Development Indicators CAIE A level ECONOMICS

GDP per capita Economic growth is defined as an increase in real GDP or an increase in the productive
potential of the country. It is measured by assessing the growth in GDP and sometimes
GDP per capita. In other words economic growth is defined and analysed in terms of
changes in national income. It is believed that the general ability to full fill material needs is
higher in a country with a high GDP compared to a country with a low GDP.
Therefore countries experiencing high growth rates are also likely to have high
consumption levels and hence experience a rise in the standard of living.
a Limitations of growth figures as a measure of economic development
a) This indicator of economic development might fail to state the true living
standards of regions or countries where much economic activity is unofficial or
hidden. In such case the GDP figures might be understated; a common
problem faced in developing countries due to the crony capitalist governing
system.
b) Cross border comparisons can be difficult since the data itself may be collected
by governments who use more or less efficient methods of measurement.
Regardless of the methodology used in computing GDP figures, the values
obtained are likely to be prone to statistical variance which either overstates or
understates the GDP figures.
c) The measurement of inflation is also problematic: if inflation is underestimated
then real output will be overestimated. Government officials may have an
incentive to overvalue output and hence overstate GDP for petty political
gains.
d) Subsistence farming in developing counties can also be a major problem in
computing GDP figures. Non marketed output may never get measured and
hence GDP figure might end up understating the true living standards.
e) To enable cross country comparisons the data need to be standardised to a
particular currency. Using current exchange rates is unlikely to be appropriate
for this. Since exchange rates are based on traded goods and are greatly
affected by speculative capital flows. The alternative, finding a purchasing
power parity rate with which to do the conversion, is non trivial in a world
where goods and services differ so widely between countries.
f) It may be more informative to see patterns of GDP per capita growth over
time, rather than just a snap shot of a particular year.
g) Cross border comparisons are made difficult as there is no sense in which this
indicator can tell the whole story of a country’s economic or social situation. For
example, there can be wide variations in government provision of health and
education in countries with similar GDP figures.
h) An inadequate indication of income distribution makes GDP figures
incompetent in indicating economic development. The unequal distribution of
the benefits of growth may act as a constraint to economic development and
lead to deteriorating living standards for the mass population of a country.
i) While bringing in benefits, increasing GDP per capita might also generate
costs particularly if it is brought about in an unsustainable way. Growth might
generate negative externalities and thus does not necessarily reflect economic
development.

Human Development The human development index is a composite index that measures a country’s average
index(HDI) achievements in three basic aspects of human development. The HDI attempts to rank all
countries on a scale of 0 (lowest human development) to 1 (highest human development).
The HDI is based on three goals or end products of development:
a) Longevity as measured by life expectancy at birth.
b) Knowledge as measured by a weighted average of adult literacy (with two thirds
weight) and the combined primary, secondary and tertiary gross enrolment ratio (with
one third weight).
 CAIE A level ECONOMICS

c) A decent standard of living as measured by Real GDP per capita adjusted for the
differing purchasing power parity (PPP) of each country’s currency to reflect the
difference in cost of living.
Advantages of
using the HDI:
a) Measures chosen are easy and cheap to collect: the information required to
construct the human development index is easy to collect from the statistics
department of the government of any country. Almost all countries invariably
maintain these measures to monitor the economic condition of the country over
time. Hence, international comparisons can be easily made.
b) Measures chosen are fairly reliable: the GDP values used in HDI is accounted for
the level of inflation of individual economy and further adjusted for any
discrepancy in purchasing power of the currency. This makes the measure quite
accurate and reliable in indicating the level of human development.
c) Indicates GDP has been used to increase social welfare: if together with a
country’s national income its citizen’s health condition and their education level
increase, it can be concluded that the incremental income has been well spent. It
also indicates a better distribution of income and wealth.
d) Can be used to represent the level of health and education.
e) Improvements in health and education rather just income reflects good governance.
f) Improvements in education and heath sector of a country are an indication of an
increase in productive capacity of the country. Educated and healthy workforce of
a country also determines long term growth. Therefore, HDI is not just an
indicator of current development but also looks deep in to the future of a
country.
Disadvantages
of HDI:
a) No indication of deprivation or poverty is included in HDI.
b) The purchasing power parity values change frequently and are likely to be inaccurate
and misleading.
c) The indicator is still flawed by the inaccuracy which results from a failure to indicate
the degree of equality in income distribution.
d) Quality of life is also affected by other factors such as the political condition of
the country, freedom of speech of individual citizens in the country,
participation of women in economic activity, access to communication and
information technology. However, none of these have been included in the HDI.

