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GDP is the total value of the goods and services produced in a country. It is a measure of the overall economic output of a country.



GDP is the total value of the goods and services produced in a country. It is a measure of the overall economic output of a country.


Difference between GNI and GDP

GNI measures the production of goods and services based on nationality whereas GDP measures the production of goods and services based on nationality


Positive Economics

how the reality is based on facts and evidence. For example, an increase in income tax reduces the disposable income of consumers. Or, out of pocket health expenditure is higher in poorer countries than in developed countries


Normative Economics

about how reality should be and is subjective. E.g. conditional cash transfers should be used to achieve higher primary school enrolments in developing countries.


iii) A line which links the cumulative percentage of population to the cumulative percentage income share is known as:

Lorenz Curve


Lorenz Curve

iii) A line which links the cumulative percentage of population to the cumulative percentage income share is known as:


iv) According to the human capital approach, private investments in education are determined by:

The comparison between the present discounted value of future income corresponding to educational qualifications, and the costs incurred to acquire them.



The production possibility frontier (PPF) describes:
The maximum combinations of output that the economy can produce using all its available resources.


Limitations of GDP

Fails to include the output of non-market activities.

Ignores income distribution.

Does not measure the stock of wealth in a country at a given moment.



“Economics is the study of how societies decide what, how and for whom to produce” – BVFD p.3


Opportunity Cost of One Good

Quantity of the other goods that must be sacrificed to obtain an additional unit of that good


Causes of Food Price Increas

o Weather shocks
o Fast growth in China and India
o Increase Use of Biofuels
o Mounting oil prices
o Export restrictions
o Stock piling (hoarding)


How the focus of Development has changed

• 1970’s development book has an image of a tractor and a city in the background – agricultural – uses the word growth – productivity focus

Today our text book focuses less on growth focuses more on women, educating children, technology, industrialisation


Economic Development

Economic development was the capacity to generate and sustain economic growth – focused mostly on improving GDP and GNI


Why GNI and GDP Differ in developing nations

because remittances are sent in and foreign investments also



Purchasing Power Parity = Number of units of foreign currency required to purchase an identical quantity of goods and services in the local market as $1 would buy in the USA


What kind of goods are cheaper in developing coutnries

Non-tradable goods


What does GNI/GDP not show?

Non-market economic activities – illegal – domestic services – informal cash – especially in developing nations – underestimates therefore more likely in developing nations

Income distribution is ignored – Inequality

GDP is a measure of flow, does not measure the stock of wealth of a county in each moment - Does not reflect environmental impacts – wealth has actually decreased if you chop down the amazon or dig out all the oil because you have no lost it

Beyond national accounts – implausible to suggest that growth of GDP and GNI means human progress


Sen and the Capabilities Approach

Income growth cannot adequately measure development, for it does not ultimately determine what individuals can be and do.

Functioning - Beings (being healthy, educated) and Doings (working, voting)

Capabilities - combination of functioning that are available to the individual (Income is essential but to convert it into functioning – education+ health may be required – different individuals can have completely different capabilities due to accessibility


HDI before 2011

a composite statistic (composite index) of life expectancy, 2/3s Literacy/ 1/3rd enrollment, and per capita income indicators, which are used to rank countries into four tiers of human development

Split into 3 sections, each number is worked out in the format - (Your literacy rate – Worst literacy rate), divided by (the best literacy – the worst literacy) All three are times together to make HDI


HDI after 2011

Countries aim to improve income and not the other two as it’s the easiest
You therefore get the same HDI as those with good education and health care but their income isn’t as high but they are more equal and more developed in that sense

Because money is worth more the poorer you are, a logarithmic function is used for the Income, so that a £10,000 increase to sierra leone makes a bigger difference that to the US


HDI Limitations

Equal weights are given embodying implicit normative judgement

Quality of education for example isn’t shown

New HDI is better but unclear that geometric mean is the best way to reflect development

