Econ 115

Lecture 1 Chapter 1 (textbook)

(Only parts of this chapter will be covered in this lecture – the rest you will read yourself !)

Below, I give a list of concepts/terms that you should be

familiar with.
❑ (What is) the third world? (The term third world has now become
somewhat obsolete)

❑ North and South (- rich North and the poor South!)

❑ LDCs: “Less-developed countries” or, also often short for
“least developed countries”.
❑ Which (countries) are emerging markets/economies? 1

❑ What do we refer to by transition economies?

Transition economies
Emerging market economies
a) A transition economy is one that is in the process of changing
from central planning to free markets. These include countries
of the former Soviet Union, and other (previously) “centrally
planned economies” in central and eastern Europe.
b) An emerging economy is typically a fast-growing (– previously
poor -) economy that has many characteristics of a developed
market economy but does not fulfil all its standards.
c) The economies of China and India are the largest among emerging
markets. The following is a list of some other large emerging
economies (by either nominal or PPP-adjusted GDP): (among 2
others) Brazil, Russia, Indonesia, Mexico, Chile and Turkey.
Some important (macro-)economic variables
▪ Gross domestic product (GDP) is the market value of all output
produced within the border of a country. It includes (also) output
produced by foreign citizens living in the country.
▪ Gross national product (GNP) is the sum of market values of all goods
and services produced by the labour and property/capital supplied by all
citizens of a country - also those living abroad - within a calendar year.

▪ Gross national income (GNI) = GDP + earnings of home country

citizens living abroad – income earned by foreigners in the home
country.
The term GNI has, by and large, replaced the term GNP.
▪ We will use the terms GDP, GNI and National Income 3

interchangeably.
Large differences between GDP and GNI may be observed
for certain countries!
Significant difference between GDP and GNI: Examples

• A large part of Angola’s national income (-about a third-)

comes from production of crude oil. Production in this sector
is dominated by foreign companies who typically take their
profits out of Angola. As a result, Angola’s GDP is about 8.9%
higher than its GNI, (data from 2024).

• GNI of Bangladesh, on the other hand, was 4.3% higher than

its GDP (in 2024). This is due large number of Bangladesh
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citizens working and earning income in foreign countries.
Some important economic variables

❑ Per capita income: One uses either “per capita GDP” or

“per capita GNI” to define per capita income.
❑ Per capita GDP = GDP/population.

❑ Real GDP: It is the GDP adjusted for domestic (price)

inflation.
❑ What is the difference between real GDP and nominal GDP?

❑ Economic growth is the change (increase) in GDP (or GNI)

of an economy over time.
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Some useful webpages

• [Link]
country-classifications-by-income-level-for-2024-2025

• [Link]
indicators/[Link]

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Distinction between growth and development
• Economic growth in a country refers to a rise in national
income, i.e., it is the rise in the country’s GDP (or GNI).
• Economic development, on the other hand, is related to
“human development”, i.e., improvements in
- health
- education, and
- other aspects of human welfare (e.g., safety and
security of citizens, absence of crime, civil rights, freedom
of speech, right to form/join organization (political rights),
“inclusiveness” of societies, absence of discrimination…)
• In other words, economic development refers to improvement 7
in the citizens’ quality of life or standard of living.
Distinction between growth and development

In other words:
A country can experience economic growth, and
at the same time, no economic development!
How?

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An attempt at defining economic development!
Another definition!
Development = a good life for all!
Development can be represented by three basic or core values:
- Sustenance [ability to meet basic needs]
- Self-esteem [have a sense of self-respect and worth]
- Freedom to choose and freedom from ‘oppressive
institutions’
A society is in a developed state if all citizens can live a worthy and
good life.
[Sustenance] Must have access to certain basic goods and services:
Clean water, adequate shelter, health care and security.
[What gives self-esteem?] Access to community life, civic 9
engagement, group activities, social/political activism.
-Freedom of choice: Must be free to make own choices/decisions.
Measuring economic development
❑How to measure the level of development of a country?
❑How to compare the levels of development between countries?
As discussed above, a country’s level of development depends on
many factors - some factors are easy to measure, e.g., income,
education, etc., but others are not, e.g., level of social conflict,
inclusiveness of a society.
❑Economists prefer things that are easily measurable.
❑UNDP (United Nations Development Program) calculates and publishes
an index of development (Human Development Index, HDI) for all
countries, and for every year. The index runs from 0 to 1. Closer to 1
you are, higher is the level of development.
❑ The index (HDI) is based on three factors, i) per capita income, ii)
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education (measured by (a) average years of schooling, and (b) expected years of
schooling) and iii) health (measured by “life expectancy at birth”).
Measuring economic development

See 2023 Human Development Index Ranking:

Go to

Human Development Index | Human Development Reports ([Link])

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More on measuring economic development
Social Progress Index (SPI) as a measure of development
❑SPI is published by Social Progress Imperative, a global
nonprofit organization (based in Washington, D.C.)
❑SPI combines 60 different social and environmental outcome
indicators.
❑Some examples of these indicators:
• Health
• Safety
• Education
• Access to technology, e.g., internet, online governance, etc.
• Rights
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See [Link]
Development gap (- read chapter 1 of textbook)

Your textbook begins (chapter 1) by comparing rich and

poor countries with respect to the various indicators of
economic development:

❑ Income, or lack of income (poverty)

❑ Health (- measured by life-expectancy, and child/infant

mortality)

❑ Education (- measured by school enrollment rates)

❑ Degree of urbanization 13
The development gap

The discussion of development gap below will largely

be done using graphs.

