Economic Development

Development Indicators
Advantages & Limitations
GDP per capita Economic growth is defined as an increase in real GDP or an increase in the productive
potential of the country. It is measured by assessing the growth in GDP and sometimes
GDP per capita. In other words economic growth is defined and analysed in terms of
changes in national income. It is believed that the general ability to full fill material needs is
higher in a country with a high GDP compared to a country with a low GDP.
Therefore countries experiencing high growth rates are also likely to have high
consumption levels and hence experience a rise in the standard of living.
a Limitations of growth figures or GDP as a measure of economic development
a) This indicator of economic development might fail to state the true living
standards of regions or countries where much economic activity is unofficial or
hidden. In such case the GDP figures might be understated; a common
problem faced in developing countries due to the crony capitalist governing
system.
b) Cross border comparisons can be difficult since the data itself may be collected
by governments who use more or less efficient methods of measurement.
Regardless of the methodology used in computing GDP figures, the values
obtained are likely to be prone to statistical variance which either overstates or
understates the GDP figures.
c) The measurement of inflation is also problematic: if inflation is underestimated
then real output will be overestimated. Government officials may have an
incentive to overvalue output and hence overstate GDP for petty political
gains.
d) Subsistence farming in developing counties can also be a major problem in
computing GDP figures. Non marketed output may never get measured and
hence GDP figure might end up understating the true living standards.
e) To enable cross country comparisons the data need to be standardised to a
particular currency. Using current exchange rates is unlikely to be appropriate
for this. Since exchange rates are based on traded goods and are greatly
affected by speculative capital flows. The alternative, finding a purchasing
power parity rate with which to do the conversion, is non trivial in a world
where goods and services differ so widely between countries.
f) It may be more informative to see patterns of GDP per capita growth over
time, rather than just a snap shot of a particular year.
g) Cross border comparisons are made difficult as there is no sense in which this
indicator can tell the whole story of a country’s economic or social situation. For
example, there can be wide variations in government provision of health and
education in countries with similar GDP figures.
h) An inadequate indication of income distribution makes GDP figures
incompetent in indicating economic development. The unequal distribution of
the benefits of growth may act as a constraint to economic development and
lead to deteriorating living standards for the mass population of a country.
i) While bringing in benefits, increasing GDP per capita might also generate
costs particularly if it is brought about in an unsustainable way. Growth might
generate negative externalities and thus does not necessarily reflect economic
development.

Human Development The human development index is a composite index that measures a country’s average
index(HDI) achievements in three basic aspects of human development. The HDI attempts to rank all
countries on a scale of 0 (lowest human development) to 1 (highest human development).
The HDI is based on three goals or end products of development:
a) Longevity as measured by life expectancy at birth.
b) Knowledge as measured by a weighted average of adult literacy (with two thirds
weight) and the combined primary, secondary and tertiary gross enrolment ratio (with
one third weight).
 c) A decent standard of living as measured by Real GDP per capita adjusted for the
differing purchasing power parity (PPP) of each country’s currency to reflect the
difference in cost of living.
Advantages of
using the HDI:
a) Measures chosen are easy and cheap to collect: the information required to
construct the human development index is easy to collect from the statistics
department of the government of any country. Almost all countries invariably
maintain these measures to monitor the economic condition of the country over
time. Hence, international comparisons can be easily made.
b) Measures chosen are fairly reliable: the GDP values used in HDI is accounted for
the level of inflation of individual economy and further adjusted for any
discrepancy in purchasing power of the currency. This makes the measure quite
accurate and reliable in indicating the level of human development.
c) Indicates GDP has been used to increase social welfare: if together with a
country’s national income its citizen’s health condition and their education level
increase, it can be concluded that the incremental income has been well spent. It
also indicates a better distribution of income and wealth.
d) Can be used to represent the level of health and education.
e) Improvements in health and education rather just income reflects good governance.
f) Improvements in education and heath sector of a country are an indication of an
increase in productive capacity of the country. Educated and healthy workforce of
a country also determines long term growth. Therefore, HDI is not just an
indicator of current development but also looks deep in to the future of a
country.
Disadvantages
of HDI:
a) No indication of deprivation or poverty is included in HDI.
b) The purchasing power parity values change frequently and are likely to be inaccurate
and misleading.
c) The indicator is still flawed by the inaccuracy which results from a failure to indicate
the degree of equality in income distribution.
d) Quality of life is also affected by other factors such as the political condition of
the country, freedom of speech of individual citizens in the country,
participation of women in economic activity, access to communication and
information technology. However, none of these have been included in the HDI.