Select your language

Suggested languages for you:
Log In Start studying!
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
|
|

All-in-one learning app

  • Flashcards
  • NotesNotes
  • ExplanationsExplanations
  • Study Planner
  • Textbook solutions
Start studying

Measures of Development

Save Save
Print Print
Edit Edit
Sign up to use all features for free. Sign up now
Economics

You may know that countries are sometimes classified as developed, developing, or emerging. But what does this classification mean? How is a country's development measured? This explanation will cover economic development and how economists measure it.

What is economic development?

As an economics student, you are must be definitely familiar with economic growth. But what is economic development? Is it the same as economic growth?

No, they don't mean the same thing.

Economic development is the process of improving the standard of living and well-being of the people in an economy.

Fundamentally, economic development is about the expansion of people's capabilities (people development) over time. Therefore, economic development goes beyond increasing the income and output associated with economic growth and also takes into account poverty reduction and income redistribution.

Economic growth is important for economic development: the more goods and services produced, the more likely the standard of living is to improve. Nevertheless, there is no guarantee that an economy experiencing economic growth will also experience economic development.

Economic development indices

Just as there are indicators to measure and quantify economic growth, the same is true for economic development.

Economic development indicators are used to measure the well-being of people by considering factors that influence the standard of living in an economy.

There are a few main indicators that measure economic development. They are:

  1. HDI - Human Development Index.
  2. HPI - Human Poverty Index.
  3. Multidimensional Poverty Index.
  4. GPI - Genuine Progress Indicator.

The Human Development Index (HDI) as a measure of development

This is the most used index to measure economic development. It takes the following three factors into account:

  1. Health. The HDI measures the average life expectancy in a specific country and compares it to the global average.
  2. Education. The HDI measures the mean years of schooling and expected years of schooling in a country.
  3. Standard of living. The HDI measures the gross national income (GNI) per head, using the principle of purchasing power parity, PPP.

In determining the HDI, each component has an equal weighting of 33%. The closer the HDI is to 1, the more developed the country is.

The table below shows the top five countries with the highest HDI ranking with their GDP and GDP per capita rankings.

HDI rankCountry HDI scoreGDP rankGDP per capita rank
1Norway0.95732nd4th
2Ireland0.95527th3rd
3Switzerland0.95520th2nd
4Hong Kong 0.94940th15th
5Iceland0.949110th7th

Table 1. HDI, GDP and GDP per capita ranking.

As you can see, despite these countries having the highest ranking in terms of economic development, they do not maintain the highest ranking in GDP, and there is a disparity in GDP per capita which is an indicator of economic growth. This illustrates how a country's level of income and output does not directly translate to a high level of economic development.

Strengths of the HDI

As the HDI is the most commonly used measure of economic development, it has many strengths:

  • Reliable. The information is updated on an annual basis and sourced reliably.
  • Accurate. The HDI is superior to single indicators as it uses two types of social data (health and education) along with one type of economic data, which gives a broader perspective.
  • Useful. The HDI is a very useful tool for governments aiming to devise policies focusing on economic and human development.

Weaknesses of the HDI

These are the main weaknesses of the Human Development Index as a measure of development:

  • Simplicity. It has been criticized for being too simple and therefore unable to give a real representation of the level of development in an economy. This is backed by the argument that economic and human development are broader concepts with far greater dimensions than the ones captured in the HDI.
  • Not equally weighted. All the factors used to calculate a country's HDI have equal weight, but there is a concern that wealth (GNI) still has too much weight in the HDI. This fact leaves room for richer countries to artificially manipulate their rankings. In addition, the GNI does not take into consideration the hidden economy which tends to make up a larger proportion of less developed countries' economies.

The hidden economy involves economic statistics that are not measured by the government and ignore government regulations and rules.

The hidden economy includes legal activities that avoid paying taxes, illegal activities (the sale of stolen goods or drug trafficking), and non-market activities (like having your own fishery).

The hidden economy is also called the underground economy, black market, and shadow economy.

Some other criticisms that the HDI as a development measure has received are:

  1. A long-life expectancy is not equivalent to a high quality of life.

    Someone with a high life expectancy could be working a high-risk job for less than average pay.

