ECONOMIC

DEVELOPMENT
TOPIC OUTLINE
• Economic Development
• Economic Growth v. Economic Development
• New Approaches to Measuring Economic Development
– Human Development Index
– Healthy Life Expectancy
– Green GNP
• Making Comparisons Between Countries
– Exchange Rate Method
– PPP Method
ECONOMIC
DEVELOPMENT
WHAT IS DEVELOPMENT?

• An act of improving by expanding, enlarging and refining

• A process of improving the quality of human lives
PURPOSE OF DEVELOPMENT

• The basic purpose of development is to enlarge people’s choices. In principle, these choices can
be infinite and can change over time. People often value achievements that do not show up at all, or
not immediately, in income or growth figures: greater access to knowledge, better nutrition and
health services, more secure livelihoods, security against crime and physical violence, satisfying
leisure hours, political and cultural freedoms and a sense of participation in community activities.
The objective of development is to create an enabling environment for people to enjoy
long, healthy and creative lives.

Mahbub ul Haq(1934-1998)
Founder of the Human Development Report
THREE CORE VALUES OF
DEVELOPMENT
• Sustenance: The ability to meet the basic needs
– Food, shelter, health and protection
• Self-Esteem: To be a person
– Sense of worth and self-respect
• Freedom from Servitude: To be able to Choose
DEVELOPMENT ECONOMICS
• Development economics is a branch of economics that focuses on improving
fiscal, economic, and social conditions in developing countries.
– Considers factors such as health, education, working conditions, domestic and
international policies, and market condition with a focus on improving conditions
in the world's poorest countries.
• The field also examines both macroeconomic and microeconomic factors
relating to the structure of developing economies, and domestic and
international economic growth.
ECONOMIC
DEVELOPMENT
V.
ECONOMIC GROWTH
ECONOMIC GROWTH

• Economic growth in an economy is demonstrated by an outward shift in

its Production Possibility Curve (PPC).
• Another way to define growth is the increase in a country’s total output
or Gross Domestic Product (GDP). It is the increase in a country’s production.
• It is the increase of a nation’s real output (GDP)
• Refers to quantitative changes
• Increase in the economy’s real gross national product or real national income
GROWTH OCCURS

1. There is a discovery of new mineral/metal deposits.

2. There is an increase in the number of people in the workforce or
the quality of the workforce improves. For example, through
training and education.
3. There is an increase in capital and machinery.
4. There is an improvement in technology.
ECONOMIC DEVELOPMENT

• A country’s economic development is usually indicated by an

increase in citizens’ quality of life.
• ‘Quality of life’ is often measured using the Human Development
Index, which is an economic model that considers intrinsic personal
factors not considered in economic growth, such as literacy rates,
life expectancy and poverty rates.
ECONOMIC DEVELOPMENT OCCURS

• An increase in real income per head – GDP per capita.

• The increase in levels of literacy and education standards.
• Improvement in the quality and availability of housing.
• Improvement in levels of environmental standards.
• Increased life expectancy.
HUMAN DEVELOPMENT INDEX
ECONOMIC GROWTH V. ECONOMIC
DEVELOPMENT
ECONOMIC GROWTH ECONOMIC DEVELOPMENT

Single Dimensional Multidimensional

Quantitative Qualitative

Continuous and steady change Spontaneous and discontinuous

change

Used for developed economies Used for developing countries

NEW APPROACHES
IN MEASURING
ECONOMIC
DEVELOPMENT
HUMAN DEVELOPMENT INDEX (UNDP)

The Human Development Index (HDI) is a statistic developed and compiled by

the United Nations to measure and various countries' levels of social and
economic development.

This index is a tool used to follow changes in development levels over time and
to compare the development levels of different countries
HOW IS HDI MEASURED
• The HDI is a summary measurement of basic achievement levels in human development. The
computed HDI of a country is an average of indexes of each of the life aspects that are
examined and then the geometric mean of the three components is calculated.
LIMITATIONS OF HDI

• limited evaluation of human development

• does not specifically reflect quality-of-life factors, such as empowerment
movements or overall feelings of security.
• Essentially redundant as a result of the high correlations between the HDI, its
components, and simpler measures of income per capita
HEALTHY LIFE EXPECTANCY
• Healthy life expectancy (HALE) is a form of health expectancy that applies disability weights to
health states to compute the equivalent number of years of good health that a newborn can
expect.

Country Male Male Female Female

HALES at birth HALES at age 60 HALES at birth HALES at age 60
Japan 72.5 78.9 77.2 83.1
Australia 70.8 78.6 72.9 80.5
North Korea 61.3 71.6 66.6 75.9
France 70.7 78.7 74.4 81.7
Canada 71.3 78.6 73.3 80.6
China 67.7 75.1 69.5 76.7
India 58.8 72.8 60.4 73.7
Indonesia 60.7 72.2 63.7 74.1
Iran Zealand
New 66.4
70.7 75.4
78.6 66.7
72.4 75.0
80.1
Philippines 58.6 72.0 63.9 74.5
GREEN GNP

• It is an economic and environmental accounting framework which

measures the national wealth by accounting for exhaustion of
natural resources and degradation of environment and investment
in environment support.
MAKING
COMPARISONS
BETWEEN COUNTRIES
§ Exchange Rate Method
§ PPP Method
PURCHASING POWER PARITY

• PPP is an economic theory that compares different countries'

currencies through a "basket of goods" approach.
• According to this concept, two currencies are in equilibrium—
known as the currencies being at par—when a basket of goods is
priced the same in both countries, taking into account the exchange
rates.
PURCHASING POWER PARITY

• Purchasing power parity (PPP) is a theory that says that in the long run (typically over several
decades), the exchange rates between countries should even out so that goods essentially cost
the same amount in both countries.

• The theory of purchasing power parity explains that there should be no arbitrage
opportunities (where price differences between countries can result in profit). Purchasing
power parity is used to compare the gross domestic product between countries.
PURCHASING POWER PARITY

• Example:

• An apple costs $1 in US while it costs Php65 in the Philippines.

• It costs Php50 in order to buy one dollar.
• Conclusion: This creates an arbitrage opportunity where people in US can stock up on bread
and bring it to the PH, where they can sell it to make a nice profit. (all things equal, meaning
input and processing costs remain constant)
EXCHANGE RATE METHOD

• Exchange rates are the amount of one currency you can exchange
for another.
• For example, the dollar's exchange rate tells you how much a dollar
is worth in a foreign currency.
MARKET EXCHANGE RATE METHOD

• To compare the GDP of countries with different currencies, it is necessary to convert to a

“common denominator” using an exchange rate, which is the value of one currency in terms
of another currency. Exchange rates are expressed either as the units of country A’s currency
that need to be traded for a single unit of country B’s currency (for example, Japanese yen per
British pound), or as the inverse (for example, British pounds per Japanese yen).

• Market exchange rates vary on a day-to-day basis depending on supply and demand in foreign
exchange markets.
COMPARISONS