Growth and Development economics week 1

Video 1: comparing income levels

Difference currencies exchange rate

relative real GDP 24%  means that the average Chinese person have 24% of the income level of average
income in the USA
GDP is the sum of final expenditure within a country’s boarder
Low income countries tend to have low price levels
Income differences based on purchasing power parities tend to be smaller than based on exchange rates
Lecture 1
Structural approach to development
Structural characteristics of a typical poor country:
– High population growth rate and urban migration
– Low investment rates
– Agriculture is the main economic sector
– Is there a causal relationship between these characteristics and development?
• Theory and measurement of inequality, poverty, structural change and growth
Comparing wellbeing
-real GDP
Take in consideration the purchasing power parity of people in the nominal income  real income
Long run real GDP/capita
1) Growth is a relatively recent phenomenon
2) The gap between rich and poor has grown
Growth since 1980

- Rise of India and China.

People with higher real GDO/capita tend to be more satisfied with life, live longer, more education and face
a moral equal income distribution
-per capita income has many limitations as an index of development
It captures the value of only those private goods and services that are bought and sold in the market.
• Ignores all non-market goods and services (e.g., unpaid household work)
• Ignores externalities/public goods (e.g., environment, public services)
• Ignores distributional concerns (e.g., poverty, inequality)
• Ignores rights, freedoms
Not included other determinants of quality of life  health and education
Human development index HDI
Takes into account the non private good aspects of development
HDIj= (I)^1/3(H)^1/3(E)^1/3
E Education (schooling) H health (life expectancy) and real GNI (I)
HDI is motivated by Amartya Sen’s capability theory: development should expand people’s “budget sets”
(broadly defined) – things that they are able to do
Dimension indices – Natural log (ln) of GNI per capita
Geometric mean vs arithmetic mean – Imperfect vs perfect substitutability across health, income, and
education
PRO explicitly account for non-monetary aspects of wellbeing (health and opportunities of education)
CONselection and aggregation of indicators is arbitrary (should all dimensions count equally?)
Comparing wellbeing
Income • Consumption • Wealth • Health • Employment status • Environment (clean air, pleasant city or
village, low crime) • Friends and fun activities • Stated life satisfaction
Low development
High poverty, low growth, high birth rate, subsistence agriculture and or urban slums, stagnant economic
opportunities poor institutions, corruption, environmental circumstances
Chapter 1: Introduction economic development
Development =The process of improving the quality of all human lives and capabilities by raising people’s
levels of living, self-esteem, and freedom
How living levels differ around the world
Living standards=strata Stylized sets of material living conditions; the 4-strata schema was created by Hans
Rosling
Subsistence economy food in grown for consumption, rural areas and poorest communities
-An economy in which production is mainly for personal consumption and the standard of living yields little
more than basic necessities of life—food, shelter, and clothing
Lowest stratum: extreme poverty
Second lowest stratum: poverty poor education and health
Second higher stratum: good education and health, and needs covered
Highest stratum: high education and consumptions and quality of goods
How to classify countries?
GNI gross national income The total domestic and foreign output claimed by residents of a country,
consisting of gross domestic product (GDP) plus factor incomes earned by foreign residents, minus income
earned in the domestic economy by nonresidents
-low income (GNI less than 996$) LIC low income countries
-lower middle income countries LMCs 996-3895$
-upper middle income countries UMCs 3,896-12,055$
-high income countries HICs 12,055 above
As recently as 1990, over half of the global population lived in low-income countries. The biggest factor in
this sharp improvement is rapid income growth in China, which became a LMC in 1999, and India, which
did so in 2007. China passed the next threshold to join the UMC group in 2010. Several other countries have
also joined the middle-income country groups since the 1990s
Economics and development studies
Development economics= The study of how economies are transformed from stagnation to growth and from
low- income to high-income status, and overcome problems of extreme poverty
The central role of women
-women in developing countries have primary responsibility for child rearing, and the resources that they are
able to bring to this task will determine how readily the cycle of transmission of poverty from generation to
generation can be broken
-development as a multidimensional process involving major changes in social structures, popular attitudes,
and national institutions, as well as acceleration of economic growth, reduction of inequality, and poverty
eradication
-change of the Social system The organisational and institutional structure of a society, including its
values, attitudes, power structure, and traditions
The Sen’s Capability Approach
Functionings What people do or can do with the commodities of given characteristics that they come to
possess or control.
