    • Cross-Country Comparison: Requires ensuring that the same things are being measured consistently in different countries.
  • Nature of the Goals:
    • Each goal has specific requirements.
    • They are nested requirements: Accurately describing current conditions is a prerequisite for intertemporal comparability, which in turn is a prerequisite for cross-country comparability.
    • Consequently, each successive goal places greater demands on the data and measurement methodology.
  • Example Comparison (illustrative data):
    • United States: GDP per Capita 52,800, Democratic government, Maternal Mortality 21 / 100,000, Infant Mortality 6.17 / 100,000, Life Expectancy 79.56 years, Literacy Rate 99%.
    • Colombia: GDP per Capita 11,100 (est. 2013), Democratic government, Maternal Mortality 92 / 100,000, Infant Mortality 15.02 / 100,000, Life Expectancy 75.25 years, Literacy Rate 93.6%.
    • Cuba: GDP per Capita 10,200 (est. 2010), Communist Dictatorship, Maternal Mortality 73 / 100,000, Infant Mortality 4.7 / 100,000, Life Expectancy 78.22 years, Literacy Rate 99.8%.

Macro Measures: GDP and GNI

  • Measuring Total Value Added: These are common starting points for assessing a country's fiscal health.
  • Total Income Measures:
    • GNI (Gross National Income) versus GDP (Gross Domestic Product): Refers to differences in including income from abroad and excluding income sent abroad.
    • Why 'G' (Gross) and not 'N' (Net)? E.g., GDP versus NDP (Net Domestic Product). 'Gross' includes depreciation, while 'Net' accounts for the consumption of fixed capital.
    • Why 'N' (National) and not 'D' (Domestic)? E.g., GDP versus GNP (Gross National Product) or GNI versus GDI (Gross Domestic Income). 'National' refers to income earned by a country's residents, regardless of where it's produced, while 'Domestic' refers to income produced within a country's borders, regardless of who earns it.
  • Challenges by Goal for GDP/GNI:
    • Current Conditions:
      • Household production: Services produced within households (e.g., cooking, cleaning) are not exchanged in markets and thus not included.
      • Black markets/Informal economy: Economic activities not officially recorded or taxed are excluded.
      • Intangibles: What about non-market values like environmental quality, leisure, or social well-being? These are not easily quantifiable in monetary terms and are typically excluded.
    • Inter-temporal Comparisons: Can GDP/GNI estimates from year to year be reasonably compared given changes in methodologies, products, and economic structures?
    • Cross-Country Comparisons: Can GDP/GNI estimates from one country to another be reasonably compared, especially considering differences in price levels and purchasing power?
  • Big Mac Index as an Illustration of Purchasing Power Parity (PPP):
    • Purpose: Illustrates challenges of measuring purchasing power across countries.
    • Method: Measures relative purchasing power by identifying a basket of widely available goods (the Big Mac) and calculating its currency-adjusted cost.
    • Variations that complicate comparison:
      • Ingredients and Composition: The precise ingredients and size of a Big Mac can vary internationally.
      • Importance of the Good: The Big Mac's relevance or consumption patterns may differ across populations.
      • Overall Experience: The dining experience (service, restaurant quality) can vary.
      • Good-Specific Regulations: E.g., health codes for restaurants impact production costs and consumer experience.
  • Measuring Inflation:
    • The same basket-of-goods method is used for inflation measurement.
    • Challenges are diminished but not eliminated.
    • Example: Computers in the US (late '90s): Processing speeds increased dramatically, but the price of a