Human Development Index

The Human Development Index (HDI) is an index used to rank countries by level of "human
development", which usually also implies whether a country is a developed, developing, or
underdeveloped country.

The HDI combines normalized measures of life expectancy, literacy, educational attainment,
and GDP per capita for countries worldwide. It is claimed as a standard means of measuring
human development—a concept that, according to the United Nations Development Program
(UNDP), refers to the process of widening the options of persons, giving them greater
opportunities for education, health care, income, employment, etc. The basic use of HDI is to
measure a country's development.

The index was developed in 1990 by Pakistani economist Mahbub ul Haq, Sir Richard Jolly,
with help from Gustav Ranis of Yale University and Lord Meghnad Desai of the London School
of Economics.
It has been used since then by UNDP in its annual Human Development Report. It is claimed
that ideas of Indian Nobel prize winner Amartya Sen were influential in the development of the
HDI. The HDI now serves as a path towards a wide variety of more detailed measures
contained in the Human Development Reports.

The HDI combines three basic dimensions:

 Life expectancy at birth, as an index of population health and longevity

 Knowledge and education, as measured by the adult literacy rate (with two-thirds
weighting) and the combined primary, secondary, and tertiary gross enrollment ratio
(with one-third weighting).
 Standard of living, as measured by the natural logarithm of gross domestic product per
capita

Methodology

In general, to transform a raw variable, say x, into a unit-free index between 0 and 1 (which
allows different indices to be added together), the following formula is used:

 x-index =

where and are the lowest and highest values the variable x can attain,
respectively.

The Human Development Index (HDI) then represents the average of the following three
general indices:
 Life Expectancy Index =

 Education Index =
 o Adult Literacy Index (ALI) =

o Gross Enrollment Index (GEI) =

 GDP =

Criticisms

The Human Development Index has been criticized on a number of grounds, including failure
to include any ecological considerations, focusing exclusively on national performance and
ranking, and not paying much attention to development from a global perspective. Two
authors claimed that the human development reports "have lost touch with their original
vision and the index fails to capture the essence of the world it seeks to portray". The index has
also been criticized as "redundant" and a "reinvention of the wheel", measuring aspects of
development that have already been exhaustively studied. The index has further been
criticized for having an inappropriate treatment of income, lacking year-to-year comparability,
and assessing development differently in different groups of countries.

Some authors have proposed alternative indices to address some of the index's shortcomings.

Economist Bryan Caplan has criticized the way scores in each of the three components are
bounded between zero and one, so rich countries effectively cannot improve their ranking in
certain categories, even though there is a lot of scope for economic growth and longevity left,
"This effectively means that a country of immortals with infinite per-capita GDP would get a
score of .666 (lower than South Africa and Tajikistan) if its population were illiterate and never
went to school." Scandinavian countries consistently come out top on the list, he argues,
"because the HDI is basically a measure of how Scandinavian your country is.

The HDI has been criticized as a redundant measure that adds little to the value of the
individual measures composing it; as a means to provide legitimacy to arbitrary weightings of
a few aspects of social development; as a number producing a relative ranking which is useless
for inter-temporal comparisons, and difficult to compare a country's progress or regression
because the HDI for a country in a given year depends on the levels of, say, life expectancy or
GDP per capita of other countries in that year. However, each year, UN member states are listed
and ranked according to the computed HDI. If high, the rank in the list can be easily used as a
means of national aggrandizement; alternatively, if low, it can be used to highlight national
insufficiencies. Using the HDI as an absolute index of social welfare, some authors have used
panel HDI data to measure the impact of economic policies on quality of life.
Gross domestic product (GDP)
The gross domestic product (GDP) or gross domestic income (GDI), a basic measure of an
economy's economic performance, is the market value of all final goods and services made
within the borders of a nation in a year. GDP can be defined in three ways, all of which are
conceptually identical. First, it is equal to the total expenditures for all final goods and services
produced within the country in a stipulated period of time (usually a 365-day year). Second, it
is equal to the sum of the value added at every stage of production (the intermediate stages) by
all the industries within a country, plus taxes less subsidies on products, in the period. Third, it
is equal to the sum of the income generated by production in the country in the period—that is,
compensation of employees, taxes on production and imports less subsidies, and gross
operating surplus (or profits).

