Chapter Two

The Development Gap and

the Measurement of Poverty

Economic Growth versus Economic

Development:
1- Economic Growth:
An increase in the real income (GDP) of an
economy.
Economic growth has both benefits and costs.
It can be measured by GDP growth rates or
GDP percapita growth rates.

Economic Growth Benefits and costs:

Benefits:
Increases in economic growth should :
enable more of everything to be produced.
Increases possibility of providing consumer goods
for all.
More consumer goods, etc. could be equated with
an increase in living standards
Wealth generated may eventually trickle down to
those who are poor by means of income
distribution taxes and benefits, etc.
Improvement in Welfare.

Costs:
Economic growth can bring with it costs:
Not all income is distributed equally.
Wealth is often concentrated in the hands of
a few.
Trickle down does not always seem
to work in practice.
Corruption may reduce redistribution
effects.
Environmental Impact.
Opportunity Cost of Growth.

Opportunity Cost of Growth:

Resource allocation
Consumer Goods?
Capital Goods?
Necessity of generating growth through
allocating resources to the sources of growth
capital goods.

Growth and Production Possibility

Frontiers

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Capital Goods

K2

K1

1. Economic growth when a

country is operating below
capacity more of both capital
and consumer goods are made
available as the economy
moves from point A to point B

C1

C2

Consumer Goods

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Capital Goods

B
K2

K1

C1

2. Country operating at full

capacity but discovers new
resources or find ways of
improving the efficiency of
existing resources, for example,
education of the population to
improve the quality of human
capital.

C2
Consumer Goods
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Capital Goods

K2
K1

C1

C2

3. Disproportionate shift in PPF caused by

investment in resources suitable for
producing certain types of goods for
example, investment from overseas may
generate growth in the production of
consumer goods as opposed to capital goods
is such investment of long term benefit to a
developing country?

Consumer Goods

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Growth and Production Possibility

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Capital Goods

K2

K1

B
A

C1 C2

4. Disproportionate shift in PPF as a

result of investment in resources that
favour generation of capital goods
may not initially seem to have major
impact on the standard of living of the
country but may have long term
benefits in enabling more sustainable
long term growth.

Consumer Goods

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Measurement of Economic Growth:

A- GDP or GDI:
The market value of all final goods and services
produced within a nation in a given year
basic measure of a country's economic performance .
i.e. the total value produced within a country
GDP = private consumption + gross investment +
government spending + (exports imports),
GDP = C + I + G + (X M).
GDP = total output X market price

B- GDP or GPI percapita:

Per capita income means how much each

individual receives, in monetary terms, of the
yearly income generated in the country.

GDP percapita = GDP/ population

When using per capita income (PCY)

figures to measure economic growth and
as an index of development in different
countries , we face 2 difficulties:
1. problem of national income accounting
in developing countries .
2. problem of converting each countries
per capita income (PCY).

1- National income accounting :

Only goods produced & sold in market are

included in the value of national income, most of
the output in developing countries does not reach
the market particularly in rural sector , where
production for subsistence purposes .

Growth rates is biased by using prices weights

when compiling national income totals from the
output statistics of different sectors of economy .

What price index to use as a deflator of money

national income in order to obtain an index of real
income .
GDP deflator = nominal GDP / real GDP 100

2- Problem of converting each countries

per capita income (PCY):

PCY in domestic currency has to be

converted into a common unit of account
( that is US $) so as to be able to make
meaningful international comparisons of
living standards . this lead to topic of
purchasing power parity (PPP) estimates
of (PCY).

Purchasing Power Parity:

A nation's GDP at purchasing power parity

(PPP) exchange rates is the sum value of all
goods and services produced in the country
valued at prices prevailing in the United States.

The most common way of constructing a PPP

ratio between two countries is to revalue the
national incomes of the two countries by
selecting a comparable basket of goods and
services in each country and estimating the
purchasing -power equivalent of each item in
country A relative to country B.

Purchasing-Power Equivalent:
IF Pia is the price of item i in country a.
Pib is the price of item i in country b.
the purchasing power equivalent of item i in
country a relative to country b is:
Pia/Pib

 By extending this calculation to all goods

and applying the price ratios to the
average quantities consumed of each item
in the two countries, we obtain a formula
for the overall purchasing power
equivalent in country A relative to
country B.
QiPia / QiPib

Suppose.....
In the year 2008
Turkish GNP=800 million TL
Population=74 million
Exchange rate:
1 USD = 1.6TL
National per capita income in USD =
GNP/population exchange rate

Turkish real GNP per-cap in 2008 at

current US dollars will be;
800 / 74 1.6 = 6,750

2- Economic Development:
A continuous and sustained rise in GDP of an
economy in addition to major social and
political transformations in order to achieve
the three core values of development:
Life Sustenance.
Self-Esteem.
Freedom.

Measuring Economic Development:

United Nations Development Program
(UNDP) has 2 alternative indexes to
compare the level of development & the
progress of countries :
Human Development Index (HDI)
Human Poverty Index ( HPI)

Human Development Index (HDI)

The HDI is a measure to summarize human
development.
It measures the average achievements in a
country, considering three basic dimensions of
human development (UNDP 2003):
Health Indicator.
Knowledge Indicator.
Economic Growth Indicator.

A long and healthy life, as measured by life

expectancy at birth (Life Expectancy Index LEI);
Knowledge (Educational Attainment Index - EAI),
as measured by the adult literacy rate (Adult
Literacy Index - ALI), which account for 2/3, and
the combined primary, secondary and tertiary
gross enrolment ratio (ERI), which account for
1/3 of the total amount;
A decent standard of living, as measured by
GDPI (Gross Domestic Product per capita Index)
given as Purchasing Power Parity US$ (PPP
US$).

 Before the HDI is calculated, an index needs to

be created for each of these dimensions. To
calculate these three dimension indices,
minimum and maximum values are chosen for
each underlying indicator. Performance in
each dimension is expressed as a value
between 0 and 1.
The HDI is then calculated as a simple average
of each dimension indices.

 The life expectancy index (LEI) measures the

relative achievement of a country in life
expectancy at birth.
The education index (EAI) measures a
countrys relative achievement in both adult
literacy and combined primary, secondary and
tertiary gross enrolment. First, an index for
adult literacy (ALI) and one for combined
gross enrolment (ERI) are calculated (data are
referred to the school year 2000/2001).

Then, these two indices are combined to create

the education index, adult literacy accounting
for 2/3 and the combined gross enrolment
accounting for 1/3. For an example, with an
adult literacy rate of 85.3% and a combined
gross enrolment ratio of 69%, the education
index was 0.799.
Gross Domestic Product Index (GDPI)

Once the dimension indices have been

calculated, determining the HDI is
straightforward. It is a simple
average of the three dimension
indices