Measuring Economic Development (Single and Composite Indicators)

Country with low human development: Niger

• Social indicators:
• HDI ranking and value: #187 0.337
• Age structure:
• 0-14 years: 49.8% (male 4,387,785/female 4,308,312) 
• 15-24 years: 18.4% (male 1,586,720/female 1,626,457) 
• 25-54 years: 25.9% (male 2,261,287/female 2,266,576) 
• 55-64 years: 3.3% (male 294,446/female 274,268) 
• 65 years and over: 2.6% (male 234,079/female 226,242) (2014 est.)
• Population growth rate: 3.8%
• School life expectancy: 
• total: 5 years
• male: 6 years
• female: 5 years (2012)
• Life expectancy at birth: 57.97 years
• Total fertility rate: 7.57 births per woman (2012)
• Education expenditures: 4.5% of GDP (2012)
• Economic indicators:
• GDP: 7.407 billion USD (2013)
• GDP per capita: 415.42 USD (2013)
• GDP - composition by sector: 
• agriculture: 35.2% 
• industry: 14.2% 
• services: 50.6% (2013 est.)
• Unemployment rate: 5.10%
• Public debt: 19.3% of GDP (2013 est.)
• Stock of direct foreign investment - at home: 84,560,003,072 US$
• Labor force - by occupation:
• agriculture: 90% 
• industry: 6% 
• services: 4% (1995)
• Dependency ratio: 112.68

Calculated gini coefficient based on data: 0.2868

Country with high human development: Uruguay

• Social indicators:
• HDI ranking and value: #50 0.790
• Age structure:
• 0-14 years: 21% (male 356,851/female 344,576) 
• 15-24 years: 16% (male 269,820/female 262,830) 
• 25-54 years: 38.9% (male 639,766/female 658,257) 
• 55-64 years: 10.1% (male 158,170/female 178,194) 
• 65 years and over: 13.9% (male 185,132/female 279,376) (2014 est.)
• Population growth rate: 0.4%
• School life expectancy:
• total:16 years 
• male: 14 years 
• female: 17 years (2010)
• Life expectancy at birth: 76.91 years
• Total fertility rate: 2.06 births per woman (2012)
• Education expenditures: 4.4% of GDP (2011)
• Economic indicators:
• GDP: 55.71 billion USD (2013)
• GDP per capita: 16,350.73 USD (2013)
• GDP - composition by sector:
• agriculture: 7.5% 
• industry: 21.5% 
• services: 71% (2013 est.)
• Unemployment rate: 6.6%
• Public debt: 57.2% of GDP (2012 est.)
• Stock of direct foreign investment - at home: $20,690,000,000 (31 December 2013 est.)
• Labor force - by occupation: 
• agriculture: 13% 
• industry: 14% 
• services: 73% (2010 est.)
• Dependency ratio: 56.12

Calculated gini coefficient based on data: 0.3848

Conclusions

What conclusions can you draw about the correlation between GDP, HDI, income equality, social and economic indicators between developed and developing countries?

Developed:
-GDP: 55.71 billion USD (2013)
-HDI ranking and value: #50 0.790
-Calculated gini coefficient based on data: 0.3848

Developing:
-GDP: 7.407 billion USD (2013)
-HDI ranking and value: #187 0.337
-Calculated gini coefficient based on data: 0.2868

Developed countries, such as Uruguay, have a much higher GDP compared to less developed countries, such as Niger. This is, of course, only based on my sample. Both USA (a developed country), and China (considered a developing country) have GDP's in the trillions, however. Developed countries have higher HDI's; however, I assumed that their income equality would also be better. With Uruguay and Niger as examples, based on the data it appears that there is more income equality in Niger. This just goes to show how careful we must be when making generalizations about undeveloped countries.

Does a high HDI correlate with relative income equality? What about low HDI?

According to the data gathered, it seems that a high HDI does not necessarily correlate with relative income equality, if compared to a country with low HDI. Uruguay's gini coefficient was found to be 0.3848, while Niger's was 0.2868.

Is a high GDP indicative of high levels of human development?

High GDP seems to indicate high levels of human development. Uruguay, for example, has a GDP of about 56 billion USD, while Niger only 7 billion USD. Uruguay has a HDI ranking of 50 while Niger 187. As such, there appears to be a correlation.

To what extent did your country with low HDI exhibit the following characteristics? 

Let us begin with low standards of living. Niger's GDP per capita is around 400 USD. Its total fertility rate is almost 8 births per woman, which suggests very low standards of living. Supporting 8 children on 400 USD a year, including yourself and all other expenses, sounds nearly impossible. Even if they do manage to survive somehow, the GDP per capita is so low and the fertility rate is so high that there simply cannot be a high standard of living.

Niger definitely exhibit low incomes. A GDP per capita of around 400 USD is insanely low. Compare that to Uruguay, where the GDP per capita is around 16,000. Uruguay's citizens make in one year what Niger's citizens make in 40 years!

