development ii

Development II Dr. E.R. Ojha / 8 December 2013

Per capital income and HDI

1. Per capita income (GDP/GNP per capita)2. Human development index (HDI)3. Linkage between GDP/economic growth and HDI

Per capital income, or income per capita:Total GNP (gross national product) divided by the total population.


What is GNP, then?It is the sum of all incomes, generated through factors of production, in a particular geographical region over a given time period.GNP = GDP + all incomes that come to people of that region from their investments in foreign places (countries, e.g.) – all incomes that go to foreigners as a result of their investments in that region.


GDP (gross domestic product) is the total monetary value, calculated at market prices, of all final goods and services produced by both residents and nonresidents in an economy/region over a certain time period, typically one year.

Economic growth is the process by which the productive capacity of the economy is increased over time to bring about rising levels of national income (GNP).


Per capita income (GNP per capita) is often found used as an indicator/index/measuring tool to measure/ assess a country’s/region’s economic wellbeing, and also the overall level of economic activity of that particular area.

Per capita income is thus used to compare the economic levels/conditions of people living in different areas. For example:


- Rural vs. urban- Developed countries vs. developing countries- Rich vs. poor in a particular country/region/the entire world

Approximately 80 per cent of the world’s total income is produced in the economically developed regions (of the world) where only 20 per cent of the world’s people live.


That also means that only 20 per cent of the world’s people are producing nearly 80 per cent of the total world output.

That is, 80 per cent of the world’s population, who are living in the Third World, are subsisting/living only on 20 per cent of the world’s income.


On average, and overall, the per capita incomes of developing countries are less than 1/20th of the per capita incomes of developed/rich countries.


However, sometimes the comparisons between developed and developing countries in terms of per capita incomes are exaggerated, when official foreign exchange rates are used to convert the developing countries’ national currency figures into US dollars.For example: In 1997, Switzerland had its per capital income (US$44,320) nearly 400 times higher than of Ethiopia (US$110).


The per capita income related conversion/comparison does not take into account the relative domestic purchasing power of the local (developing country’s) currency.

To overcome the above problem/limitation, PPP (purchasing power parity) is used instead of the exchange rate as a conversion factor.


What is PPP?It is the number of units of a country’s currency (e.g. NRs.) required to purchase the same quantity and quality of goods and services in the local market as could be purchased in the US for $1.


Thus, if the domestic prices of a country are relatively lower, PPP measures of GNP (or GNP expressed in terms of PPP) will be higher than the GNP estimated by using the foreign-exchange rates.

So, when PPPs are used the income gaps between rich and poor nations tend to be lower.


Human Development Index (HDI)HDI ranks all countries into three groups:HDI level Group0.00-0.50 Low HDI country0.51-0.79 Medium HDI country0.80-1.00 High HDI country

For a given year, HDI measures relative, not absolute, levels of HDI.


HDI focuses on the ends/goals of development (longevity, knowledge, material choice/income) rather than the means (such as the per capita income/GDP alone).

HDI is also used to compare various categories of people and places within a particular country: Ex: women vs. men; urban vs. rural; eastern vs. farwestern; mountains vs. terai; as well as ethnic groups of people.

development ii

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