ECONOMIC DEVELOPMENT

FIRST YEAR SECOND TERM

2025-2026

The HDI is the geometric mean of normalized indices for each of the three
dimensions. This technical note describes the data sources and the steps
CHAPTER 1: INTRODUCTION AND OVERVIEW OF ECONOMIC for calculating HDI values.
DEVELOPMENT

East Asian Miracle Is a geometric mean of normalized indices for each of the three
Taiwan, China, and South Korea showed development until the Asian dimensions.
Crisis

Asian Financial Crisis

Started on July 4, 1997
Vulnerability in the rapid growth of Asian countries.
IMFP and the World Bank implemented hefty regulations in the
Philippines and Thailand.

The reasons for the Asian Crisis were mainly caused by Thailand

Large capital inflows (Bank lending and Portfolio flows)

The Bank of Thailand was lent a huge amount of loans from Japan, South
Korea, and Indonesia, which caused Economic Bubbles
Long and Healthy Life
Weak financial aystems and governance -​ Life Expectancy at birth
-​ Life Expectancy index
Currency mismatch + Short-term foreign debt
Access to Knowledge
Exchange-rate Regimes that invited one-way debts -​ Expected years of schooling
Exchange-rate regimes -​ Mean years of schooling
Pegged System - a country fixes its exchange rate to another currency, -​ Education Index
often the U.S. dollar, to maintain economic stability.
2 Thailand Baht = $1 Decent Standard of Living
GNI per Capita = GNI/Population
Social impact of the crisis has been substantial as the unemployment rate -​ Earnings per population of society
in Asian countries grew. -​ GNI index

Differences Between Development Economics And Other Branches Raise to ⅓ will result to the HDI
Of Economics
Economic Development - covers Macroeconomics, Microeconomics, Step 1. Creating the dimension indices
Mathematical Economics, and Econometrics Minimum and maximum values (goal post) are set in order to transform
Measuring Growth and Development the indicators expressed in different units into indices between 0 and 1.
Use of GDP, GNI, exchange rates, and purchasing power parity leads to a These goalposts act as the “natural zeros” and “aspirational targets”, from
pattern of growth over time. which component indicators are standardized.

Gross Domestic Product Ex. If life expectancy is 20 years minimum, then based on historical data,
C + I + G + (X - M) no one dies at 20 years old.
Aggregate Consumption (C) = Household + Commercial + Industrial
Consumption GNI per Capita is justified by unmeasured subsistence.
Gross Investments (I)- newly purchased equipment/plants -​ Can be the workers who are not paying taxes
Government Spending (G)- Infrastructure, salaries of government
workers
Export - Import/ Import - Export (X-M/M-X)

Gross National Income

GNI = GDP + NFIA (Net Factor Income from Abroad)

Green GNI
Assesses the impact of environmental degredation in the development
experience.

Purchasing Power Parity

A way to convert currencies so that P1 buys the same basket of goods and
services in every country.

In practice, PPP is a currency conversion rate that removes price-level

differences across countries, so you can compare “real” purchasing power
rather than market exchange rates.

GNI = Removes price level differences through CPI (Consumer Price

Step 2. Aggregating the dimensional indices
Index)
➢​ (𝐶𝑃𝐼2 - 𝐶𝑃𝐼1/ 𝐶𝑃𝐼1) x 100 = Inflation
➢​ PPP = Nominal Value/Real Value

Basic Concept of Human Development Index (HDI)

Summary of measures of achievements in three key dimensions of human GNI per Capita = Ln of actual value - Ln of minimum value/ Ln of max
development: a long and healthy life, access to knowledge, and a decent value - Ln of min value
standard of living
 ECONOMIC DEVELOPMENT
FIRST YEAR SECOND TERM
2025-2026

Agriculture diminishes over time and industry increases. Productivity is

CHAPTER 2: GROWTH AND THE ASIAN EXPERIENCE higher in industry so higher growth depends upon this shift.
Why do economies grow?
Initially, agriculture has a large share of output when the economy is at a
An increase in Aggregate Consumption and Exportation tends to increase
low level of development. Share of industry and services is small.
our GDP

