Economic Development

-improve economic welfare of society (standard living)

*** Progress in an economy, or the qualitative measure of this. Economic development usually refers to the
adoption of new technologies, transition from agriculture-based to industry-based economy, and general
improvement in living standards.

Economic Growth
GDP Growth Rate: GDP1 GDPt-1
GDP t-1
Economic Development Economic Growth
Economic Growth does not necessarily mean you have Economic Development
*** should be noted that if population has grown along with economic production, increases in GDP do not
necessarily result in an improvement in the standard of living. When the focus is on standard of living,
economic growth is expressed on a per capita basis.

Measures of Development
1. GNP per capita =

GNP
Total population

GNP = GDP + NFIA

***It was considered at time that if the rate of growth of income per capita increases over a long period of
time, it would indicate that the country was moving towards higher standard of
living and achieving economic goals.
The increase in real per capita income can be achieved if the nation has the ability to expand its output at a rate
faster than the changes in price level.
Example:

GNP = P 30,000,000,000
Total population = 657, 898
GNPPC =

30,000,000,000
657, 898

= P45, 559.77383

cannot be reliable. For instance

GNP per capita
1 person= P 29,000,000,000

657,897 people = 1,000,000,000

*** In fact the per income does not represent the standard of living of the people. We shall have to consider the level
of distribution of income, the rate of inflation in the country.

2. Human development Index

-Literacy
-Access to water & food

-Education
-Gender Equality

***According to economists, the issue is not only how much growth but what kind of growth. They
formulated Human Development Index (HDI)
***According to this measure, if the citizens of country are able to get and consume more goods and services
than before, people will be considered better off. The welfare of the
people will rise . In the words of Okun and
Richardson, ``Economic development is a
sustained and secular improvement in the material well-being
which is reflected in increase in goods and services.''

Poverty condition welfare

 There is a lack of resources (basic needs, shelter, food, clothing) for material survival

***The poverty threshold, or poverty line, is the minimum level of income deemed adequate
in a given country In
practice, like the definition of poverty, the official or common
understanding of the poverty line is significantly
higher in developed than in developing countries.
***The common international poverty line has in the past been roughly $1 a day.[4] In 2008, the World Bank came out
with a revised figure of $1.25 at 2005 purchasing-power parity (PPP).

Absolute Poverty
Lack of household income
Lack of food consumption
Self-judgement
***Absolute poverty measures the number of people living below a certain income threshold or the number of
households unable to afford certain basic goods and services.

Relative poverty
Head-count index
Poverty gap index

***Relative poverty measures the extent to which a household's financial resources falls below an average income
threshold for the economy. Although living standards and real
incomes have grown because of higher employment
and sustained economic growth over
recent years, the gains in income and wealth have been unevenly distributed
across the
population.

Income Inequality
Kuznets Ratio =

income of upper 20% of population

Income of lower 40% of population

***This is a measure of inequality, i.e. it is a high number if a society is inequal. To see this, notice that the Kuznets
ratio is high if the richest 20% receive a large share of income and/or
the poorest 40% receive a small share of
total income.

***hypothesis that as a country develops, there is a natural cycle of economic inequality driven by market forces which
at first increases inequality, and then decreases it after a certain average income is attained. [2]
*An example of why this happens is that early in development investment opportunities for those who have money
multiply, while wages are held down by an influx of cheap rural labor to the cities. Whereas in mature
economies, human capital accrual, or an estimate of cost that has been incurred but not yet paid, takes the place of
physical capital accrual as the main source of growth; and inequality slows growth by lowering education levels
because poor people lack finance for their education in imperfect credit markets.

Gini coefficient + Lorenz curve

Househo
ld

Annual Income

114,000

47,000

58,000

70,000

87,000

161,000

38,000

29,000

367,000

10

18,000

1st
decile:
2nd
decile:
3rd
decile:
4th
decile:
5th
decile:
6th
decile:
7th
decile:
8th
decile:
9th
decile:
10th
decile:

% of total
income

cumulative % of
income

18,000

1.820020222

1.820020222

29,000

2.932254803

4.752275025

38,000

3.842264914

8.594539939

47,000

4.752275025

13.34681496

58,000

5.864509606

19.21132457

70,000

7.077856421

26.28918099

87,000

8.796764408

35.0859454

114,000

11.52679474

46.61274014

161,000

16.27906977

62.89180991

367,000
989,000

37.10819009
100

100

Gini coefficient = A
BCD

ACD = 1
BCD

Between 0 & 1
G=0 perfect equality
G=1 perfect inequality

***Gini-coefficient of inequality: This is the most commonly used measure of inequality. The coefficient varies
between 0, which reflects complete equality and 1, which indicates complete inequality (one person has all the income
or consumption, all others have none). Graphically, the Gini coefficient can be easily represented by the area between
the Lorenz curve and the line of equality.

