2 - Comparative Economic Development Flashcards
3 basic indicators of development
- Gross national income (GNI)
- Gross domestic product (GDP)
- Purchasing power parity (PPP) method instead of exchange rates
Define GNI
Total domestic and foreign output claimed by residents of a country + incomes earned by foreign residents - income earned in domestic economy by non-residents
Define GDP
Total output of goods and services produced by the country’s economy within the country’s territory by residents and non-residents; regardless of its domestic or foreign claim
Define purchasing power parity (PPP)
Calculations of GNI using common set of international prices for all goods and services, to provide more accurate comparisons of living standards
What’s the obvious way to compare income
Exchange rates
2 problems using exchange rates
1) They can change significantly over short periods of time, implying large swings in ‘standards of living’
2) Exchange rates more relevant to goods that are exchanged, tradables, rather than non-tradables (services). Non-tradables tend to be cheaper in developing countries
- As a result, calculations of GDP based on exchange rates, tend to over-estimate cost of living in poor countries
What does GNI not measure between developing and developed countries
It doesn’t measure domestic purchasing power of different currencies
How is the problem addressed of GNI not measuring PPP of different currencies
By comparing GNI and GDP using PPP
How’s PPP calculated
Using common set of international prices for all goods
- How many units of a foreign currency is required to purchase the quantity of goods and services in the local developing country marker as $1 would buy in the US
- Adjustments are made for differing relative prices across countries so that living standards are measured more accurately
Why are non-tradables (services) prices much lower in developing countries
Lower wages
If domestic prices are low what will the PPP be
PPP of GNI per capita will be higher than estimates using foreign exchange rates, as cost of living will be cheaper (purchasing power is higher)
Holistic measures of living levels
- Income
- Health
- Education
What type of means is used to calculate New HDI and Traditional HDI
New HDI = Geometric mean (add the 3 components indexes and then find the cubic root)
Traditional HDI = Arithmetic mean (add the 3 components and divide by 3)
What are the 3 components in the equation of new HDI
(Ilife x Ieducation x Iincome) 1/3
Differences between traditional and new HDI
- Traditional HDI assumes one component traded off the other as perfect substitutes
- This reformulation allows for imperfect substitutability
- New HDI addresses how ‘well-rounded’ a country’s performance is across the 3 dimensions
- GNI per capita replaces GDP per capita
- Lower goalpost for income been reduced due to new evidence on lower possible income levels
Comparing characteristics among developing countries
- Lower levels of living and productivity
- Lower levels of human capital
- Higher levels of inequality and poverty
- Higher population growth rates
- Greater Social fractionalisation
Are living standards converging across countries?
Average living standards ratio between developing and developed countries before industrial era to currently
3:1 before industrial era
100:1 currently
When did great divergence occur
- Following the industrial revolution as technological advances, discovery of shipping routes
- Growth of real output per person since 1750 gradually increased
2 reasons why living standards converging across countries is likely
1) Diffusion of ideas across countries (technological transfer), so can avoid trial and error, grow fast
2) Diminishing returns to capital (though as economies develop, they often find ways to compensate)
If poorer countries are growing faster what will the plot of data look like
Will be downward sloping, indicating convergence
If poorer countries are growing slower what will the plot of data look like
Upward sloping, indicating divergence
Even when average income in developing country is faster what can still happen
The absolute difference can still continue to widen between incomes in developed and developing countries, before they begin to shrink (lags)
What’s stronger absolute country convergence or country income convergence
Absolute country convergence
Convergence and divergence in terms of inequality
A fall in inequality = Convergence
A rise in inequality = Divergence
What can population-weighted countries do in terms of convergence
Look at changes in convergence more specifically between rural and urban areas (China for example)
Risks and opportunities of future convergence
Risks = New technological divides, climate change, armed conflicts
Opportunities = World May be on a sustainable path towards a great re-convergence
Long run causes of comparative development (geography)
- Geography important in pre-modern era
- Colonists viewed opportunities they could exploit in colonies
- Geography affected comparative advantages; resources and people
- Geography helps explain “motivation” for institutions; extractive when comparative advantage was in activities with increasing returns (sugar cane, mining)
- Bad institutions created high inequality which caused slower growth and slow improvement of human capital
