1. Measuring development Flashcards
What is the difference between GDP and GNI per capita?
GDP measures the total value of all goods and services produced within a country’s borders over a specific period, typically a year or a quarter.
GNI is the total domestic and foreign value added claimed by a country’s residents without making deductions for depreciation (or wearing out) of the domestic capital stock.
Why do we draw this key distinction in development economics?
Because GDP per capita is most commonly used however the World Bank uses GNI
What do we mean when we talk about development?
A multidimensional process involving major changes in social structures, popular attitudes and national institutions as well s the acceleration of economic growth, the reduction of inequality and the eradication of poverty
How do we make GNI and/or GDP figures internationally comparable?
- The Atlas Method
- The Purchasing power parity method
What is the atlas method?
A three-year moving average of exchange rates adjusted for differences in inflation
Why can we not use regular exchange rates to compare countries GNI/GDP?
Official exchange rates may be too volatile (and subject to manipulation)
Why is the atlas method commonly used?
Weak checks and balances on political power mean that the elite can decide the ER which results in two ER, one favourable to those trying to buy things in US dollars and the market ER which is often far lower which sets up the opportunity for arbitrage. The averages can amend this.
What is the weakness of the atlas method?
It misses a lot of the nuances of the country:
- Reliance on exchange rates
- Doesn’t account for PP
- Ignores non-market activities
What is the purchasing power parity method?
It compares a basket of goods in one country vs that same basket of goods in another country. Purchasing Power Parity is the number of units of a foreign country’s currency required to purchase the quantity of goods and services in the local developing country market as $1 would buy in the United State
Why is the PPP method often seen as better?
Accounts for non-tradeable goods and differences in the cost of living between countries.
What are non-tradable goods?
Goods that don’t operate in markets that impact the exchange rate
Why do we use other metrics than income to measure wealth and what are some of them?
Because there are several notable exceptions notably in resource rich countries. There is no alternative to relying on other non-income indicators, whether single-dimensional such as years of healthy life, or multidimensional incorporating at least health and education along with wealth
How can you calculate GDP from GNI?
Thus, GNI comprises GDP plus the difference between the income residents receive from abroad for factor services (labour and capital) less payments made to nonresidents who contribute to the domestic economy
How do income disparities differ between developed and developing countries when accounting for PPP?
Income gaps between developed and developing nations tend to be less when PPP is used. The most important reason is that real wages are lower in developing countries, which makes the price of (low-skill) services cheaper in real terms
What are some of the limitations of GNI?
There are other limitations of GNI (including PPP) calculations as measures of economic performance and welfare, including the lack of accounting for environmental losses to the prevalence of nonmonetary transactions, distributional concerns, and other capabilities
Why is there often large differences between exchange rates and PPP ER?
In many low income countries, people don’t partake in markets, they use non-tradable goods
