Economic Development (Copy)
11.3 Economic Development
11.3.1 Classification of Economies in Terms of Their Level of Development
- Economies around the world are commonly classified into groups based on their level of economic development. This classification helps understand their economic structure, challenges, and policy needs.
- Developed Economies (Advanced Economies):
- High levels of per capita income and economic output.
- Well-established infrastructure, industrialisation, and technological advancement.
- High standards of living, including access to healthcare, education, and social services.
- Economies dominated by service and high-tech industries.
- Examples: USA, UK, Germany, Japan, Australia.
- Developing Economies:
- Middle-income levels, with growing but incomplete industrialisation.
- Rapid urbanisation and population growth are common.
- Challenges include poverty, inequality, and limited infrastructure.
- Economic activity often relies on agriculture, manufacturing, and emerging services.
- Examples: India, Brazil, South Africa, Indonesia.
- Least Developed Countries (LDCs):
- Very low per capita incomes and weak economic structures.
- High poverty rates, poor infrastructure, weak institutions.
- Heavy dependence on agriculture, often subsistence farming.
- Vulnerability to economic shocks, political instability, and external debt.
- Examples: Afghanistan, Haiti, Chad, Malawi.
- Additional Classifications:
- Emerging Markets: Fast-growing economies transitioning towards more industrialisation and service sectors.
- Transition Economies: Countries moving from centrally planned to market economies (e.g., former Soviet states).
11.3.2 Classification of Economies in Terms of Their Level of National Income
- Classification can also be based on national income measures, primarily Gross National Income (GNI) per capita:
- High-Income Economies:
- GNI per capita above approximately $12,000 (World Bank classification).
- Characterised by high standards of living, diversified economies, strong institutions.
- Upper Middle-Income Economies:
- GNI per capita between $4,000 and $12,000.
- Rapid industrialisation with improving infrastructure and social services.
- Lower Middle-Income Economies:
- GNI per capita between $1,000 and $4,000.
- Emerging manufacturing sectors, but large rural populations.
- Low-Income Economies:
- GNI per capita below $1,000.
- Predominantly agrarian, subsistence economies with widespread poverty.
- Significance of Income Classification:
- Helps international organisations in allocating aid, setting policy priorities, and designing economic programs.
11.3.3 Indicators of Living Standards and Economic Development
Monetary Indicators
- Real Per Capita National Income (GDP, GNI, NNI):
- GDP (Gross Domestic Product): Total value of goods and services produced within a country’s borders in a year.
- GNI (Gross National Income): GDP plus net income from abroad (e.g., remittances, investments).
- NNI (Net National Income): GNI minus depreciation of capital (measures income available for consumption and saving).
- Purchasing Power Parity (PPP):
- Adjusts nominal income to account for cost of living differences across countries.
- Enables more accurate comparisons of living standards.
- Limitations of Monetary Indicators:
- Ignore income distribution; averages may mask inequality.
- Exclude non-market activities, such as subsistence farming or household work.
- Do not measure environmental degradation or quality of life.
Non-Monetary Indicators
- Focus on human welfare and social progress:
- Health Indicators:
- Life expectancy at birth, infant mortality rate, access to clean water and sanitation.
- Education Indicators:
- Literacy rates, enrolment ratios, average years of schooling.
- Access to Basic Services:
- Healthcare availability, electricity, housing quality.
- Social Indicators:
- Crime rates, political freedom, gender equality.
Composite Indicators
- Combine multiple aspects of development into single indices to provide a holistic measure:
- Human Development Index (HDI):
- Created by UNDP.
- Components:
- Real GNI per capita (income dimension).
- Life expectancy at birth (health dimension).
- Expected years of schooling (education dimension).
- Scores range from 0 (low development) to 1 (high development).
- Used for cross-country and time comparisons.
- Measure of Economic Welfare (MEW):
- Attempts to adjust GDP by adding factors like leisure and environmental quality, subtracting pollution and resource depletion.
- Offers a broader perspective on welfare beyond income.
- Multidimensional Poverty Index (MPI):
- Measures acute poverty through multiple deprivations in health, education, and living standards at the household level.
- Captures aspects missed by income-based measures.
11.3.4 The Kuznets Curve
- Proposed by economist Simon Kuznets to describe the relationship between economic growth and income inequality:
- Stage 1 (Early Development):
- Industrialisation and urbanisation cause rising inequality as wealth concentrates in emerging industries.
- Stage 2 (Mature Development):
- Growth spreads more evenly due to better education, social programs, and economic diversification.
- Income inequality begins to decline.
- Criticism:
- Empirical support mixed; many countries do not follow this pattern exactly.
- Does not account for globalisation or policy differences.
11.3.5 Comparison of Economic Growth Rates and Living Standards
Over Time
- Countries generally experience rising GDP per capita over decades, reflecting growth and improving living standards.
- Example: South Korea’s rapid industrialisation and growth raised incomes and reduced poverty dramatically from 1960 to present.
- However, growth may be uneven, with periods of stagnation or recessions reducing gains.
Between Countries
- Significant disparities in growth rates and living standards between developed and developing countries.
- Influencing factors:
- Quality of institutions and governance.
- Natural resource endowments.
- Human capital development.
- Economic policies and openness.
- Convergence theory suggests poorer countries can grow faster to catch up, but structural and institutional barriers often impede this.
Diagrams
Diagram 1: Classification of Economies by Income and Development
Income per Capita
↑
| Developed Economies
|-------------------------
| Middle-Income Economies
|-------------------------
| Low-Income Economies (LDCs)
|___________________________→ Level of Economic Development
Diagram 2: Components of the Human Development Index (HDI)
HDI = Composite Index of
--------------------------
| Income (GNI per capita) |
| Life Expectancy |
| Education (Schooling) |
--------------------------
Score from 0 to 1 (higher is better)
Diagram 3: Kuznets Curve
Income Inequality (Gini Coefficient)
↑
| *
| * *
| * *
| * *
|___*________*________→ Economic Development
Low High
Inequality rises then falls as development progresses
Diagram 4: Growth and Living Standards Over Time
GDP per Capita
↑
| /
| /
| /
| /
|______/__________________→ Time
Improvement in living standards parallels growth
Diagram 5: Purchasing Power Parity (PPP) Concept
Country A Currency
↑
| Nominal Exchange Rate
| Adjusted for local prices → Real purchasing power
Enables better comparison of living standards
Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Economics Full Scale Course