The most common approach to measuring and quantifying GDP is the expenditure method:

GDP = consumption + gross investment + government spending + (exports − imports)

= C + I + G + (X − M).

"Gross" means that depreciation of capital stock is not subtracted out of GDP. If net investment is
substituted for gross investment in the equation above, then the formula for net domestic product is
obtained. Consumption and investment in this equation are expenditure on final goods and services.
The exports-minus-imports part of the equation (often called net exports) adjusts this by subtracting
the part of this expenditure not produced domestically (the imports), and adding back in domestic
area (the exports).

Economists (since Keynes) have preferred to split the general consumption term into two parts;
private consumption, and public sector (or government) spending. Two advantages of dividing total
consumption this way in theoretical macroeconomics are:

 Private consumption is a central concern of welfare economics. The private investment and
trade portions of the economy are ultimately directed (in mainstream economic models) to
increases in long-term private consumption.
 If separated from endogenous private consumption, government consumption can be treated
as exogenous, so that different government spending levels can be considered within a
meaningful macroeconomic framework.

Measuring GDP

Components of GDP

Each of the variables C (Consumption), I (Investment), G (Government spending) and X − M

(Net Exports) (where GDP = C + I + G + (X − M) as above)

 C (Consumption) is private consumption in the economy. This includes most personal

expenditures of households such as food, rent, medical expenses and so on but does not
include new housing.
 I (Investment) is defined as investments by business or households in capital.
  G (Government spending) is the sum of government expenditures on final goods and
services. It includes salaries of public servants, purchase of weapons for the military, and any
investment expenditure by a government. It does not include any transfer payments, such as
social security or unemployment benefits.
 X (Exports) is gross exports. GDP captures the amount a country produces, including goods
and services produced for other nations' consumption, therefore exports are added.
 M (Imports) is gross imports. Imports are subtracted since imported goods will be included
in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic.

Types of GDP and GDP growth

GDP real growth rates for 2008

1. Current GDP is GDP expressed in the current prices of the period being measured
2. Nominal GDP growth is GDP growth in nominal prices (unadjusted for price changes).
3. Real GDP growth is GDP growth adjusted for price changes.

(Calculating the real GDP growth allows economists to determine if production increased or
decreased, regardless of changes in the purchasing power of the currency.)

GDP vs. GNP

GDP can be contrasted with gross national product (GNP, or gross national income, GNI), which
the United States used in its national accounts until 1992. The difference is that GNP includes net
foreign income (the current account) rather than net exports and imports (the balance of trade). Put
simply, GNP adds net foreign investment income compared to GDP. United States GDP, GNP and
GNI (Gross National Income) can be compared at EconStats.

GDP is concerned with the region in which income is generated. It is the market value of all the
output produced in a nation in one year. GDP focuses on where the output is produced rather than
who produced it. GDP measures all domestic production, disregarding the producing entities'
nationalities.

In contrast, GNP is a measure of the value of the output produced by the "nationals" of a region.
GNP focuses on who owns the production. For example, in the United States, GNP measures the
value of output produced by American firms, regardless of where the firms are located. Year-over-
year real GNP growth in the year 2007 was 3.2%.

Limitations of GDP to judge the health of an economy

GDP is widely used by economists to gauge the health of an economy, as its variations are relatively
quickly identified. However, its value as an indicator for the standard of living is considered to be
limited. Criticisms of how the GDP is used include:

 Wealth distribution – GDP does not take disparity in incomes between the rich and poor
into account.
  Non-market transactions – GDP excludes activities that are not provided through the
market, such as household production and volunteer or unpaid services. As a result, GDP is
understated.
 Underground economy – Official GDP estimates may not take into account the underground
economy, in which transactions contributing to production, such as illegal trade and tax-
avoiding activities, are unreported, causing GDP to be underestimated.
 Non-monetary economy – GDP omits economies where no money comes into play at all,
resulting in inaccurate or abnormally low GDP figures. For example, in countries with major
business transactions occurring informally, portions of local economy are not easily
registered.
 GDP also ignores subsistence production.
 What is being produced – GDP counts work that produces no net change or that results
from repairing harm. For example, rebuilding after a natural disaster or war may produce a
considerable amount of economic activity and thus boost GDP. The economic value of health
care is another classic example—it may raise GDP if many people are sick and they are
receiving expensive treatment, but it is not a desirable situation.
 Externalities – GDP ignores externalities or economic bads such as damage to the
environment.
 Sustainability of growth – GDP does not measure the sustainability of growth. A country
may achieve a temporarily high GDP by over-exploiting natural resources or by misallocating
investment.

Alternatives to GDP
 Human Development Index (HDI) –HDI uses GDP as a part of its calculation and then
factors in indicators of life expectancy and education levels.

 Genuine Progress Indicator (GPI) or Index of Sustainable Economic Welfare (ISEW) –

The GPI and the similar ISEW attempt to address many of the above criticisms by taking the
same raw information supplied for GDP and then adjust for income distribution, add for the
value of household and volunteer work, and subtract for crime and pollution.

 Wealth Estimates –The World Bank has developed a system for combining monetary wealth
with intangible wealth (institutions and human capital) and environmental capital.

Some people have looked beyond standard of living at a broader sense of quality of life or well-
being. It also states that GDP is a statistic crucial to the success of a specified country

 Private Product Remaining –Murray Newton Rothbard and other Austrian economists
argue that because government spending is taken from productive sectors and produces goods
that consumers do not want, it is a burden on the economy and thus should be deducted. In
his book America's Great Depression, Rothbard argues that even government surpluses
from taxation should be deducted to create an estimate of PPR.

 European Quality of Life Survey –This survey, the first wave of which was published in
2005, assessed quality of life across European countries through a series of questions on
overall subjective life satisfaction, satisfaction with different aspects of life, and sets of
questions used to calculate deficits of time, loving, being and having.
  Gini Coefficient –Considers the disparity of income within a nation.

 Gross National Happiness –The Centre for Bhutanese Studies in Bhutan is currently
working on a complex set of subjective and objective indicators to measure 'national
happiness' in various domains (living standards, health, education, eco-system diversity and
resilience, cultural vitality and diversity, time use and balance, good governance, community
vitality and psychological well-being). This set of indicators would be used to assess progress
towards Gross National Happiness, which they have already identified as being the nation's
priority, above GDP.

 Happy Planet Index –The Happy Planet Index (HPI) is an index of human well-being and
environmental impact, introduced by the New Economics Foundation (NEF), in July 2006. It
measures the environmental efficiency with which human well-being is achieved within a
given country or group. Human well-being is defined in terms of subjective life satisfaction
and life expectancy.

Some definition:

The United Nations publishes a Human Development Index (HDI) every year, which
consists of the –
1. Education index,
2. GDP Index,
3. Life Expectancy Index and
4. Gross enrolment ratio
These three components measure the educational attainment, GDP per capita and life
expectancy respectively.
1. Life expectancy –
Life expectancy is the average number of years of life remaining at a given age. It is the
average expected lifespan of an individual.
http://en.wikipedia.org/wiki/Life_Expectancy_Index - cite_note-0 Life expectancy is heavily dependent
on the criteria used to select the group. For example, in countries with high infant mortality
rates, the life expectancy at birth is highly sensitive to the rate of death in the first few years of
life.
In these cases, another measure such as life expectancy at age 5 (e 5) can be used to exclude the
effects of infant mortality to reveal the effects of causes of death other than early childhood
cause.
Calculating life expectancies
The starting point for calculating life expectancies is the age-specific death rates of the
population members. For example, if 10% of a group of people alive at their 90th birthday die
before their 91st birthday, then the age-specific death rate at age 90 would be 10%.
These values are then used to calculate a life table, from which one can calculate the
probability of surviving to each age. In actuarial notation the probability of surviving from age
x to age x+n is denoted and the probability of dying during age x (i.e. between ages x and
x+1) is denoted .

