Measures of Rural Economy

(1) Per Capita Real Gross National Products

v  Gross Domestic Products (GDP): GDP is the final value of the goods and services produced within the
geographic boundaries of a country during a specified period of time, normally a year.

v  In calculating GDP, the focus is on the total value of goods and services produced within the country
borders, irrespective of whether the value addition is due to residents or non-residents of the country.

v  GDP is a widely used measure to determine the size of the economy of a nation.

v  Gross National Products (GNP): GNP is the market value of all final goods and services produced in a
year and attributable to factors of production supplied by normal residents of a country.

v  Gross Domestic Products (GDP): GDP is the final value of the goods and services produced within the
geographic boundaries of a country during a specified period of time, normally a year.

(GNP = GDP + net property income from abroad)

= Gross Domestic Product + Net Income Receipts – Net outflow to foreign assets

v  GNP takes into consideration the income earned by citizens of a country present within or outside the
country. It excludes the income generated by foreign nationals who are residing in the country.
Gross Domestic Product (GDP) Gross National Product (GNP)

The value of goods and services produced within the The value of goods and services produced by a
geographical boundaries of a nation in a financial year citizen of a nation irrespective of geographical limits in
is termed as GDP a financial year is known as GNP

Measures only domestic production Measures only the production by nationals

Production that is obtained domestically Production that is achieved by citizens living in

different nations

GDP highlights the strength of the country’s economy GNP highlights the residents’ contribution towards the
development of the economy

Scale of operations - Local Scale Scale of operations - International Scale

It excludes goods and services that are being produced It excludes goods and services that are produced by
outside the economy foreigners living in the country.
v  Real GNP is the GNP adjusted for changes in prices, and is computed by dividing GNP by
General Price Index (GPI). The GPI is measured by a price index. A price index is a weighted
average of the prices of a selected basket of goods and services relative to their prices in
some base-year.

General Price Index = (X1 + X2 + X3 + … + XN) / N]; [Real GNP=GNP/GPI]

v  Per capita real GNP is the most widely used measure of the economic well-being of people.

v  An increase in the average real GNP per capita means that we are economically better off.

v  GNP does not include everything that contributes to human happiness, and does not exclude
everything that diminishes it.
(2) Per Capita Expenditure on Community Facilities and Services

v  Level of development in a country is a function of per capita quantity of various goods and
services consumed by its population.

v  It does not matter whether goods and services consumed are purchased by a person with his
personal income or he receives them without specific expenditure on his part.

v  Certain services, facilities and civic amenities such as schools, hospitals, roads, parks, police
protection and street lights, are provided by government or at a nominal cost to its people.

v  Availability of these facilities and services represents ‘real income’ and therefore, constitutes part
of level of living.

v  Per capita public expenditure on such services and amenities is a good measure of socio-
economic welfare.
(3) Per Capita Consumption Expenditure

v  Per capita consumption expenditure of rural people is considered a better measure of rural
development for several reasons including relative ease of recall by the respondent of the
expenditure incurred and the general tendency of rural people not to hide any expenditure, as
compared to income.

v  Per capita consumption expenditure is a reasonably good proxy variable for per capita income.

v  The National Sample Survey Organization (NSSO) conducts sample surveys all over India at
regular intervals to estimate the consumption expenditure for both urban and rural people.
 (4) Human Development Index (HDI)

Human Development Index (HDI) measures achievements in three aspects of human development: health,
education and living standards.

The global HDI, first presented in the 1990 Human Development Report (HDR), measures a country's success in
the human development achievements for its citizens: a long and healthy life (using health data), access to
knowledge (using education data) and a decent standard of living (using income per capita).

