How Economic Development is measured?

December 31, 2017 December 31, 2017

The measurement of Economic development is done taking into account economic growth and various aspects of economic welfare. Since, economic welfare is a qualitative aspect of development; it needs to be measured in some way or the other. Some ways to measure the economic development are as follows:

Growth in GNP/GDP

Initially, only GDP /GDP was taken as a measure to assess economic development. Increase in GDP/GNP is expected to ensure greater availability of goods and services to a larger part of population with higher standards of living. However, there are several limitations of this method as follows:

  • Increase in Size of GDP does not necessarily mean greater availability of goods and services.
  • Increase in GDP may be eaten away by increasing population leading to no increase or even decrease in per capita income.
  • If GDP is calculated at current prices, it might be increasing due to price rise and there may be no change in availability of goods and services.
  • Sometimes, production for self consumption is not included in GDP due to non availability of data. It makes GDP underestimated.
  • If increase in GDP is brought about by forcing labour to work for longer hours and thereby reducing their welfare, it can’t reflect economic welfare.
  • If the share of capital goods is more in GDP, it will not increase Economic Welfare in the present but in the future.
  • If increase in output is because of increased production of defense goods, even then there will be no change in economic welfare.
  • If increased output is contributed by increase in the production of liquor, cigarettes, tobacco etc. It does not indicate economic welfare.
  • If GDP increases and goes into the pockets of few rich leaving majority in the miserable condition, it can’t be called an indicator of economic welfare.
Per Capita Income as an Index of Economic Welfare

Today, increase in per capita real income is taken as an indicator of economic welfare. However, this also has its own limitations as follows:

  • Per capita income does not show the distribution of GDP whether it is equally distributed or unequally distributed.
  • It does not reflect the kinds of goods and services that are being produced and consumed in the society. It may be so that the economy is producing pedigree, anti-aging creams on the one hand and 26% people are living below poverty line as it is happening in India.
  • Economic Welfare also depends on the quality of public goods.
UNRISD’s Core Indicators of Development

United Nations Research Institute on Social Development selected the most appropriate indicators of development and analyzed the relationship between these indicators at various levels of development. This was an alternative way of measuring economic development. The list of core indicators of socio-economic development is as follows:

  • Expectation of life at birth
  • Consumption of animal protein,
  • Combined primary and secondary enrolment
  • Average number of persons per room
  • Newspaper circulation per 1,000 population
  • Percentage of economically active population with electricity, gas, water, etc.
  • Agricultural production per male agricultural worker
  • Percentage of adult male labour in agriculture
  • Electricity consumption, kw per capita
The Physical Quality of Life Index (PQLI)

The Physical Quality of Life Index (PQLI) was developed in 1970s by Morris to respond to the dissatisfaction due to use of GNP/GDP as a measure of economic development. It was a relatively simple index taken as average of three figures viz. basic literacy rate, infant mortality and life expectancy at age 1. Each of these were given equal weightage. It was calculated as follows:

  • Find percentage of the population that is literate (literacy rate).
  • Find the infant mortality rate. (out of 1000 births) INDEXED Infant Mortality Rate = (166 – infant mortality) × 0.625
  • Find the Life Expectancy. INDEXED Life Expectancy = (Life expectancy – 42) × 2.7

The Physical Quality of Life Index (PQLI) is a summation of complex social interrelationships on which no theoretical explanation imposes any given weights/biases. PQLI might be regarded as an improvement but shares the general problems of measuring quality of life in a quantitative way. It has also been criticized because there is considerable overlap between infant mortality and life expectancy.

Human Development Index (HDI)

HDI is part of the UNDP Human Development Report developed by Pakistani Economist Mahbub ul Haq and Indian Nobel laureate Amartya Sen. Its goal was to place people at the centre of the development process in terms of economic debate, policy and advocacy. “People are the real wealth of a nation,” was the opening line of the first report in 1990.

HDI measures average achievements in a country in three basic dimensions of human development viz. A long and healthy life; Access to knowledge; A decent standard of living. The overall index is a geometric mean of three indices viz. Life Expectancy Index, Education Index, GNI Index. They are shown in the following graphics:

However, there are several limitations of HDI also because the three indicators used in HDI are good but not ideal. It does not consider distribution of income directly. The index is relative and not absolute and therefore the results derived from it may be misleading.

Inequality-adjusted HDI (IHDI)

The Inequality-adjusted Human Development Index (IHDI) adjusts the Human Development Index (HDI) for inequality in distribution of each dimension across the population.  The IHDI accounts for inequalities in HDI dimensions by “discounting” each dimension’s average value according to its level of inequality.

If there is no inequality across people, HDI is equal to IHDI. However, in case of inequalities, the value of IHDI is always less than HDI. This implies that the IHDI is the actual level of human development (accounting for this inequality), while the HDI can be viewed as an index of “potential” human development (or the maximum level of HDI) that could be achieved if there was no inequality.

The “loss” in potential human development due to inequality is given by the difference between the HDI and the IHDI and can be expressed as a percentage.

Gender related Development Index (GDI)

The Gender related Development Index (GDI) measures gender inequalities in achievement in three basic dimensions of human development as follows:

  • Health, which is measured by female and male life expectancy at birth
  • Education, which is measured by female and male expected years of schooling for children and female and male mean years of schooling for adults ages 25 and older
  • Command over economic resources, measured by female and male estimated earned income

The index shows the loss in human development due to inequality between female and male achievements in these dimensions. It ranges from 0, which indicates that women and men fare equally, to 1, which indicates that women fare as poorly in comparison to their male counterparts as possible in all measured dimensions.

In order to address shortcomings of the GDI, a new index Gender Inequality Index (GII) was proposed. This index measures three dimensions viz. Reproductive Health, Empowerment, and Labor Market Participation.

Multidimensional Poverty Index (MPI)

The Multidimensional Poverty Index (MPI) identifies multiple deprivations at the individual level in health, education and standard of living. It uses micro data from household surveys, as basis of deprivation of Cooking fuel, Toilet, Water, Electricity, Floor, Assets.  Each person in a given household is classified as poor or non-poor depending on the number of deprivations his or her household experiences. These data are then aggregated into the national measure of poverty. The indicator thresholds for households to be considered deprived are as follows:

Education
  • School attainment: no household member has completed at least six years of schooling.
  • School attendance: a school-age child (up to grade 8) is not attending school.
Health
  • Nutrition: a household member (for whom there is nutrition information) is malnourished, as measured by the body mass index for adults (women ages 15–49 in most of the surveys) and by the height-for-age z score calculated using World Health Organization standards for children under age 5.
  • Child mortality: a child has died in the household within the five years prior to the survey.
Standard of living
  • Electricity: not having access to electricity.
  • Drinking water: not having access to clean drinking water or if the source of clean drinking water is located more than 30 minutes away by walking.
  • Sanitation: not having access to improved sanitation or if improved, it is shared.
  • Cooking fuel: using ‘dirty’ cooking fuel (dung, wood or charcoal).
  • Having a home with a dirt, sand or dung floor.
  • Assets: not having at least one asset related to access to information (radio, TV, telephone) and not having at least one asset related to mobility (bike, motorbike, car, truck, animal cart, motorboat) or at least one asset related to livelihood (refrigerator, arable land, livestock).

Computation of the Multi-Dimensional Poverty Index (MDPI) reveals that, despite recent progress in poverty reduction, more than 2.2 billion people are either near or living in multidimensional poverty.

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