Sen identifies five sources of disparity between (measured) real incomes and actual advantages:14 (1)
personal heterogeneities, such as those connected with disability, illness, age, or gender; (2) environmental
diversities, such as heating and clothing requirements in the cold or infectious diseases in the tropics, or the
impact of pollution; (3) variations in social climate, such as the prevalence of crime and violence, and “social
capital”; (4) distribution within the family—economic statistics measure incomes received in a family
because it is the basic unit of shared consumption, but family resources may be distributed unevenly, as
when girls get less medical attention or education than boys do; and (5) differences in relational perspectives,
meaning that some goods are essential because of local customs and conventions.
 external capabilities, which are “abilities to function that are conferred by direct connection or
relationship with another person.
 Consider functionings as resulting from choices, given capabilities. The functioning of a person is an
achievement.
 capabilities as “the freedom that a person has in terms of the choice of functionings, given his
personal features (conversion of characteristics into functionings) and his command over
commodities.
Happiness and development
there is wide variation in the relationship between income and happiness, especially across developing
countries. One of the findings is that the average level of happiness or satisfaction increases with a country’s
average income
 average happiness is greater with higher average income, but the relationship is increasing at a
decreasing rate; and after a high enough level of income is reached
The sustainable development goals
-Successor to the earlier Millennium Development Goals (MDGs), a set of 17 broad goals, among them
to: end poverty and hunger; ensure healthy lives, quality education, gender equality, water and sanitation,
and modern energy; promote inclusive growth, employment, resilient infrastructure, industrialisation,
innovation, and improved cities; reduce inequality; combat climate change and environmental damage;
and promote peace, justice, and global partnership
-achieved by the end of 2030
-The universality principle: The SDGs apply to every nation (with action encouraged from every sector).
- The integration principle: All the goals must be achieved; to do so it is necessary to account for their
interrelationships.
- The transformation principle: It is not sufficient to take “piecemeal” steps.
The Millennium development goals 2000-2015
A precursor to the SDGs adopted by the United Nations in 2000 to: eradicate extreme poverty and
hunger; achieve universal primary education; promote gender equality and empower women; reduce
child mortality; improve maternal health; combat diseases; ensure environmental sustainability; and
develop a global development partnership. Goals were assigned targets to be achieved by 2015.
-Some critics argued the MDG targets were not ambitious enough, others argued that goals were not
prioritised; for example, reducing hunger may leverage the achievement of many of the other health and
education targets.
-Progress reports toward achieving the SDGs The United Nations issues annual reports on progress and
challenges toward achieving the SDGs
Chapter 2: Comparative Economic Development
Developing countries= low levels of living and other development deficits.
Human capital= Productive investments in people, such as skills, values, and health resulting from
expenditures on education, on-the-job training programs, and medical care.
Great divergenceinequality in world economy
Comparison of average national income: low-income countries (LICs), lower-middle-income countries
(LMCs), upper middle-income countries (UMCs), high-income OECD countries, and other high-income
countries (HICs)
There are still some high income countries with part of the population in extreme poverty, poor health
and low social development. Some times very high income countries lack in important capabilities
-low- and middle-income countries are concentrated in sub-Saharan Africa, North Africa and the Middle
East, Asia, Latin America and the Caribbean, and among “transition” countries of Eastern Europe and
Central Asia.
people in even some of these very high-income countries often lack in important capabilities.
-Very high-income country An informal category for a per capita income standard indicative of
economies that master frontier technologies, skills and productivity at a point in time, such as $40,000 in
2018.
-A country may be viewed as still developing if it has passed the high-income line but is widely viewed
as susceptible to an income decline, such as due to financial and debt instability
Purchasing power parity
Depreciation (or wearing out) The wearing out of equipment, buildings, infrastructure, and other forms
of capital, reflected in write-offs to the value of the capital stock.
