IB/Group 3/Economics/Economic Development/Measuring development

Per capital income figures
Per capita GNI or per capita GDP represent measures of per capita income. The difference between GDP and GNI is that GNI excludes incomes earned domestically by foreign factors (which are paid abroad, for example the profits of multinational corporations) but it includes incomes earned abroad by nationals of the country. Per capita income figures are computed by dividing GNI or GDP of a country by the mid-year total population of the country. Usually, per capita income figures are also called PPP (purchasing power parity) dollars, sometimes referred to as 'international dollars,' which have same purchasing power over GDP as a conversion factor, and not the market exchange rate, is that cost of living may differ substantially between countries and market exchange rates do not necessarily adjust to capture these differences.

The World Bank uses per capita GNI to determine the following income classifications: low income was defined as $975 or less in 2008; middle income was $976 to $11,905; and high income was $11,906 or more. A further at GNI per capita - $3,855 - is made between lower-middle income and upper-middle income economies.

The classification is useful and may provide us with some information on the level of development of a country as there is a positive correlation between per capita income and social welfare. Few would question that Norway is more developed than Zimbabwe. But since growth in per capita income does not necessarily imply improved living standards, classification based on per capita income is also fraught with problems. Using per capita income may mask very significant differences between countries.

These are some issues to be aware of when using per capita income figures to determine the level of development of countries.


 * Per capita income fails to incorporate income distribution considerations. Per capita income is just a simple average providing no information on whether income is equitably or very unequally distributed.
 * Using per capita income figures does not take into account the value of the environmental degradation often associated with increased production. Te pressure on agriculture to produce more food products is responsible for soil erosion and the burning of forests. Industrialisation is also often accompanied by massive migration from rural to urban areas, leading to heavily polluted and congested cities. Emissions from industry and increased energy requirements also decrease the quality of life.
 * Per capita income figures fail to include non-marketed subsistence production which may be relatively significant in some low-income countries. Non-marketed subsistence production refers to foods and other goods and services produced by a family for its own consumption. More generally, per capita income figures fail to include the size of parallel ('black' or shadow) economies in developing countries.
 * Relying on per capita income also conceals useful information on the composition of output. Two economies with equal per capita income levels may differ with respect to living standards because of different output mix. A country that spends a large proportion of its GDP on, say, defence, devotes resources there that could have been used to otherwise in the production of pro-development goods. The value of leisure, a very important 'good' an individual may enjoy, is not included in the calculation of GNI or GDP. It makes a big difference to workers if the average working week is over 50 hours and they can seldom take a holiday, or if the working week is only 35 hours and everyone enjoys four weeks' paid leave every year.
 * Lastly, per capita income does not include the value of the stream of services flowing from the accumulated social other capital of an economy that individuals enjoy. Living standards at any point in time are not affected just by the current income but also by the stock of accumulated wealth. For example, the existence of a high-quality and free public school system implies that households with children may devote more of their income to goods and services not related to education.

Despite these and other shortcomings, per capita income remains the best single indicator of development available but must be employed with caution in any analysis.

Other single indicators
Single indicators of the level of development of a population include the following:


 * Health-related indicators may be used, such as health expenditure per capita; life expectancy at birth (years); infant mortality (per 1,000 live births); mortality of children aged under fie years (per 1,000); malnutrition prevalence, weight, and /or height for age (of children under five years old); births attended by skilled health staff (% of total); maternal mortality ratio(per 100,000 live births); immunisation, DPT, and measles (% of children aged between 12 and 23 months); improved sanitation facilities (% of population with access); prevalence of HIV (% of population aged between 15 and 49 years); physicians (per 10,000 people); hospital beds (per 10,000 people).
 * Education-related indicators may be taken into account, such as literacy rate (% of people aged 15 years and older); mean years of schooling (of people aged 25 years and older); expected years of schooling (years); expenditure per student, primary, secondary, and tertiary (% of GDP, per capita); pupil-teacher ratio, primary; ratio of girls to boys in primary and secondary education (%); school enrolment, primary secondary, and tertiary (%); trained teachers in primary education (% of total teachers).
 * Other indicators include newspaper circulation per 1,000 population, energy consumption per capita, percentage of GDP derived from each sector of the economy and urban population.

An excellent source of current data on health, education, and other development-related indicators are the statistical tables at the end of the World Development Report published annually by the World Bank.

Composite indicators
No single indicator is powerful enough to illustrate satisfactorily the complex issue of development. It is therefore preferable to rely on several indicators synthesised into a single variable.

A number of composite indices have been devised. They integrate economic, social, and even political aspects of development. The most widely quoted and used composite indicator is the human development index (HDI). The HDI measures average achievements of a population in terms of health, education, and access to goods and services and was devised as a simple rival to GNP concentrating only on longevity, basic education, and minimal income. The HDI 'succeeded in challenging the hegemony of growth-centric thinking' (that is, it was successful in displacing per capita income as a summary measure of development).

The health dimension of the HDI is captured by life expectancy at birth. In 2010 the indicators used to measure progress in education have been revised and now include the mean years of schooling that a child of school entrance age could expect to receive if prevailing patterns of enrolment were to stay the same (instead of adult literacy and gross enrolment rate). Access to goods and services is measured by per capita income which in 2010 has also been revised and now refers to GNI per capita in PPP dollars, replacing GDP per capita. The reason for this change to GNI is that in a globalised world it is preferable to focus on the income of the residents of a country as this income may significantly differ from domestic production.

Major drawbacks of the HDI include:


 * a reliance on national averages which conceals skewed distributions in the variables included within a population, and
 * the absence of 'a quantitative measure of human freedom'

Being an average it may conceal important differences within a country. Women and rural populations as well as the very old and the very young often suffer disproportionately but this is not illustrated through the HID. In addition, environmental concerns are not addressed. It is possible for a country to have a high HDI and be 'unsustainable, undemocratic, and unequal.'

Note that three composite indicators were introduced by the UNDP in 2010 capturing multidimensional inequality (the inequality-adjusted HDI, known as the IHDI), gender disparities (the gender inequality index) and extreme deprivation (the multidimensional poverty index).


 * The IHDI is a measure of human development that takes into consideration the extent of inequality in the country. Under perfect equality the HDI and the IHDI are equal. Inequality in the distribution of health, education, and income lowers the HDI on an average person in society below the aggregate HDI of the country (based on the UNDP Human Development Report, 2010).
 * The gender inequality index attempts to reveal differences in the distribution of achievements between women and men in a country. Often women and girls are discriminated against in health, education, and in the labour market, which negatively affect their freedom.
 * The multidimensional poverty index replaces the human poverty index. It complements money-based measures of poverty by considering 'multi deprivations and their overlap.' Low level of income is byt one dimension of the poverty experienced by people in many countries of the world − poverty extends to other dimensions such as poor health and nutrition, low education and skills, inadequate livelihoods, bad housing conditions, social exclusion and lack of participation. The multidimensional poverty index shows the number of people who are poor (suffering a given number of deprivations) and the numbe rof deprivations with which poor households typically struggle.