The life expectancy at age x, denoted , is then calculated by adding up the probabilities to
survive to every age. This is the expected number of complete years lived (one may think of it
as the number of birthdays they celebrate).

Because age is rounded down to the last birthday, on average people live half a year beyond
their final birthday, so half a year is added to the life expectancy to calculate the full life
expectancy.
An average age for death expectancy is very close life expectancy (and exactly same for the
exponential growth of death rate with increasing age).

Life expectancy is by definition an arithmetic mean. It can be calculated also by integrating the
survival curve from ages 0 to positive infinity (the maximum lifespan, sometimes called
'omega'). For an extinct cohort (all people born in year 1850, for example), of course, it can
simply be calculated by averaging the ages at death. For cohorts with some survivors it is
estimated by using mortality experience in recent years.
Note that no allowance has been made in this calculation for expected changes in life
expectancy in the future. Usually when life expectancy figures are quoted, they have been
calculated like this with no allowance for expected future changes. This means that quoted life
expectancy figures are not generally appropriate for calculating how long any given individual
of a particular age is expected to live, as they effectively assume that current death rates will be
"frozen" and not change in the future. Instead, life expectancy figures can be thought of as a
useful statistic to summarize the current health status of a population. Some models do exist to
account for the evolution of mortality (e.g., the Lee-Carter model).
On an individual basis, there are a number of factors that have been shown to correlate with a
longer life. Some factors that appear to influence life expectancy include family history, marital
status, economic status, physique, exercise, diet, drug use including smoking and alcohol
consumption, disposition, education, environment, sleep, climate, and health care.
Life Expectancy Index
The Life Expectancy Index is a statistical measure used to determine the average lifespan of
the population of a certain nation or area. Life expectancy is one of the factors in measuring the
Human Development Index (HDI) of each nation, along with adult literacy, education, and
standard of living.
Life expectancy is also a factor in finding the physical quality of life of an area.
The formula to find the life expectancy of an area is:
 (LE: Life expectancy at birth)
2. Education Index –
The Education Index is measured by the adult literacy rate (with two-thirds weighting) and the
combined primary, secondary, and tertiary gross enrollment ratio (with one-third weighting). The
adult literacy rate gives an indication of the ability to read and write, while the GER gives an
indication of the level of education from kindergarten to postgraduate education.
Education is a major component of well-being and is used in the measure of economic development
and quality of life, which is a key factor determining whether a country is a developed, developing,
or underdeveloped country.

3. Adult Literacy Index –

The Adult literacy index (ALI) is a statistical measure used to determine how many adults can read
and write in a certain area or nation. Adult literacy is one of the factors in measuring the Human
Development Index (HDI) of each nation, along with life expectancy, education, and standard of
living.
The equation for measuring the Adult literacy rate is:


4. Gross enrolment ratio –

Gross enrolment ratio (GER) or gross enrolment index (GEI) is a statistical measure used in the
education sector and by the UN in its Education Index.
The GER gives a rough indication of the level of education from kindergarten to postgraduate
education – known in the UK and some other countries (mostly in the Commonwealth of Nations) as
primary, secondary, and/or tertiary – amongst residents in a given jurisdiction.
In the UN, the GER is calculated by expressing the number of students enrolled in primary,
secondary and tertiary levels of education, regardless of age, as a percentage of the population of
official school age for the three levels.
Example
 Locale A has 950,000 pupils enrolled in education in the academic year 2005/06.
 Locale A has 1,000,000 pupils of school age.
GER = number of actual students enrolled / number of potential students enrolled
= (950,000 / 1,000,000) = 0.95

UN Human Development Index Use

A combined gross enrolment ratio (CGER), incorporating all three levels of education, is used to
calculate the Human Development Index (HDI), an annual gauge of well-being for UN member
states. Amongst other measures used in the calculation, the CGER is given one-third weight in
assessing the knowledge component, represented by gross enrolment, while the adult literacy rate is
assigned two-thirds weight.