Economic Development

Contact Information
Email: Nancy.Virts@csun.edu
Phone: 818-677-2434 or 2462
Office: BB 4256
Office Hours: Tuesday and Thursday
1-2, Thursday 6-7 and by
appointment
 Contact
My website can be found through the
Econ Dept website under faculty.
It has class syllabus , readings and
other course materials
I will post any powerpoints of lectures used
I will contact you by University Email
 Class rules
DO NOT DISRUPT THE CLASS IN ANY
WAY
No Talking
No Cell Phones
Computers may be used only to look at
class material
No Reading of Other Material
 Suggestions for Success
Read the syllabus, have it available
at home and school
Attend class both physically and
mentally
Have a regular study schedule
Do not take this class if you cannot
come every week.
 Course Requirements
One Midterm
Essay
worth 100 points
Paper
Worth 100 points
Comprehensive final
Will be given only on date scheduled
which is December 9 at 8 pm
Worth 200 points
 Economic growth is very uneven
A look at a satellite photo taken
makes this very clear
Not all area with light have same
standard of living
Some dark areas have low population
density but not all
 Why isnt the whole world
developed?
Differences in resources
Differences in culture
Maybe part of the answer but not all
of it
Consider the next satellite photo of
North and South Korea, countries
with similar resources and culture
 Why do we care about
economic growth?
Economic Growth is connected to
well being
Correlation between GDP per capita
and life expectancy and literacy
GDP, Life Expectancy, and Literacy

Copyright2004 South-Western
Cost of slow growth in India
Economic growth was slow in India
prior to 1981
After economic reforms were
implemented in the 1980s, per capita
growth increased from 1.4 % per
year to 2.89 in the 1980s, 4.19% in
1990s and 6.78% from 2001-2006
 Swaminathan S. Anklesaria Aiyar
estimates that if economic reforms
had taken place 10 years earlier,
14.5 million infant deaths could have
been avoided
In addition there would have bee
261 million fewer illiterates, and 109
million fewer poor people.
 No Easy Answers
Will look at growth and development
from different perspectives
Before growth can be explained it
must be measured.
How do we measure size of
economy?
 Measurement Issues
When judging whether the economy
is doing well or poorly, it is natural to
look at the total income that
everyone in the economy is earning.
Before WWII there were no statistics
to measure the size of the whole
economy
 THE MEASUREMENT OF GROSS
DOMESTIC PRODUCT
Gross domestic product (GDP) is a
measure of the income and expenditures
of an economy.
It is the total market value of all final
goods and services produced within a
country in a given period of time.
 Measurement of GDP
GDP is the Market Value . . .
Output is valued at market prices.
Cannot add eggs to cars to oranges
directly
GDP is a weighted average
When prices are determined in markets
they reflect the marginal value people
place on them.
 Measurement of GDP
Of All Final . . .
It records only the value of final goods,
not intermediate goods (the value is
counted only once).
If a baker buys flour, it is not part of
GDP, the bread produced from it is. If
you buy flour in the supermarket it is
part of GDP.
 Measurement of GDP
Goods and Services . . .
It includes both goods (food, clothing,
cars) and services (haircuts, doctor visits).
Includes only those goods and
services produced in market
Not those produced at home
A women marries her gardener and GDP falls
Important to remember because in developing
countries many goods may be produced
outside the market
 No illegal goods
Prostitution is part of GDP in Nevada, not CA
Important to remember differences in legal
structure when comparing different
countries
 Measurement of GDP
. . . Within a Country . . .
It measures the value of production
within the geographic confines of a
country.
GNP is a similar measure
total value of all final goods and services
produced by a countrys citizens
regardless of where produced.
 GDP and Welfare
GDP is the best single measure of the
economic well-being of a society.
GDP per person tells us the income and
expenditure of the average person in the
economy.
Higher GDP per person indicates a higher
standard of living.
GDP is not a perfect measure of the
happiness or quality of life, however.
 GDP and Welfare
Some things that contribute to well-
being are not included in GDP.
The value of leisure.
The value of a clean environment.
The value of almost all activity that
takes place outside of markets, such as
the value of the time parents spend with
their children and the value of volunteer
work
 Problems with GDP
measurement for developing
economies
Does not include non traded goods
Home production
Illegal activities
Data may not be accurate
Limited resources for data collection
Difficult to count production in
agricultural area
Incentive to under report production to
avoid taxes etc
 Growth vs Development
Growth rate of GDP may rise without
development
Discovery of oil or other natural
resources
Development measured by increases
in literacy, health care etc.
Most of the time they are correlated
but not always
 GDP per Capita
GDP per Capita is GDP per person
GDP/population
GDP and GDP per capita can be
different
China vs. Switzerland
Which measure is best depends on
the problem
Marketing Rolex watches vs. KFC
 Example Ghana
year GDP (PPP) GDP per
(billion capita
dollars) (PPP) dollars
2007 32.56 1400

2008 34.94 1500

2009 36.58 1500

 Real Vs. Nominal
Nominal GDP values the production
of goods and services at current
prices.
Real GDP values the production of
goods and services at constant
prices
 Real vs. Nominal
An accurate view of the economy
requires adjusting nominal to real
GDP by using a measure of inflation
like the GDP deflator or the CPI.
 Nominal to Real GDP
Converting Nominal GDP to Real GDP
Nominal GDP is converted to real GDP as
follows:

N o m in a l G D P 20X X
R e a l G D P20X X 100
G D P d e f la to r2 0 X X
Or CPI20xx
 CPI is calculated by finding how the
cost of purchasing a fixed basket of
goods changes over time
Problems to be aware of include
Substitution bias (If relative prices
change the composition of the basket
shifts)
Quality changes
 How do we compare GDP between
different countries with different
currencies?
Exchange rates
How much one currency trades for another
Determined by the supply and demand for
currency which depends on traded goods
only
Fluctuate daily
 Many goods, like Big Macs are not
traded between countries.
Services like haircuts, rents etc,
These tend to be much cheaper in
poor countries than developed
countries
 Purchasing Power Parity
If exchange rates are used to
compare the size if these countries to
developed countries will make them
seem smaller than the really are.
Should use PPP to compare size of
economies across countries
Calculated by taking a basket of goods
and finding how much it costs in
different countries
 How much difference does it
make?
For Ghana in 2009
GDP in official exchange rate was
14.76 billion dollars
GDP in PPP was 36.58 billion dollars
 Alternate Measures
Life expectancy, infant mortality,
height by age can all be used to
judge standard of living
 Growth Calculations
Growth rate for a year is calculated by
(GDPt+1 GDPt )/GDPt

Growth rate over N years is calculated

by
GDPt+N=GDPt(1+g)N
 Examples
Nominal GDP for Ghana was 16.7
billion dollars in 2008 and 14.9 billion
in 2007. What was the rate of
growth?
(16.7-14.9) /14.9 = .12 or 12%
 Do you think these numbers are
using exchange rates or PPP?
Real GDP growth in Ghana was 7.3%,
what was happening to prices?
Prices were Rising
 Examples
If the GDP of Ghana is 16.7 billion
dollars in 2008 and growth rate of
GDP is 5% for 10 years, how much
will GDP be in 2018?
GDP 2018=16.7(1+.05)10=27.2