Based on the calculations, it appears that Niger did not exhibit income inequality, if compared to Uruguay. Niger had a gini coefficient of 0.2868, while Uruguay had a gini coefficient of 3848, which is relatively worse.

Regarding poor health, Niger's life expectancy at birth is 19 years lower than Uruguay's, which is a huge difference. The high total fertility rate of 8 children and a very low GDP per capita of 400 USD all suggest that the citizens of Niger experience poor health. The low GDP of Niger, compared to Uruguay, also suggests that there cannot be a lot of expenditure on heath care. A low GDP means that the government gets less revenue than Uruguay's government, and thus they have less money to spend on health care.

Niger most definitely exhibits symptoms of inadequate education. Only 4.5% of the country's already very low GDP is spent on education, and the total school life expectancy is 5 years. Uruguay's is 16 years. This suggests that most residents of Niger complete only half of high school, which most likely amounts to a low-skilled labour force.

Low levels of productivity are definitely evident in Niger, based on previously examined indicators. The low GDP per capita suggest a very low output per person, and the conclusion that Niger has poor health conditions also support the hypothesis that there are low levels of productivity within the country.

Compared to Uruguay, Niger most definitely shows high rates of population growth and dependency burdens. There is a population growth rate in Niger of 3.8%, while in Uruguay it is only 0.4%. Niger's dependency ratio is twice as high as Uruguay's—112.68 and 56.12 respectively.

Niger did not show high levels of unemployment. It has an unemployment level of ~5%, while Uruguay, a highly developed country, has an unemployment level of ~6%. Perhaps this is due to the high dependency ratio: many kids who are not working are not counted towards the level of unemployment. Also, while the unemployment level may be relatively low in Niger, since the GDP per capita is only 400 USD, it suggests that that 5% value is not that accurate. Sure, people may be "employed"; however, does that really mean anything if they're incomes are, on average, 400 USD?

Compared to Uruguay, Niger does have a higher dependence on agricultural production. However, only ~35% of Niger's GDP comes from agriculture compared to ~51% from services. Therefore, there does not appear to be a very significant dependence on agricultural production.

Regarding foreign direct investment, there is about 85 billion USD worth of foreign investment stock in Niger, compared to about 20 billion USD in Uruguay. That is over four times as much, and considering their huge differences in GDP, 85 billion USD worth of foreign investment stock is a lot more in Niger than if it were in Uruguay, because suggests a large percentage of revenue does not stay in Niger.

How can you explain the concepts of single and composite indicators? To what extent are these indicators effective?

A single indicator could be considered something like the unemployment rate. It measures one variable, such as the level of unemployment. A composite indicator is something like HDI. Its value is based on multiple different single indicators, which amount to a more effective indicator of economic development. A single indicator is not as effective in terms of showing economic development, because it only takes into consideration one variable. Sure, the unemployment level in a country, such as Niger, may be low (~5%); however, many other indicators (GDP per capita, foreign investment stock, public debt, school life expectancy, and life expectancy) are not necessarily suggesting high human development within Niger. Therefore, composite indicators are more effective than single indicators, because they take into consideration multiple variables, which together amount to a more well-rounded conclusion on HDI.

Development Economics Review Questions, Student Work Point 28.3

End of Chapter Review Questions

1. Using a PPF diagram, explain how it is possible for a country to achieve economic growth.

Economic growth is an increase in the amount of goods and services produced per head of the population over a period of time. So, to increase that amount the following can be done. There are four categories of sources of economic growth: natural factors, human capital factors, physical capital and technological factors, and institutional factors.

Regarding natural factors, a country such as Singapore with a small amount of land of ~581.5 square kilometers in 1965 was able to achieve economic growth by increasing its land size. Singapore has increased its land size to ~697.2 square kilometers, which is an increase of about 20%. That is a huge percentage of land increase, and the new land will allow factories, offices, schools, hospitals, households, basically anything that requires land, to be built. There will be space for factors of production, which should lead to an increase in economic growth.

The problem with the preceding paragraph's statement, however, is that it may not be beneficial for other countries to take on this approach of achieving economic growth. Malaysia, for example, would not benefit nearly as much from that increase in land. That same increase in land would only amount to a 0.03% increase! It is fair to say that the costs of increasing land size would not be justified by the potential gains for a country such as Malaysia, or most countries for that matter. Therefore, instead of increasing the quantity of land, they can focus on increasing the quality of land. This can be done through fertilization, better planning of land usage, improved agricultural methods, and through building tall structures. Hong Kong, for example, is a great example of building upwards. They have an abundance of skyscrapers that have helped increase factors of production and make the most of their available land.

