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Economic Development
Indicators of living standards and economic development
Human Development Index
The problems of using GDP/GNP to compare living standards and economic development between countries over time have led to the development of other measures, the best known being the Human Development Index (HDI). This measures changes in development levels over time and compares development levels in different countries. As from the 2011 report this includes: a long and healthy life: life expectancy at birth education index: mean years of schooling and expected years of schooling A decent standard of living: GNP per capita (PPP $). Countries are placed in four categories of human development: very high; high; medium; and low. In the 2013 report, these represented the following proportions of the world's population:
- very high and high 30 percent medium 52 per cent
- Low 18 percent.
Measure of Economic Welfare
The Measure of Economic Welfare (MEW) was the work of Nordhaus and Tobin as an alternative to just using GDP. MEW took national output as a starting point but adjusted it to include an assessment of the value of leisure time and the amount of unpaid work in an economy. This increased the welfare value of GDP. On the other hand, the value of the environmental damage caused by industrial production and consumption was also included, reducing the welfare value of GDP.
Multidimensional Poverty Index
Another measure introduced in 2010 is the Multidimensional Poverty Index (MPI), see Table 9.5. This has three dimensions of poverty: health; education; and living standards, divided into ten indicators. This replaced the Human Poverty Index based on four aspects of human life: longevity; knowledge; economic provisioning; and social conclusion.
Kuznets curve
The Kuznets curve is an inverted U-curve, although variables along the axes are often mixed and matched, with inequality or the Gini coefficient on the Y axis and economic development, time, or per- capita incomes on the X axis. The curve claims to show that as an economy develops initially inequality increases, but, that after a certain average income is reached, inequality then decreases. This assumes that a country that is industrialising (and mechanising agricultural production) will draw people into urban areas improving their standards of living, but causing greater inequality with those still in rural areas. Only at a later stage will the benefits of growth reach these people and start to close the gap.
Income distribution
Although low standards of living are due to a range of factors such as poor health care and facilities, inadequate education, malnutrition, and high levels of inequality, the major factor is often income inequality. Table 9.7 shows the share of national income going to the richest and poorest 20 percent. As can be seen, many developing countries have a wide gap between the richest, often commanding 40 percent or more of the income and the poorest who often have less than 10 percent of the income. One way of comparing inequality between countries is to use the Gini coefficient. Table 9.8 shows that developed countries have lower levels of inequality than the other groups. As countries develop rapidly this often results in more unequal income distributions as shown by the BRIC countries Brazil and China.
Gini coefficient and the Lorenz curve
The Gini coefficient
A Gini coefficient is a way of measuring inequality in the distribution of income in an economy. It is measured by the ratio of the area between the diagonal and the Lorenz curve to the total area under the diagonal. The bigger this area, the more unequal the distribution of income. It measures the extent to which the distribution of income in an economy diverges from the position of absolute or total equality. The lower the figure, the more even is the distribution of income. In many developed countries, the coefficient is around 0.3, but in developing countries, it is likely to be closer to 0.5.
The Lorenz curve
This is a graphical representation showing the extent of inequality in the distribution of income in an economy. The more unequal the distribution of income in an economy, the more divergent the Lorenz curve will be from the diagonal line of absolute equality. Figure 8.3 shows how Lorenz curves can demonstrate the differences in the distribution of income in two countries, country X and country Y. The greater the degree of inequality, the further the Lorenz curve will be below the 45-degree line. This is the case with country X, indicating that income is more unevenly distributed in country X than in country Y.