Dimensions Long and Healthy life Knowledge A descent Standard Living

Indicators Life expectancy at birth Mean of year of schooling Expected year of schooling GNI per capita (PPPUS$)

Dimension Life expectancy Index Education Index GNI Index

Index

Human Development Index

Purchasing Power Parity (PPP): rates of exchange

Procedure for computing Human Development Index (HDI)

(1)  Long and healthy life

v  The long and healthy life dimension uses life expectancy at birth as its indicator.

v  It is defined as “number of years a new-born infant could expect to live if prevailing patterns of age-specific
mortality rates at the time of birth were to stay the same throughout the child’s life” (UNDP. 2010. p. 224).

v  The life expectancy index is calculated using a minimum value of 20 years and a maximum value of 85
years.

v  Minimum value for life expectancy (20 years) is based on long-run historical evidence from Maddison (2010)
and Riley (2005) which shows that if a society or a sub-group of society has a life expectancy below the
typical age of reproduction, then that society would fail to reproduce itself.

v  Minimum level of 20 years is therefore the life expectancy needed for a society to survive. The maximum
value is fixed at 85 years, as that can be interpreted as an aspirational goal for societies.
(2) Knowledge

v  The education component is measured by two indicators: (i) mean years of schooling for adults aged 25
years and older, and (ii) expected years of schooling for children of school entering age.

v  Estimation of mean years of schooling are based on the duration of schooling at each level of education.
Expected years of schooling estimation is based on two factors: (a) Enrolment by age at all levels of
education and (b) Number of children of school age in the population for each level of education.

v  Two indicators are first normalized using a minimum value of 0 and maximum value of 15 for mean years of
schooling and 18 for expected years of schooling.

v  As societies can exist without formal education, the minimum value of 0 years is used for both education
variables. The maximum values were set to aspirational fixed goalposts in the 2014 HDR11.

v  Both indicators are then combined to produce an education index, which is the arithmetic mean of two
(equally-weighted) sub-indices of education.
(3) Decent standard of living

v  The decent standard of living component is measured using an income based measure.

v  The income component is measured using the natural logarithm of GNI per capita adjusted by PPP.

v  For calculation of this component, the minimum value is PPP $100, and the maximum value is set at PPP
$75,000.

Purchasing Power Parity (PPP) rates of exchange are used to take account of price differences between
countries. Unlike market exchange rates, PPP adjusts the exchange rate to consider variations in prices between
countries. This is important because what a person can buy with US$1 in USA greatly differs from what INR 63 can
buy in India.
 The fixed boundaries used for each indicator of the global HDI in 2014 are summarised as below:

Variables Minimum Maximum

(1) Heath (Life expectancy at birth, years) 20 85
(2) Education
(i) Mean year of schooling (years) 0 15
(ii) Expected years of schooling (years) 0 18
(3) Standard of living (Income US$) 100 75000
Source : UNDP (2014), Technical note 1, p.2

Computing Human Development Index (HDI)

The HDI in 1994 according to the United Nations Development Programme (UNDP):

Country Life expectancy Adult literacy (%) Mean years of schooling Income ($)
(Years) (Years)
Greece 77.3 93.8 7.20 7,680
India 59.7 49.8 2.40 1,150

Threshold value was taken to be global average real GDP per capita of $5,120.

When it computed the maximum and minimum values for the four basic variables were fixed as below:

Variables Maximum Minimum

Life expectancy (Year) 25 85
Adult literacy (%) 0 100
Mean year of schooling (Year) O 15
Income (USD $) 200 40,000
1. Life expectancy index

Greece= ​77.3−25.0/85−25 =0.872

India= ​59.7−25.0/85−25 =0.578

2. Adult literacy index

Greece= ​93.8−0/100−0 =0.938

India= ​49.8−0/100−0 =0.498
 3. Mean year of schooling index

Greece=2 (0.938) + 0.467=0.781

India=2 (0.498) + 0.160 = 0.385

4. Income Index
Adjusted income for Greece= 5,120+2​(7,680)↑^ ↑1 /2=5,221

Greece= ​5221−200/5385−200 =0.968

India= ​1150−200/1150−200 =0.183

Country Life expectancy Index Education Index Income Index All three HDI
Greece 0.872 0.781 0.968 2.621 0.874
India 0.578 0.385 0.183 1.146 0.382
Human Development Index (HDI)

Human Development Index (HDI) Type of development

< 0.5 Low level of human development

Between 0.5 and 0.8 Medium level of development

< 0.8 High level of development