Regarding the second category of factors, human capital, it can be increased as well through either quantity or quality. Encouraging population growth or increasing immigration levels will increase the quantity of human capital. By improving education for children, vocational training, healthcare, and by re-training the unemployed, the quality of human capital can be increased. This should help the country achieve economic growth, because it will increase the amount of goods and services produced per head of the population, or in other words, productivity.

Regarding physical capital and technological factors, once again economic growth can be achieved by either increasing the quality or quantity of this factor. The quantity of this factor can be increased by building factories, offices, machinery, shops, or motor vehicles. Quality can be improved by bettering higher education, research and development, and access to foreign technology and expertise. This will, once again, increase the amount of goods and services produced per head of the population, which is an increase in economic growth.

The last category, institutional factors, is what can also help a country achieve economic growth. An adequate banking system, legal system, educational system, infrastructure, political stability, and good international relationships should all contribute to an improvement in economic growth.

To illustrate these ways of achieving economic growth, a production possibilities frontier (PPF) diagram has been created. Let us say that the quality of human capital has been increased. This will increase productivity, and therefore lead to greater output per person. The market for two goods, Laptops and Phones, has been graphed in the format of a PPF:

As we can see in Figure 1, when the quality of human capital increases, output per person increases. This leads to more goods/services being produced, such as phones or laptops. That is why X shifts to X1, and Y shifts to Y1. The more north-east the curve expands, the greater total output there is within a country. If it is expanding, there is economic growth. W and Z are points at which we can produce laptops or phones. W is not the most efficient point, because we can produce more. Z is a point at which production is maximized. With economic growth, however, Z moves outwards to Z1.

2. To what extent is it fair to say that economic growth inevitably leads to economic development?

Economic growth is an increase in the amount of goods and services produced per head of the population over a period of time, while economic development is an improvement in welfare, by means of increasing life expectancy, education levels, or reducing child mortality rates.

Higher levels of economic growth lead to an increase in GDP per capita, which should increase welfare. People will have greater disposable income and will be able to afford food, clothing, healthcare, and other necessities. The issue, however, is how GDP per capita is calculated. GDP / population = GDP per capita. Some few extremely wealthy individuals may push the GDP to higher levels and create the illusion of an increase in incomes. Some groups may not experience improvement, while only a few individuals will. Therefore, this argument supports the idea that economic growth may not necessarily lead to economic development.

With higher economic growth GDP will increase. An increase in GDP will mean that government revenue from taxation will increase, because the more transactions are taking place, the more revenue goes to the government. An increase in government revenue will mean that the government will have more resources to improve education, healthcare, and infrastructure. These improvements should lead to greater economic growth, and create a perpetual loop of both economic growth and development improving. However, most developing countries have an inefficient taxation system in place. Nevertheless, they will still benefit from increased GDP, because it will still increase government revenue. Where that increase in government revenue will go is of course uncertain. A corrupt government may prevent economic growth to lead to economic development in this situation.

Market-based activities which increase GDP growth may only benefit the rich. The greater not so wealthy population may not benefit from an increase in GDP.

Most importantly, economic growth comes at the cost of increased pollution. In other words, the welfare gain from economic growth may only be short-term. The long-term costs of economic growth may very well lead to a greater decrease in welfare, therefore not leading to economic development at all. It will lead to quite the opposite. This is because greater economies require more resources. More energy is demanded. As such, this leads to huge emissions of carbon dioxide, which greatly contribute to global warming. Global warming may increase the scarcity of safe water and food, cause droughts, spread tropical diseases, and decrease usable land mass due to a rise in sea levels. This will no doubt in the long-run decrease the welfare of future generations.

To conclude, economic growth can lead to economic development under the right circumstances. Whether we are looking in the short-term or the long-term can also affect the answer to the question. Economic growth must be done in a certain way to lead to valuable economic development.

3. To what extent could it be argued that all developing countries share the same set of characteristics?

All developing countries share the following same set of characteristics: low standards of living, characterized by low incomes, inequality, poor health, and inadequate education; low levels of productivity (output per person); high rates of population growth and dependency burdens (people over 15 and under 64 must support people outside that range); high and rising levels of unemployment and underemployment; substantial dependence on agricultural production and primary product exports; prevalence of imperfect markets and limited information; dominance, dependence, and vulnerability in international relations. While they do share common sets of characteristics, they are different in some respects. Developing countries vary in their sources of income. One country may get their income from diamonds and oil, while another may produce agricultural products.

Developing countries differ in history. Thus, they will be different in regards to social, political, and economical aspects. They also vary in population and geographical size. For example, China has a huge geographical and population size, whereas Djibouti may not. They are both developing countries. They also vary in ethnic and religious breakdowns; however, they tend to have multiple ethnicity and religions in each developing country. The industry structures are also different, per capita income levels differ, and so does the political structure in each developing country.

So while generalizations can be made about developing countries, they do differ in many respects. As such, it can be argued that they share the same set of characteristics; however, upon further examination one will find their true diversities.