HDI can also hide Inequalities and rights and freedom and happiness


R. Layard 2005

There is a positive correlation between income and self-reported happiness up to a level of about $15,000 to $20,000 – beyond this the association disappears

Factors such as political and religious freedom and social cohesion also associated with higher happiness = social capita


Limitation of R. Layard


Correlation does not imply causality – little is known about what really causes happiness or life satisfaction

Self-reported life satisfaction has reporting bias


Traditional Economics

Concerned primarily with efficient growth of scarce resources

Assumes economic rationality and a purely self-interested oriented idea of decision making – therefore equilibrium will always be found


Poltical Economics

Concerned with the relationship between politics and economy

Emphasis on the role of power during economic decision making


Development Economics

Concerned with allocation of resources with sustained growth over time, also deals with social, political, and institutional mechanisms


What are the three core values of Development

1. Sustenance
-The ability to meet life-sustaining basic needs

2. Self-Esteem
a. To be a person
b. All peoples and societies seek some basic form of self-esteem – identity, dignity, respect, honour, recognition

3. Freedom from Servitude (Slavery)
a. To be able to choose how to live your life


3 Objectives of Development

1. To increase the availability and widen the distribution of basic life-sustaining goods such as food, shelter, health, and protection

2. To raise levels of living, including, in addition to higher incomes, the provision of more jobs, better education and greater attention to cultural and human values, all of which will serve not only to enhance material well-being but also to generate greater individual and national self-esteem

3. To expand the range of economic and social choices available to individuals and nations by freeing them from servitude and dependence not only in relation to other people and nation states but also to the forces of ignorance and human misery


8 Componants to assess structural diversity of developing economies

1. Size of country – area, population, and income

2. Historical and colonial background

3. Quality of physical and human resources

4. Ethnic and religious composition

5. Importance of public and private sectors

6. Nature of industrial structure

7. Degree of dependence on external political and economic forces

8. Distribution of power, social and political structures, and its institutions


6 Characteristics of Developing Nations

1. Low level of living – low income, poor health, poor education

2. Low level of productivity

3. High population growth

4. Dependence on primary products and agriculture

5. Imperfect market and limited information

6. Dependence and vulnerable within international relations


Does poverty = Hunger?

the poor could afford to eat 2400 calories a day which is beyond the threshold for an active working life – but excludes disasters and wars

Poor purchase fewer calories than 40 years ago because there is less manual work and need for calories


Total Poverty Gap

TPG – Total income necessary to raise everyone who is below the poverty line to that line – cannot be manipulated through income transfers amongst the poor – on per capita basis = TPG/N


What is MPI

Built from household level survey data

Varies between 0 and 1

Considers 10 separate deprivation indicators covering 3 key dimensions: education, health and standard of living

It defines cut-offs for deprivation in each indicator

Using the number of deprivations defines a deprivation score for each individual

Identifies one as poor if that score is beyond a threshold

Multidimensional headcount ratio = No. MD Poor/ Total Population

Poverty intensity = average deprivation score of those who are classified as poor

Therefore, the multidimensional poverty index = (MD headcount ratio) X (Poverty Intensity)


MDP Headcount Ratio

Multidimensional headcount ratio = No. MD Poor/ Total Population


Poverty Intensity

Poverty intensity = average deprivation score of those who are classified as poor


How to measure MPI for the whole country

multidimensional poverty index = (MD headcount ratio) X (Poverty Intensity)


Why is growth not always Pro-poor?

Lack of physical access to market: e.g. rural/remote location. Affects ability to buy inputs, goods and sell produce.

Lack of access to financial markets and assets: poor do not have resources to invest, save and innovate.

Lack of qualifications and poor health: impairs employability in high paid sectors, and hampers business capacity for expansion

Often the poor are self-employed (either or willingly or otherwise – see Banerjee and Duflo, Ch.9). If the value of their production doesn't rise, their income does not either.