Human Poverty Index Instead of using the level of income as the sole yard stick for measuring human
(HPI) development, the HPI uses indicators of the most basic dimensions of deprivation: a
short life, lack of basic education and lack of access to public and private resources.
The HPI concentrates on the deprivation in the three essential elements of human life
already reflected in the HDI: longevity, knowledge and a descent standard of living.
The HPI is derived separately for developing countries (HPI – 1) and a group of select
high income OECD countries (HPI – 2) to better reflect the socio economic differences
and also the widely different measures of deprivation in the two groups.

HPI – 1:
While the HDI measures achievement, the HPI – 1 measures deprivations in the three
basic dimensions of human development captured in the HDI:
 CAIE A level ECONOMICS
a) A long and healthy life – vulnerability to death at a relatively early age, as
measured by probability at birth of not surviving to age 40.
b) Knowledge – exclusion from the world of reading and communications, as
measured by the adult literacy rate.
c) A decent standard of living – lack of access to overall economic provisioning,
as measured by the unweighted average of two indicators, the percentage of
the population not using an improved water source and the percentage of
children under weight for age.

HPI – 2:
The HPI – 2 measures deprivations in the same in the same dimensions as the HPI –
1 and also captures social exclusion. Thus it reflects social deprivations in four
dimensions.
a) A long and healthy life – vulnerability to death at a relatively early age, as
measured by
the probability at birth of not surviving to age 60.
b) Knowledge – exclusion from the world of reading and communications, as
measured by the percentage of adults (age 16 – 65) lacking functional literacy
skills.
c) A decent standard of living – as measured by the percentage of people living
below the income poverty line (50% of the median adjusted household
disposable income).
d) Social exclusion – as measured by the rate long term unemployment (12 months
or more).

Gender related While the HDI measures average achievement, the GDI adjusts the average
development Index achievement to reflect inequalities between men and women in the following
(GDI) dimensions:
a) A long and healthy life, as measured by life expectancy at birth.
b) Knowledge, as measured by the adult literacy rate and the combined primary,
secondary and tertiary gross enrolment ratio.
c) A decent standard of living as measured by earned income (PPP US$).

Theses components of the HDI are weighted according to gender differences. A

Gender This measure of development focuses on women’s opportunities rather than their
empowerment capabilities; the GEM captures gender inequality in three key areas:
measure (GEM) a) Political participation and decisions making power, as measured by women’s and
men’s percentage share of parliamentary seats.
b) Economic participation and decision making power, as measured by two indicators
– women’s and men’s percentage shares of positions as legislators, senior
officials and managers and women’s and men’s percentage shares of professional
and technical positions.
c) Power over economic resources, as measured by women’s and men’s estimated
earned income (PPP US$).
 CAIE A level ECONOMICS

Multi The MPI assesses the nature and intensity of poverty at the individual level, with
dimensional poor people being those who are multiply deprived and the extent of their
poverty index poverty being measured by the extent of their deprivations. The MPI can be used
(MPI) as an analytical tool to identify the most vulnerable people, show aspects in which
they are deprived and help to reveal the interconnections among deprivations.
This can enable policy makers to target resources and design policies more
effectively. The MPI has three dimensions: health, education, and standard of
living. These are measured using 10 indicators. Each dimension is equally
weighted; each indicator within a dimension is also equally-weighted.
The MPI reveals the combination of deprivations that batter a household at the
same time. A household is identified as multidimensionally poor if and only if it is
deprived in some combination of indicators whose weighted sum exceeds 30% of
all deprivations.
1. Education (each indicator is weighted equally at 1/6 )
• Years of Schooling: deprived if no household member has completed five years of schooling
• Child Enrolment: deprived if any school-aged child is not attending school in years 1 to 8
2. . Healt (each indicator is weighted equally at 1/6)
• Child Mortality: deprived if any child has died in the family
• Nutrition: deprived if any adult or child for whom there is nutritional information is malnourished
3. . Standard of Living(each indicator is weighted equally at 1/18)
• Electricity: deprived if the household has no electricity
• Drinking water: deprived if the household does not have access to clean drinking water or clean
water is more than 30 minutes walk from home
• Sanitation: deprived if they do not have an improved toilet or if their toilet is shared
• Flooring: deprived if the house-hold has dirt, sand or dung floor
• Cooking Fuel: deprived if they cook with wood, charcoal or dung
• Assets: deprived if the house-hold does not own more than one of: radio, TV, telephone, bike, or
motorbike, and do not own a car or tractor