*On the figure to the right, the Lorenz curve maps the cumulative income share on the vertical axis against the
distribution of the population on the horizontal axis. In this example, 40 percent of the population obtains around 20
percent of total income. If each individual had the same income, or total equality, the income distribution curve would
be the straight line in the graph the line of total equality.
*The Gini coefficient is calculated as the area A divided by the sum of areas A and B. If income is distributed
completely equally, then the Lorenz curve and the line of total equality are merged and the Gini coefficient is zero. If
one individual receives all the income, the Lorenz curve would pass through the points (0,0), (100,0) and (100,100),
and the surfaces A and B would be similar, leading to a value of one for the Gini-coefficient.

Desirable Properties of Gini coefficient

1. Anonymity
2. Scale Independence

3. Population Independence
4. Transfer Principle(G1 = 0.4; G2 = 0.45)

Anonymity: it does not matter who the high and low earners are.

Scale independence: the Gini coefficient does not consider the size of the economy, the way it is measured,
or whether it is a rich or poor country on average.
Population independence: it does not matter how large the population of the country is.

Transfer principle: if income (less than the difference), is transferred from a rich person to a poor person the
resulting distribution is more equal.

Structural Diversities of Developing Economics

1. Size of the country
-geographic area
-population
-GDP/income

Developing countries differ hugely in terms of geographical size and also in terms of
population size.
Some developing countries are very large, such as China, Brazil, and India and
Democratic Republic of the Congo, where others are very small in terms of land mass,
such as Swaziland, Jamaica and Nauru. In terms of population, it is a common mistake
to assume that all developing countries have large populations.
Developing countries range from China (1.4 billion) to East Timor an Fiji with less than
1 million people.
Although it is often assumed that all developing countries have very low levels of
income per capita, we should be aware that there are marked differences between per
capita income from developing country to developing country.
Venezuela has a high GDP per capita, but it is still very much a developing country.

2. Historical & Colonial Background

A large proportion of developing countries were once colonies of the developed
countries.

However, the extent to which this has affected these countries varies greatly.

Much depends upon for how long these countries were colonized and whether the
independence was given freely or whether it had to be fought.

It could be argued that countries gained some positive outcomes from colonization,
such as Singapore and Hong Kong and some countries did not, such as Vietnam and
Angola.

Colonized or not, there is no doubt that whatever developing countries we consider,

there will be marked historical differences that will set the countries apart from each
other socially, politically and economically.

3. Ethnic & Religious Traditions

Developing countries have a wide range of ethnic and religious diversity.
High levels of ethnic and religious diversity within a country make it more likely that
there will be political unrest and internal conflict.
This has been evident in Rwanda, Sri Lanka, Ethiopia and Angola in the last 20 years.
Examples of countries that more religiously homogenous would be Morocco and
Jamaica.

4. Endowment of Physical and human resources

There is a tendency to assume that developing countries must be poorly endowed with resources, both
physical and human. However, this is not necessarily the case. While it is common for human resources to be
undernourished and poorly educated and thus low skilled (low levels of human capital), endowment in terms
of physical resources can very immensely between developing countries. Angola possess oil and diamonds
and yet is still very much a developing country.
It should be remembered that a lack of physical resources does not necessarily mean that a country cannot
be successful. Japan is not well endowed with physical resources and Singapore has almost literally none.
However, both countries have created economic miracles in the last 50 years.

5. Relevance of public and private sectors

6. Nature of Industrial Sectors
-primary-agriculture
- secondary- manufacturing
-terriary- transportation, communication, commerce and finance

It is widely assumed that all developing countries depend upon the production and exporting of primary
products.
While this may be true of many developing countries, many are reliant on basic manufactured products for
exports. (eg: Bangladesh)
Others such as Cape Verde and Maldives are actually mainly exporters of services in the form of tourism.