Gross domestic product (GDP) measures the total value for final use of output produced by an economy,
by both residents and nonresidents. GNI comprises GDP plus the difference between the income
residents receive from abroad for factor services (labour and capital) less payments made to nonresidents
who contribute to the domestic economy
Purchasing power parity (PPP) Calculation of GNI using a common set of international prices for all
goods and services, to provide more accurate comparisons of living standards.
Income gaps between developed and developing nations tend to be less when PPP is used→ real wages
are
lower in developing countries, which makes the price of (low-skill) services cheaper in real terms
Comparing countries by HDI index
Human Development Index (HDI)= An index measuring national socioeconomic development, based
on combining measures of education, health, and adjusted real income per capita. →living as measured
by real per capita gross domestic income adjusted for the differing Purchasing Power Parity of each
country’s currency to reflect cost of living and for the assumption of diminishing marginal utility of
income
Diminishing marginal utility The concept that the subjective value of additional consumption (income)
lessens as total consumption becomes higher.
Dimension index= actual value – minimum value / maximum value – minimum value
HDI = H^(1/3)E^(1/3)I^(1/3) →H stands for the health index; E stands for the education index;
and I stands for the income index
HDI classified countries in four groups: low human development (0.0 to 0.549), medium human
development (0.550 to 0.699), high human development (0.700 to 0.799), and very high human
development (0.80 to 1.0).
Key Similarities and Differences Among Developing Countries
1. Levels of income and productivity
At very low income levels, a vicious circle may set in whereby low income leads to low investment in
education and health as well as plant and equipment and infrastructure, which in turn leads to low
productivity and economic stagnation→ poverty trap
Small countries not self sufficient
2. Human capital attainments
remain great disparities in human capital around the world→ developing nations, have lagged in their
average levels of nutrition, health and education
-, student attendance and completion, along with attainment of basic skills such as functional literacy,
remain problems. The problem is moving from getting children into school to providing a quality
education once they arrive.
3. Inequality and absolute poverty
inequality is substantially higher than in most developed countries (where inequality has in many cases
been rising in recent decades). Inequality varies greatly among developing countries, with generally
much lower, though typically rising, inequality in Asia.
Absolute poverty →The situation of being unable or only barely able to meet the subsistence essentials
of food, clothing, shelter, and basic health care.
4. Population growth and age structure
Crude birth rate= the number of children born alive each year per 1,000 population→ developed
countries have close to zero population growth→Population growth rates are determined by the
difference between the birth rate and the death rate (net of migration).
Both older people and children are often referred to as an economic dependency burden(economically
unproductive and therefore not counted in the labour force) in the sense that they are supported
financially by the country’s labour force
5. Rural population and rural-to-urban migration
hallmarks of economic development is a shift from agriculture to manufacturing and services
urbanization
6. Social fractionalisation
Fractionalisation= significant ethnic, linguistic, and other social divisions within a country.
The greater the ethnic, linguistic, and religious diversity of a country, the more likely it is that there will
be internal strife and political instability, particularly if inequality falls along these identity group lines.
7. Level of industrialisation and manufactured exports
Industrialisation is associated with high productivity and incomes and has been a hallmark of
modernisation and national economic power. Most developing countries have diversified away from
agricultural and mineral exports, at least to some extent.
Industrialisation increase productivity
8. Geography and natural resource endowments
climate change due to global warming is projected to have its greatest negative impact on Africa and
South Asia. Resource endowment A nation’s supply of usable factors of production, including mineral
deposits, raw materials, and labor.
Resource endowment A nation’s supply of usable factors of production, including mineral deposits, raw
materials, and labor.
9. Extent of financial and other markets
Some aspects of market underdevelopment are that they often lack: (1) a legal system that enforces
contracts and validates property rights; (2) a stable and trustworthy currency; (3) an infrastructure of
roads and utilities that results in low transport and communication costs so as to facilitate interregional
trade; (4) a well-developed and efficiently regulated system of banking and insurance, (5) substantial
market information for consumers and producers about prices, quantities, and qualities of products and
resources as well as the creditworthiness of potential borrowers; and (6) social norms that facilitate
successful long-term business relationships.
Imperfect market A market in which the theoretical assumptions of perfect competition are violated by
the existence of, for example, a small number of buyers and sellers, barriers to entry, and incomplete
information
Incomplete information The absence of information that producers and consumers need to make
efficient decisions resulting in underperforming markets.