Before we can compare income between countries, we

need to point out that for the purpose of comparison,
there are some serious problems with the “standard
measure” of income (e.g., GDP).

We discuss these problems/issues first.

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GDP: Problem of measurement and comparison
We introduce here more concepts:
▪ Exchange rate conversion – PPP-adjustment
▪ “International dollar” or PPP-dollar

Each country’s GDP is usually measured in its own currency

(Local Currency Unit or LCU). If one wants to compare ‘per capita
GDP’ between countries, one will typically use official or market
exchange rates to convert income measures from one currency
to another, say from Rupee to Dollar.

[Note that the exchange rate of a country, say country A (say, India) vis-a-
vis another country B, (say, USA) is determined by the flows (-exports and
imports-) of goods (- we call these traded goods - ) and as well as flows 15
financial capital (investments) between A and B, (India and USA)]
GDP: Problem of measurement and comparison
❑However, if you wish to compare the per capita income of India
with that of the US, it will not be a good idea to use official
exchange rate to convert India’s per capita income (expressed)
in rupees into dollars.
❑The official exchange rate will (by and large) always
underestimate the purchasing power in poor countries since
prices of local (non-traded) goods, e.g., many food items and
services such as taxi ride, hair cut, etc., are much lower in poor
countries than in rich countries.
❑For comparison, one can construct a world price (in $) for all
goods and services and then evaluate GDP (or per capita GDP)
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(of all countries) based on these prices. This gives us GDP in $,
adjusted for ”purchasing power parity (PPP)”.
1. PPP-adjustment to standard measure of GDP, an example
Consider the example of USA and India. All numbers used here are
hypothetical.
Standard measure of GDP (using market exchange rate, Rupees 50 = $1)
USA Quantity Price($) Total India Quantity Price (Rupees) Total

Manuf. goods 1000 × 10 = $10000 Manuf. 200 × 500 = Rs 100000

Nontraded goods 500 × 20 = $10000 Nontraded 600 × 200 = Rs 120000
(service, etc.)

GDP (USA) ………………… ……. = $20000 GDP (India) ………… = Rupees 220000
GDP (India) in dollar 220000/50 = $ 4400
-------------------------------------------------------------------------------------------------

PPP-adjustment to India’s GDP: Evaluating India’s GDP using US prices

(Here, we define US prices as “world prices”)
Manuf. 200 × $10 = $ 2000
Nontraded 600 × $20 = $ 12000
India’s GDP (PPP) = $ 14000

Ratio of PPP measure of GDP and standard measure of GDP: $14000/$4400 = 3.18 17
Another way of adjusting for differences in purchasing power
PPP exchange rates: A definition and an example (Pages 4-5 in your textbook)
PPP exchange rates are based on prices of all goods and services (-
both traded and non-traded -) and are constructed such that the same
basket of goods in one country has the same dollar value in all other
countries.
Example: Consider 3 countries: USA (NY City), India (Delhi) and
Bangladesh (Dhaka). Consider also the following basket of goods (-
daily consumption of a poor):
1ൗ 𝑘𝑔 𝑟𝑖𝑐𝑒 This basket costs Taka 300 in Bangladesh
2
1ൗ 𝑘𝑔 𝑣𝑒𝑔𝑒𝑡𝑎𝑏𝑙𝑒
2 ,, ,, ,, Rupees 250 ,, India
1ൗ 𝑘𝑔 𝑓𝑖𝑠ℎ
2 ,, ,, ,, US$ 10 ,, the USA
𝐵𝑢𝑠 𝑓𝑎𝑟𝑒 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑢𝑡𝑖𝑛𝑔 𝑡𝑜 𝑤𝑜𝑟𝑘

However, the official exchange 18

PPP exchange rate: US$ 1 = 300/10 = Taka 30 rates are:
US$ 1 = 250/10 = Rupees 25 US$1= Taka 115
US$1= Rupees 85
PPP-dollar or International dollar

Definition:
PPP-dollar = International dollar

From the example on the previous slide:

1 dollar (PPP) = 25 rupees
1 international dollar = 25 rupees

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Comparing GDP per capita using market exchange
rate and PPP exchange rate (2024)

Country GDP per capita in $ (at GDP per Ratio of PPP

market exchange rate) capita, PPP$ calc. to market
rate calc.
Norway 86810 101032 1.16

Germany 55800 72300 1.3

China 13303 27105 2.04

India 2697 11159 4.14

US 65548 65548 1.0 20

The next few slides will show development
gaps between countries using graphs or maps
- global maps.
[Link]