As industrialization takes place, the share of agriculture declines, and that

An increase in imports decreases the GDP
of industry and services.
Theory Economic Growth
Two Sector Model of Growth
Traditionally, labor and capital were introduced as the only variables
The Lewis-Fei-Ranis model (LFR), named after the three economists who
determining the level and the growth of output.
developed it.
➢​ Y=f(K,L)
➢​ Modern and Traditional Sector
Other factors were not considered until it was noted by Solow that there
Solow Growth Model
was a huge residual factor that was unexplained.
➢​ This residual has been called Total Factor Prodcutivity (TFP)
or sometimes multifactro productivity
Where k and y denote the per capita units of capital and output,
TFP is very large in industrial countries, explaining as much or more than
respectively.
50% of economic growth in the postwar era.
𝑘(𝑡) = 𝐾(𝑡)/𝑃(𝑡) and 𝑦(𝑡) = 𝑌(𝑡)/𝑃(𝑡)
Such a list might include:
-​ the adoption of new technology,
This fundamental Solow equation says that the amount of per capita
-​ better educated workers,
capital in the current period depends upon the per capita capital in the
-​ better management,
last period, the saving rate in the previous period, and the rate of
-​ better coordination within the organization,
population growth.
-​ more efficient production techniques,
-​ better inventory management,
New Growth Theories
-​ better and cheaper distribution and marketing skills and
Stress the importance of externalities and the possibility of increasing
organization.
returns to scale of the Solow model
➢​ The key to this is human capital formation
Embodied TFP can be measured by adjusting the factor inputs of labor
and capital
Higher per capita incomes tend to slow growth because of diminishing
Disembodied TFP cannot - it has to go to residual
returns, but higher endowments of human capital tend to speed up
growth.
Harrod-Domar Model
Dynamic version of a simple Keynesian Model
Returns to such investments may be increasing

Policy Enviroment Before the Transition to Rapid Growth

The policy environment in most developing countries throughout the
➢​ Growth is dependant on the rate of capital formation and the world stressed import substitution policies for industry.
efficieny of the use of capital (capital/output ratio)
➢​ Population growth can be added and it reduces the rate of Import Substitution
growth, ceteris paribus Promote the use of domestic products in production instead of using
foreign products
The Solow Model
It introduces diminishing returns to capital and focuses on the long run Developing countries had a comparative advantage in
Primary Products (Agricultural Products), and so they should export these
Convergence to a steady state level of per capita income occurs despite
differences in initial conditions. Inflows of investments are needed for these developing countries

Total income grows at the same rate as the population. Incentives are given to industries are successful in implementing import
substitution
The higher the rate of saving, the higher the steady state level of per
capita income. Outward Looking Policy
Acquire foreign technology
When we add technical progress to the Solow model in the form of more
efficient workers, then we have growth in per capita income at the same Mercantilist Strategy
rate as the of growth in worker efficiency Acquire wealth by selling products to other countries
Japan
Power Balance Theory
Emphasixzed the exploitation of poor “southern” economies by the rich Asian Growth Miracle
industrial “northern” economies Primary Factors
-​ Openness
Deterioration of the terms of trade of agricultural products in poor -​ Macroeconomics Stability
economies further aggravates the situation -​ Labor Market Stability
-​ Education Policies
Structuralist Approach Agricultural products are the first things developing countries develop.
The structural approach was developed in the 1960s and 1970s by Hollis External Market - extending the scope of the industries.
Chenery. Chenery was initially trained as an engineer, and this approach Labor-intensive industries in developing countries
reflects his training. Export Promotion instead of import substitution
​
A shifting balance between the three major sectors of the economy - Secondary Factors
agriculture, industry, and services -​ Initial Conditions
-​ Sector Policies
Convergence of Income
 ECONOMIC DEVELOPMENT
FIRST YEAR SECOND TERM
2025-2026

The Solow model tells us that incomes will converge to a steady state
irrespective of where they started out.

This assumes that the technical progress coefficient, π, remains constant

across all countries.

To test the hypothesis of absolute convergence, we can see if there is a

relationship between per capita income in an initial period and the
growth in income in successive periods

log[Y(1990) - Y(1960)] = a + blogY(1960)

Where in,
a- constant, b - slope

The convergence of the income of two different countries is possible ​

​
Tests of this model for several sets of countries shows that it doesn’t hold
for a heterogeneous group of countries around the world.​
​
It does hold for OECD countries and for OECD and Asian countries
together.​
​
It does not hold for developing countries in general.

OECD - Organization for Economic Cooperation and Development

A less restrictive form of convergence is called conditional convergence

-​ In this form of the model, we allow various parameters of the
growth equations to change between different countries or
groups of countries
-​ There would still be convergence in growth rates of income,
but the level of income in the steady state would differ.
-​ This level would develop upon saving rates, population
growth rate, and depreciation rates of capital

Tests of this model shows that there is still a lot of unexplained variation
in per capita income, although variations in the population growth rates
and saving rates did explain about half of the variation in per capital
income across countries
-​ The result implied that the convergence rate is very slow
-​
Conditional Convergence
Parameters of Convergence of Income
-​ Consumption, Investments, Net Export, and Foreign
Exchange can be parameters of GDP

Convergence is very slow

Technology and education can spur our convergence rate