10. Quality of institutions and external dependence
Colonial legacy  institutions created during the colonial period often had pernicious effects on
development that in many cases have persisted to the present day
property rights have been generally less secure, constraints on elites have been weak, and a smaller
segment of society has been able to gain access to and take advantage of economic opportunities colonial
era institutions often favoured extractors of wealth rather than creators of wealth, harming development
then and now→ European colonisation often created or reinforced differing degrees of inequality, often
correlated with ethnicity, which have also proved remarkably stable over the centuries
infrastructure were made not for development but for exploitation of the land and resources
increase dependence on exports form developed countries via trade agreements
Poverty
Africa share in global poverty rises from 23% to 43% but most of the poor are still in Asia→World
poverty fell →Most reduction is Asian Chinese and Indian
Most of the poor today live in middle-income countries and no low income countries→Poverty pockets
within and across countries have grown in importance Lockdown push 71 and 100m people into extreme
poverty, especially in south Asia Most people lost work and returned to more rural areas → few jobs but
living costs are cheaper Income growth is a necessary but not sufficient condition for development
Inequality between richest and poorest countries is increasing
Are living standards of developing and developed nations converging?
Divergence A tendency for per capita income (or output) to grow faster in higher-income countries than
in lower-income countries so that the income gap widens across countries over time (as was seen in the
two centuries after industrialisation began
The great divergence
 Convergence The tendency for per capita income (or output) to grow faster in lower-income
countries than in higher-income countries so that lower-income countries are “catching up” over
time. When countries are hypothsised to converge not in all cases but other things being equal
(particularly savings rates, labour force growth, and production technologies), then the term
conditional convergence is used.
Reason to expect convergence  technology transfer
The second reason to expect convergence if conditions are similar is based on diminishing returns to
factor accumulation. Today’s developed countries high levels of physical and human capital; in a
production function analysis, this would explain their high levels of output per person. But in traditional
neoclassical analysis, the marginal product of capital and the profitability of investments would be lower
in developed countries where capital intensity is higher, provided that the law of diminishing returns
applied
even when the average income of a developing country is becoming a larger fraction of developed
country average incomes, the absolute differences in incomes can still continue to widen for some time
before they finally begin to shrink. A process of absolute country convergence is a stronger standard than
(and appears only with a lag after) a process of relative country income convergence.
The encouraging convergence trend is not inevitable. Potentially, the trend could be derailed by new
technological divides, climate change impacts in Africa and other areas, policies that are self-defeating
or serve narrow interest groups, and development-in-reverse disasters of widespread armed conflict.
Long run causes of comparative development
-physical geography.-
-economic rules
-economic and political inequality
Reverse fortune countries with a lot of resources were exploited and other countries were used a
settlement for Europeans so they have better infrastructures
Past population density and past urbanisation, which are positively correlated with past income, are
negatively correlated with current income, these authors show.59 There is evidence that colonisers set up
more extractive institutions (ones designed to extract more surplus from colonised populations) in
prosperous areas and that these institutions have often persisted into the contemporary period
Tutorial article: Beefed up borgenomics
-Burgernomics is based on the theory of purchasing-power parity (PPP), the notion that in the long run
exchange rates should move towards the rate that would equalise the prices of an identical basket of
goods and services (in this case, a burger) in any two countries
-the raw Big Mac index suggests that the yuan is undervalued by 44% against the dollar
Ketchup growth
“Balassa-Samuelson effect”. Rich countries have much higher productivity and hence higher wages in
the traded-goods sector than poor countries do. Because firms compete for workers, this also pushes up
wages in non-tradable goods and services, where rich countries' productivity advantage is smaller. So
average prices are cheaper in poor countries
China's average income is only one-tenth of that in America so economic theory would suggest that its
exchange rate should be below its long-run PPP
Supersize jubilee
In trade-weighted terms our calculations suggest that the yuan is a modest 7% undervalued, hardly
grounds for a trade war. That is less than previous estimates of a 20-25% undervaluation, based on
models that calculate the appreciation in the yuan needed to reduce China's current-account surplus to a
manageable level of, say, 3% of GDP