Scope of Economic Development
• Economic growth is very uneven
• A look at a satellite photo taken makes this very clear
• Not all area with light have same standard of living
• Some dark areas have low population density but not all
Why isn’t the whole world developed?
• Differences in resources
• Differences in culture
• Maybe part of the answer but not all of it
• Consider the next satellite photo of North and South Korea, countries with similar resources and culture
Why do we care about economic growth?
• Economic Growth is connected to well being
• Correlation between GDP per capita and life expectancy and literacy
GDP, Life Expectancy, and Literacy
Copyright©2004 South-Western
Economic growth in India
• Economic growth was slow in India prior to 1981
• After economic reforms were implemented in the 1980s, per capita growth increased from 1.4 % per year to 2.89 in the 1980s, 4.19% in 1990s and 6.78% from 2001-2006
Measurement Issues
• When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is
earning.
THE MEASUREMENT OF GROSS DOMESTIC PRODUCT
• Gross domestic product (GDP) is a measure of the income and expenditures of an economy.
• It is the total market value of all final goods and
services produced within a country in a given period of time.
Measurement of GDP
• GDP is the Market Value . . .”
– Output is valued at market prices.
– GDP is a weighted average
– When prices are determined in markets they
reflect the marginal value people place on them.
Measurement of GDP
• Goods and Services . . . “
– It includes both goods (food, clothing, cars) and services (haircuts, doctor visits).
• Includes only those goods and services produced in market
– Not those produced at home
• Important to remember because in developing
countries many goods may be produced outside the market
– No illegal goods
• Prostitution is part of GDP in Nevada, but not for drugs
• Important to remember differences in legal structure when comparing different countries
GDP and Welfare
• GDP is the best single measure of the economic well-being of a society.
• GDP per person tells us the income and expenditure of the average person in the economy.
• Higher GDP per person indicates a higher standard of living.
• GDP is not a perfect measure of the happiness or quality of life, however.
GDP and Welfare
• Some things that contribute to well-being are not included in GDP.
– The value of leisure.
– The value of a clean environment.
– The value of almost all activity that takes place outside of markets, such as the value of the time parents spend with their children and the value of volunteer work
Problems with GDP measurement for developing economies
• Does not include non traded goods
– Home production – Illegal activities
• Data may not be accurate
– Limited resources for data collection
– Difficult to count production in agricultural area – Incentive to under report production to avoid
taxes etc
Growth vs Development
• Growth rate of GDP may rise without development
– Discovery of oil or other natural resources
• Development measured by increases in literacy, health care etc.
• Most of the time they are correlated but not always
GDP per Capita
• GDP per Capita is GDP per person
– GDP/population
• GDP and GDP per capita can be different
– China vs. Switzerland
Real Vs. Nominal
• Nominal GDP values the production of goods and services at current prices.
• Real GDP values the production of goods and services at constant prices
Real vs. Nominal
• An accurate view of the economy requires adjusting nominal to real GDP by using a
measure of inflation like the GDP deflator or the CPI.
Nominal to Real GDP
• Converting Nominal GDP to Real GDP
– Nominal GDP is converted to real GDP as follows:
Real GDP Nominal GDP GDP deflator
20XX
20XX 20XX
100
Or CPI20xx
• How do we compare GDP between different countries with different currencies?
• Exchange rates
– How much one currency trades for another – Determined by the supply and demand for
currency which depends on traded goods only – Fluctuate daily
• Many goods, like Big Macs are not traded between countries.
– Services like haircuts, rents etc,
• These tend to be much cheaper in poor countries than developed countries
Purchasing Power Parity
• If exchange rates are used to compare the size if these countries to developed countries will make them seem smaller than the really are.
• Should use PPP to compare size of economies across countries
– Calculated by taking a basket of goods and finding how much it costs in different countries
How much difference does it make?
• For Ghana in 2009
• GDP in official exchange rate was 14.76 billion dollars
• GDP in PPP was 36.58 billion dollars
Alternate Measures
• Life expectancy, infant mortality, height by age can all be used to judge standard of living
Growth Calculations
• Growth rate for a year is calculated by (GDPt+1 –GDPt )/GDPt
• Growth rate over N years is calculated by GDPt+N=GDPt(1+g)N
Examples
• Nominal GDP for Ghana was 16.7 billion
dollars in 2008 and 14.9 billion in 2007. What was the rate of growth?
• (16.7-14.9) /14.9 = .12 or 12%
• Do you think these numbers are using exchange rates or PPP?
• Real GDP growth in Ghana was 7.3%, what was happening to prices?
• Prices were Rising
Examples
• If the GDP of Ghana is 16.7 billion dollars in 2008 and growth rate of GDP is 5% for 10 years, how much will GDP be in 2018?
• GDP 2018=16.7(1+.05)10=27.2
