chapter 1economics

7/27/2019 Chapter 1economics

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Economics, Institutions, and

Development: A Global

Perspective

Introduction to DevelopmentEconomics


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Principles and Concepts:

Economic Development

What is the real meaning ofdevelopment?

How can one apply economic concepts

and theories to gain a betterunderstanding of development process?

Why do some countries develop andothers remain poor?

What are the sources of development andhow do we measure development?


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Does historical record of developmenthelp us understand it better?

What are the most influential theories of

development and are they compatible? Is development process of developing

nations independent or interdependentwith that of developed nations?


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Examples of an affluent economy andsubsistence economy.

Nature of development economics:

Traditional economics- efficientallocation of scarce resources

Political economics- social andpolitical process

Development economics- Role ofvalues, attitudes, and institutions

So, what do we mean by development?


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Definition of Economic Development:

1950s

In economic terms, development is thecapacity of a nation to generate and sustainan annual increase in its GNP of 5% or more.

Traditional economic measures:

GDP: is the market value of all final goods andservices produced within a country in a givenperiod of time

Y=C+I+G+NX

GNP: is the market value of all final goods andservices produced by permanent residents ofa country in a given period of time

GNP= GDP+ net factor income fromabroad


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Common alternative index is the rate of growth of incomeper capita or per capita GNP

Per capita GNP: is the per-head value of final goodsand services produced by permanent residents of acountry in a given period of time. It is converted to USD

using the current exchange rate. PPP Measure: the number of units of a countrys

currency required to purchase the same of basket ofgoods and services in the local market that a US $1would buy in the USA. Under PPP, exchange ratesshould adjust to equalize the price of a common basketof goods and services across countries. Penn WorldTables rank countries using the PPP method.


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Comparison of GNP

GNP Per Capita (US $)

Country Exchange rate PPP

UK 24,500 23,550

USA 34,260 34,260

Zimbabwe 480 2,590

Bangladesh 380 1,650

China 840 3,940

India 460 2,390

Sri Lanka 870 3,470


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Problems:

Underreporting of income by developingcountries

High proportion of income is generated

for self-consumption. Prices of non-traded goods are not

appropriately reflected in exchange

rates. Markets are not competitive and

externalities are not reflected.


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1970s

Dethronement of GNP in the 1970s andincreasing emphasis on redistributionfrom growth

Increasing emphasis on non-economicsocial indicators

Economic development consists of thereduction or elimination ofpoverty,inequality and unemployment within thecontext of a growing economy.


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Human goals of economic development :Sens Capabilities Approach: 1985

Economic growth is not an end in itself and hasto enhance the lives people lead and thefreedoms that they enjoy

Capability to function is what matters for statusas a poor/non-poor person and it goes beyondavailability of commodities

Capabilities: freedom that a person has in termsof the choice of his functionings,

Functionings is what a person does withcommodities of given characteristics that theypossess/control


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The concept of functionings reflects the variousthings a person may value doing

Therefore, development cannot focus only onincome, but we also need to look at other factorsimpacting a persons capability to function.

Amartya Sen traced five sources of disparity

between real incomes and actual advantages: Personal heterogeneities

Environmental diversities

Social climate variations

Differences in relational perspectives

Distribution within family


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1990s

World Bank in its 1991 WDR asserted thatthe challenge of development is to improve

the quality of life.

The improved QOL involves higher incomes,better education, higher standards of healthand nutrition, less poverty, a cleanerenvironment, more equality of opportunities,greater individual freedom, and a richer culturallife.


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Economic factors capital

Labor Natural resources

technology

established markets (labour, financial, goods)

Non-economic factors (institutional, social,values) attitudes toward life and work

public and private structures

cultural traditions systems of land tenure, property rights

integrity of government agencies


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Conclusion:Development is a multi dimensionalprocess involving changes in social

structures, popular attitudes, andnational institutions, as well as theacceleration of economic growth, the

reduction of inequality, and theeradication of poverty. (Todaro and

Smith)


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Development is both a physical reality and astate of mind for attaining a better life.

Three basic core values as a practicalguideline for understanding development Sustenance

Self-esteem

Freedom

Specific components of better life vary fromtime to time and from society to society.

Three Objectives of Development:

Increase availability and distribution of basicgoods

Raise levels of living

Expand range of social and economic choicesavailable to individuals

chapter 1economics

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