The poor are especially vulnerable to hazards, whence afraid to invest and innovate.

Government may not use increased fiscal revenue to improve services that reach the poor; multidimensional poverty is not alleviated. See ODI (2008) for a number of other contributing factors


Lorenz Curve

Lorenz curve is a graphical representation of the distribution of income or of wealth


Human Capital

the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country.
 Investments embodied in people
 Skills of people
 Education of people
 Health of people
 A result of training, education, healthcare

Education (and health) is a key input to the aggregate production function, hence a driver of growth. Education (and health): simultaneously a development input and output


Physical Capital

 Machines
 Infrastructure


Technolohical Development

 Innovation
 Advances
 Ideas


Why increasing income is not sufficient to prompt human capital investments?

More money doesn’t mean better nutrition

Investment in education doesn’t mean better education


What determines investments in education

If the area of the benefits shape is larger than the area of the costs shape, parent will invest in their child’s future if they can

Initial investments in health or education lead to a stream of higher future income

The present discounted value of this stream of future income is compared to the costs of investment


Determinants of the demand for education on an independent level

Private benefits of education (those that accrue directly to the student and his family)

Private costs of education

Individuals invest up to the point where private benefit of an additional investment = private cost of that additional investment


Determinants of state education supply - State level

Social benefits of education (benefits of schooling including those that accrue to others, or even the whole society)

Social costs of education (those born by the whole society)

Governments invest up to the point where social benefit of an additional investment = social cost of additional investment


Who drives the supply of education

In theory the state could do this, but I practice political economy drives the supply of education


Education and inequality

Expansion of free/ heavily subsidized higher education beyond socially justifiable resource allocation

E.g. Malawi: strong universities but substandard primary schools in rural areas

Often very low quality of basic education

In face of inequality of opportunities in access to education (typical of developing countries) education may lead to an increase in income inequality.

Yet, countries that developed more successfully ensured that educational opportunities, and outcomes are distributed more evenly in society


Gender Inequality of Opportunities In Education

The rate of return on women’s education is higher than that of men in developing countries

Women’s education linked to effective family planning and lower fertility rates (hence higher GNI per capita)

Maternal education is a key circumstance variable determining the vicious circle of inequality of opportunity – we saw this in the final question discussed in the last seminar


extent of Education inequality

developing countries have higher levels of education inequality

Also, a correlation between years of education and education inequality

The less time you spend at school the more the education is unequal


Why supply of education isnt enough

There needs to be demand for education, there's no point learning things if they won't improve your future

Quality of schooling can be very low in many developing countries.

Extremely high teacher absenteeism

Critique: Easterly (2002) – “Creating skills where there exists no technology to use them is not going to foster economic growth.”


Strategies to increase demand of education

Once parents realize returns to education are high they will invest in their children’s human capital

Policy recommendation: make it attractive to invest in business that requires educated labor! Demand for education will rapidly increase!

Supply will follow (public and private)

And because there is money involved, parents will check that teachers do a good job. Quality of education also likely to increase


Jensen 2002

Offshore call centers expand in Northern India

Despite traditional gender bias, parents begin investing in their daughters’ education

Even the fraction of girls who are stunted declines.


Supply Strategies

Hard evidence that boosting schooling supply causally increases earnings. Up to a point, yes!

E.g. School availability in Indonesia lead to higher wages (Duflo, 2001). Similar results estimated for many other countries across the developing world.

Also, evidence that increasing the number of compulsory number of years of education causally impacts on wages in developing countries

But quality of education is generally low. Supply matters, but demand is also key!

Supply side and demand-side strategies are policy complements, not substitutes!


The role of expectation in education

Changing parental misperceptions: education pays at all levels!

Changes in curricula and pedagogy inherited from colonial era: focus on the median, not the elite!

Remedial teaching: it is cost-effective to help kids catching-up!

