DEVELOPMENT

ECONOMICS

Nguyen Quynh Hoa, PhD

Topic 2: Basic concepts and
theoretical framework
The definition and essence of economic growth and
development
Measuring of economic growth and development
Factors affecting economic growth
Reading Materials
Michael Todaro et al 2020. Chapter 2, 3
Perkins et al, 2006. Chapter 2,3,4
Mansour Zarra – Nezhad and Fatimah Hosainpour,
2011, Review of Growth models in less developed
countries, The International Journal of Applied
Economics and Finance 5(1): 1- 17
Neri Salvadori (edited), The Theory of Economic
Growth: a ‘Classical’ Perspective
 ?What is economic growth
Economic growth
Economic growth is the increase of a nation’s real income (GDP,
.GNI…)
:Results from
,Greater quantities of natural resources, human resources, and capital
Improvements in the quality of resources, and
.Technological advances that boost productivity
[Link]
Measuring economic growth and
development
Measuring of economic growth

Economic growth rate (g) = (Yt – Y0)/ Y0

Quantity of economic growth (∆Y) = Yt – Y0

GO (gross output)
GDP (Gross Domestic products)
GNI (Gross National Income)
GDI (Gross Disposable Income )
GO (Gross output) = IC + VA
GDP: is the market value of all final goods and services produced within a country
in a given period of time
GDP=C+I+G+NX (1)  demand side, expenditure approach
GDP = GO – IC (2)  production approach
GDP = w + In + Pr + Dp + Ti + R (3)  Income approach
GNI: is the market value of all final goods and services produced by permanent
residents of a country in a given period of time
GNI= GDP+ net factor income from abroad
GDI: Gross national disposable income: Gross national disposable
income equals gross national income (at market prices) minus current transfers
(current taxes on income, wealth etc., social contributions, social benefits and
other current transfers) payable to non-resident units, plus current transfers
receivable by resident units from the rest of the world
GDI = GNI + net current transfer from abroad
 GDP>< GNI
What is the best indicator for economic growth ?
Economic growth and economic development are
mutually exclusive
GDP per capita is an accurate measure of personal
income
Gross National Income (GNI) and Gross Domestic
Product (GDP) are used interchangeably to mean the
.same
Income per capita = total income/ population
Growth rate of income per capita = economic
growth rate – population growth rate
:Rule of 70
:Problems
Underreporting of income by developing
countries
High proportion of income is generated for
.self-consumption
Prices of non-traded goods are not
.appropriately reflected in exchange rates
Markets are not competitive and
.externalities are not reflected
The PPP method is used as an Using PPP to
alternative tocorrect
adjustforGDP/GNI
possible statistical bias. The Penn
World table is a widely cited source of PPP adjustments, and the so-called Penn Effect
.reflects such a systematic bias in using exchange rates to outputs among countries
For example, if the value of the Mexican peso falls by half compared to the US dollar, the .2
Mexican Gross Domestic Product measured in dollars will also halve. However, this
exchange rate results from international trade and financial markets. It does not
necessarily mean that Mexicans are poorer by a half; if incomes and prices
measured in pesos stay the same, they will be no worse off assuming that imported
goods are not essential to the quality of life of individuals. Measuring income in different
.countries using PPP exchange rates helps to avoid this problem
PPP exchange rates are especially useful when official exchange rates are artificially .3
manipulated by governments. Countries with strong government control of the economy
sometimes enforce official exchange rates that make their own currency artificially strong. By
contrast, the currency's black market exchange rate is artificially weak. In such cases, a PPP
.exchange rate is likely the most realistic basis for economic comparison
 A
Compariso
n of Per
Capita GNI,
2005
 Human Development Index
HDI as a holistic measure of living levels (The HDI was
created to emphasize that people and their capabilities
should be the ultimate criteria for assessing the
development of a country, not economic growth alone)
[Link]
[Link]
The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country
.stands in relation to these goalposts, expressed as a value between 0 and 1
The education component of the HDI is now measured by mean of years of schooling for adults aged 25 years
and expected years of schooling for children of school entering age. (a).Mean years of schooling is estimated based on
educational attainment data from censuses and surveys available in the UNESCO Institute for Statistics database and
Barro and Lee (2010) methodology. (b). Expected years of schooling estimates are based on enrolment by age at all
levels of education and population of official school age for each level of education. Expected years of schooling is
capped at 18 years. The indicators are normalized using a minimum value of zero and maximum values are set to the
.actual observed maximum value of mean years of schooling from the countries in the time series
The life expectancy at birth component of the HDI is calculated using a minimum value of 20 years and
maximum value of 83.4 years. This is the observed maximum value of the indicators from the countries in the time
series, 1980–2010. Thus, the longevity component for a country where life expectancy birth is 55 years would be
0.552. That is, (55 – 20)/(83.2 – 20) = 35/63.2 = 0.552
For the wealth component, the goalpost for minimum income is $100 (PPP) and the maximum is $107,721 (PPP),
.both estimated during the same period, 1980-2011
Goalposts for the Human Development Index in this Report

Dimension Observed Maximum Minimum

Life Expectancy Mean Years of Schooling 83.2 (Japan,2010) 13.2 20 0 0 0 163 (Zimbabwe,
Expected Years of Schooling Combined (US, 2000) 20.6 (Australia, 2008)
Education Index Per Capita Income 2002) 0.951 (NZ, 2010)
(PPPs) 108,211 (UAE, 1980)

Having defined the minimum and maximum values, the sub-indices are calculated as
:follows
Dimension index

For education, the equation is applied to each of the two subcomponents, then a geometric
mean of the resulting indices is created and finally, the equation is reapplied to the
geometric mean of the indices, using 0 as the minimum and the highest geometric mean of
.the resulting indices for the time period under consideration as the maximum
Human Development Index
:The HDI is the geometric mean of the three dimensions indices
The expression above embodies imperfect substitutability across all HDI dimensions. It thus addresses one of the most
serious criticisms of the linear aggregation formula, which allowed for perfect substitution across dimensions. Some
.substitutability is inherent in the definition of any index that increases with the values of its components
Example: China
Indicator Value
Life expectancy at birth (years) = 73.5
Mean years of schooling (years) = 7.5
Expected years of schooling (years) = 11.4
GNI per capita (PPP US$) = 7,263
.Note: Values are rounded
Life expectancy index =(73.5 – 20)/(83.2 – 20) = 0.847
Mean years of schooling index = (7.5 – 0)/(13.2 – 0) = 0.568 )a(
Expected years of schooling index = (11.4 – 0)/(20.6 – 0) = 0.553 )b(
= Education index
= Income index
= Human Development Index (HDI)
Table 2.5
HDI for Countries with Similar Income
Levels

.Data Source: 2016 Human Development Report 2016, Table 1, Pages 198-201 (New York: United Nations Development Program), 2015 data
 Factors affecting growth and development of
developing countries
:Economic Factors in Economic Development
Supply side
Capital Formation -
Labor force -
Natural resources -
Technological progress -
Demand side
Final consumption (Household and Government) -
Investments -
Foreign trade surplus (NX) -
Supply side
Y = f (K,L, R, T) -

PL
PL2 AS2 AS0
PL0 AS1
PL1

A
D
Y2 Y0 Y1 Y
 Demand side

Y = F(C,G, I, NX) -

PL A
PL S
1
PL
0 AD
PL 1
2 AD1 AD
0
Y1 Y0 Y2 Y
 Factors affecting growth and development of
developing countries
Non - Economic Factors in Economic
:Development

Formal Institutions -
Informal institution -
Social organisation -