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Map of the world: Country size proportion to the actual land area

22
 Population 2022

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The size of each territory shows the relative proportion
of the world’s population living there in 2022.
GNI 2018

2018 GNI (at market exchange rate)

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This map shows the proportion of worldwide GNI (based on official exchange rate with the US$)
that is found there. Data source: World Bank
Gross Domestic Product (Purchasing Power Parity) 2018

2018: Country-size as proportional to GDP (PPP)

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 Absolute poverty

This map shows the proportion of all people on less than or equal to US$1.9 (in 26
Purchasing Power Parity (PPP)) a day living there in 2016.
Data source: UNHDR, 2016
 Under age-5 mortality

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This map shows the proportion of all “under 5-year olds” who died in 2015.
Infant mortality rate - Country Comparison ([Link])
 No primary education

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Territory size proportional to the primary school age population (age 5-10)
not attending primary school in 2010-15.
 No secondary education

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Territory size proportional to the secondary school-age population (age 11-16)
not attending secondary school in 2010-15.
Life expectancy growth 1950-2015

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Life expectancy at birth (in years)

Countries/regions 1961 2023

Sub-Saharan Africa 42 62
South Asia 46 72
US 70 78
Bangladesh 45 75
India 46 72
China 40 78
Japan 68 84

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Development gap

Question: Why is there a development gap?

❑We will search for answers to this question all through
this course.
A historical perspective:
In order to get a clear perspective on the development
issue, we should not only look at the development gap at a
given point in time (- a static view -), we should also look at
how this gap is evolving over time.
❑Is the gap between world’s rich and poor getting larger
over time? 32
Development gap
First, some simple facts/observations about evolving gaps.
Economic growth
• Consider two countries (A and B) with the same per capita
GDP at a given point in time.
• With everything else the same, if country A has a higher
growth rate than country B, then a gap in GDP per capita
between A and B will emerge over time.
Population growth
• Consider again the same two countries, A and B, with the
same per capita GDP.
• If country B has a higher population growth than A (and all
else stays the same), then the per capita GDP in B will lag
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behind that of A - and a (widening) gap with emerge over
time.
GDP of countries in year 1500 34
Stories of economic catch-up and decline
• Historical decline of China relative to Europe from around year
1600.

• Historical catch-up of Japan and Germany to UK and the US (-

1960 onwards)

Decline of South American giants:

• Argentina was among the 10 richest countries in the world in

early 1900. However, by the end of the century, it had declined
relative to all other wealthy countries.

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Read text, pages 18-24
World Bank classification of countries by income
level
Threshold July 2020
Per capita GNI (current $)

Low income < 1036

Lower-middle income 1036 – 4045

Upper-middle income 4046 – 12535

High income > 12535

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 Rich and poor countries: World Bank classification
GNI per capita PPP (constant 2017 $)

Classification % of world Average GNI Examples

population per capita (PPP)
2010 2019 2010 2019 2010 2019

Low-income 12% 8.7% $1971 $2460 Haiti Haiti

Bangladesh

Lower-middle- 36% 38% $4685 $6582 India Bangladesh

income Sri Lanka India

Upper-middle- 36% 37.2% $11769 $16185 China

income Malaysia

High-income 16% 16.1% $37183 $49776 Taiwan

France

World $13897 $16944

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[Link]
[Link]
38
Economic growth: A historical view
Angus Maddison: World economic growth, 1-2008

Year 1 – 1000:
• No economic growth (in per capita income) in the world
during this period.

Year 1000 - 1820:

• World per capita income rose by 0.05% per year.

Rapid economic growth started around 1820, (although,

with large regional variation).
• The per capita growth in world economy during 1820-2010 39
was about 1.3%.
Economic growth: A historical view
Formula for annual compound growth:
𝑌𝑡 = 𝑌0 1 + 𝑟 𝑡 , 𝑌 ≡ 𝑖𝑛𝑐𝑜𝑚𝑒, 𝑡 ≡ 𝑡𝑖𝑚𝑒

𝑟 ≡ 𝑦𝑒𝑎𝑟𝑙𝑦 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒

“Doubling time”: Example

• 1
With a growth rate of 0.05% or 20 %, it will take about 1400 year
for income to double.
• With growth rates of 1.3% and 10% respectively, it will 54 years
and 7.3 years respectively for income to double.
1400
100 1 + 0.0005 = 201.3

100(1 + 0.013)54 = 200.87

7.3 40
100 1 + 0.1 = 200.52
Economic growth 1970 – 2019

Rate of GDP (per capita) growth (percent/year)

1970s 1980s 1990s 2000s 2010s

East Asia and Pacific

(Example: Malaysia, 5.0 6.4 6.1 8.6 6.5
China, Vietnam)

(Eastern) Europe and 4.4 1.5 -2.9 5.7 3.8

Central Asia

South Asia 1.2 3.5 3.8 4.8 5.3

Sub-Saharan 1.1 -1.2 -0.2 2.6 0.6

Africa

High income 2.4 2.5 1.8 1.1 1.6

countries
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