Incentives to teachers: need to understand motivations explaining recruitment and teacher performance

Monitoring quality of schooling: evidence from India

Ability streaming?


How health improves education

Infant health key determinant of school attendance and educational attainment

Longer LE increase returns to education


How education improves health

Increases wages, making nutrition and healthcare more affordable

Improve health literacy, understanding of the health system and response to programmes

Education may change time and risk preferences – delayed birth, healthier lifestyle

Sex education and health education

More doctors and health professionals


Does growth improve populations health

Positive correlation but not always connected

Public health expenditure may not increase with GDP per capita; this, in turn, may fail to improve health care coverage, especially amongst the poor

Growth may even lead to a double burden of disease: relative affluence may add new diseases, such as obesity and diabetes.


Can poor health push you into poverty?

Health care finance in low-income countries is dominated by out-of-pocket payments (OOPs); relative lack of prepayment mechanisms, such as tax and health insurance.

In theory, such expenditures are deemed catastrophic when they are higher than a given proportion of the household expenditure.

In practice, according to the WHO, the percentage of households pushed into poverty due to catastrophic health payments as high as 5% in the developing world.


What is a mechanism for reducing risk?

Risk Pooling

By making a regular payment into a fund to be covered against catastrophic OOPs.

However, what if everyone suffers from the same thing as the Ebola crisis for example

Universal coverage is the best option but not everyone can afford the same -> therefore there is low take up and partial coverage. Also in reality there are high risk individuals and low risk individuals who don’t want to pay for the high risk


Healthcare Finance - Private Insurance

a. Unlikely to be the solution in medium and low-income countries

b. Low risk individuals reluctant to join, causing a high premium for high risk individuals

c. Regulation is required like consumer protection and financial regulation but this is often not possible within weak institutions of developing nations


Health care finance - General Tax Revenue

a. Pools across wide social base – little bureaucracy

b. Often insufficient in developing countries

c. Some will pay more than others even if healthy


Health care finance - Social Health Insurance

a. Payroll taxes – mandatory by employer

b. Enhances reliability and stability

c. Means people who don’t work aren’t covered

d. Efficiency gains may be offset by admin costs


Health care finance - Community-based health insurance

a. Flat premium for a limited range of services

b. Usually voluntary

c. Because premium is flat, in theory the scheme would attract a disproportionate number of high risks; this compromises financial viability.


Health care finance - other finance schemes

a. Informal payments

b. International development assistance
i. Support system wide improvements or specific interventions through support state institutions or NGOs?


Does progress towards universal coverage improve population health?

In most cases improved coverage leads to a sizable reduction in OOPs and catastrophic health payments

But the evidence regarding population health is mixed:

Thai ’30 Baht’ programme: service utilisation up by around 10 percentage points between 2001 and 2005; subsequent reduction in infant mortality of almost 7 percentage points

But no effect on patterns of healthcare utilisation (and health outcomes) in high profile coverage improvements such as Mexico’s ‘Seguro Popular’ and China’s ‘New Cooperative Medical Scheme’.


Why is the emand for effective free healthcare low?

Low responsiveness of public services

Asymmetric information, agency problems and supply-induced demand

Private doctor makes the person feel better but not necessarily in the long run, therefore the population think they are better

The market solution to imperfect information is the agency relationship

The ‘Principal’ (patient) appoints an ‘agent’ (healthcare provider) to make health related decisions on his behalf

But the agent is also the supplier…

The patient does not have the knowledge required to monitor the agent: e.g. it it hard to learn about preventive care from experience.

Information asymmetry, combined with the agency role, gives rise to the possibility of demand inducement by healthcare provider: Roemer’s law: in a private healthcare setting “a bed built is a bed filled”.


Positive Externalities

Health care use may have positive externalities:

Social benefits much higher than purely private ones

Individual (private) demand does not take social benefit into account.

Subsidies, free provision, information may be needed