7. Degree of Dependence on external economic & political fortress

UN/IMF/WB/ADB/USAID/Japan ODA
8. Distribution of power/ institutions and political structures
Developing countries have very different political structures from each other.

Democracies such as Brazil, Indonesia & Mexico Monarchies such as Brunei and
Tobago
Military Rule, such as Myanmar & Pakistan. Single Party Rule, such as China, Cuba
& Syria

Transitional Political Systems, where a country is in transition often caused by

conflict and civil war and cannot be classified (eg: Somalia)
Within each structure, there are of course many substructures. Democracies may be
presidential systems, semi-presidential systems, parliamentary republics or
constitutional monarchies.
The main point is that with developing countries being so diverse in their systems or
government, it is very difficult to establish one-size-fits all solutions to developmental
problems.
To conclude, we can say that while there are some common characteristics that are held by
developing countries to a some degree, there are also several significant differences. One
must be very cautious in making generalizations that imply that all developing countries are
the same.
Common Characteristics of developing countries
1. Low levels of living
Low Standards of living tend to be experienced by the majority of the population.
The main indicators of these low living standards are high poverty levels (i.e very low incomes), high levels of
inequality, very poor housing, low standards of health, high infant mortality rates, high levels of malnutrition
and a lack of education.

2. Low levels of productivity

In the developing countries, the levels of labor productivity are very low compared with those in developed
countries. The reason which lead to this is that they lack capital and experienced management.
Developed countries have enough capital and experience to buy machinery to increase their productivity. To
raise productivity for third world countries,
domestic savings and foreign finance must be used to generate new investment in physical capital goods.
This will give more opportunity to the workers in terms of education and training and have more high tech
machinery to increase in the productivity.

3. High rate of population growth & dependency burden

Those of working age, usually assumed to be 15 to 64, have to support a much larger proportion of children
than does the work force in developing countries.

Older people and children are often referred to as an economic dependency burden because they are the
nonproductive members in the society and therefore must be supported financially by the government or the
country's labor force. The dependency burden in developed countries is one-third of their population, whereas
45% in the less developed countries. The high dependency burden is stopping the country from developing
because most of the money generated in the country goes to children and older people.

population t populationxt-1100
population t-1
4. Substantial dependence on agricultural production and high experts

There is a big difference between the proportionate size of the agricultural population in the third world
countries (75%) versus the developed countries (5%). People in the third world countries are concentrating in
production of agricultural and other primary production activities because at low level of income, their first
priorities are food, clothing and shelter.

Their agricultural productivity is low not only because of the large number of people involve in agricultural
production but their limited technologies, poor organization, and limited physical and human capital input.

For their primary product exports, they have a high exports rate. Most developing countries are exporting
basic foodstuffs, nonfood cash crops, and raw materials. Most of their earning is come from export. Although
they earned many foreign exchanges through exports but they used the money to pay the interest they borrow
from other developed countries.

5. Prevalence of imperfect markets

However, this is possibly problematic, since while market-based approaches may work well in economies that
are efficiently functioning , many developing countries face imperfect markets and imperfect knowledge.
Developing countries may lack many of the necessary factors that enable markets to work efficiently.
They may lack a functioning banking system, which enables and encourages savings and then investment.
They lack a developed legal system, which ensures that business takes place in a fair and structured manner.
They lack adequate infrastructure, especially in terms of transport routes of all types, which would enable raw
materials, semi-finished products and final goods to more around the country, and to be moved out of the
country , efficiently and at low cost.

They lack accurate information systems for both producers and consumers, which often leads to imperfect
information, the misallocation of resources and misinformed purchasing decisions.

6. Dominant dependence on international organization

*In almost all cases, developing countries are dominated by developed countries because of the economic
and political power of the developed countries.
*In addition, they are dependent upon them for many things, such as trade, access to technology, aid and
investment
*It is not really possible for economically small, developing countries to isolate themselves from world
markets.

Demand for children

Cd f (Y, Pc, Px, tx)
(+) (-) (+) (+)
Y = income
Pc = price of raising children
Tx = preference for having children
Px = price of other goods relative to price of raising children
Opportunity cost = value of forgone opportunity given a certain choice