  2. The number of years people spend in school doesn't accurately measure the quality of the education they receive.

  3. The HDI alone does not measure the extent of inequality in a country. It is possible to have a satisfactory HDI rank and a huge income gap between the very wealthy and the very poor.

  4. The HDI fails to give an account of whether the development is sustainable.

    Country Y might be experiencing economic growth and improved living standards, but issues such as pollution and corruption remain.

The Genuine Progress Indicator (GPI) as a measure of development

The Genuine Progress Indicator builds off GDP as an economic indicator by including measures of the impact of economic growth on the environment as well as various social factors. The GPI takes GDP into consideration while also measuring the negative impacts of growth.

In this measurement, resource depletion and degradation are subtracted from the positive impacts of growth to determine the level of development. The GPI tries to get a bigger picture of the average quality of life by measuring information such as housework, parenting, the costs of crimes, and the value of volunteering work.

The Human Poverty Index (HPI) as a measure of development

The Human Poverty Index complements the HDI as it is an indication of the standard of living in an economy. It considers the level of poverty and deprivation of a community in a country. The HPI uses two indices:

  1. The HPI-1 is used to measure developing countries.
  2. The HPI-2 is used for developed countries that are part of the Organization for Economic Co-operation and Development (OECD).

The HPI has limited utility as it combines the average deprivation levels of each dimension and it can’t be linked to any particular group of people.

The Multidimensional Poverty Index as a measure of development

The MPI replaced the HPI in 2010. It differs from the HPI as it assesses poverty at the individual level.

If one person is deprived of a third or more of ten (weighted) indicators, the global index identifies them as 'MPI poor'. The extent of poverty is measured by the percentage of deprivation a person is experiencing.

Economic happiness and economic growth

Can be happiness linked to economic growth? In economics, measuring happiness is very subjective. This would involve the evaluation of a wide range of factors that affect wellbeing, quality of life, and self-reported levels of happiness.

Some of these factors are:

  • Income
  • Quality of consumption
  • Quality of work
  • The welfare of family members
  • Leisure
  • Environment, politics, and other non-economic factors that can affect happiness, such as religious freedom.

The Gross Domestic Happiness Index

Despite the number of factors that impact happiness and how subjective it is, there is an index that economists use to measure happiness: the Gross Domestic Happiness (GDH) index.

From the neoclassical economic perspective, higher income levels correlate with higher levels of utility and economic welfare, as a person is more able to purchase the goods and services (food, shelter, healthcare, and education) that would improve their quality of life.

‘Happiness’ is a complicated concept to quantify for measuring purposes, but many economists claim 'psychological surveys' can give a reliable measure of the level of happiness or satisfaction people are experiencing in their lives.

Does economic growth increase happiness?

As for the relationship between happiness and economic growth, the Easterlin Paradox pokes a hole at it. Upon attaining a certain level of per capita income developed countries failed to increase happiness according to the national happiness polls.

According to this paradox, it would seem that a person's absolute income whilst living in a rich country is not as important as their relative income. Therefore, people were more concerned with being 'comparatively better off than those around them' than simply having money.

In 2008, Betsey Stevenson and Justin Wolfers refuted this paradox, claiming that there was in fact a genuine connection between GDP per capita and happiness.

Other reasons why a rising GDP may not lead to increased happiness include the fact that the allocation of resources for the purpose of economic growth may bring about negative costs to society, which will impact its happiness levels.

A country could achieve economic growth thanks to mining, but if they're mining in their natural parks, this will be detrimental to society in the future: people will have fewer natural places to visit and pollution will increase. This, in turn, will affect their health in the long run.

Measures of Development - Key takeaways

  • Economic development is the process of improving the standard of living and well-being of the people in an economy.
  • Economic development and economic growth aren’t the same.
  • The main indicators that measure economic development are:
    1. HDI - Human Development Index
    2. HPI - Human Poverty Index
    3. Multidimensional Poverty Index
    4. GPI - Genuine Progress Indicator
  • The HDI is the most used indicator. It consists of three components: health, education, and standard of living. Each component has an equal weighting of 33%.
  • The GPI builds off GDP as an economic indicator by including measures of the impact of economic growth on the environment as well as various social factors.
  • The HPI is a complement to the HDI as it is an indication of the standard of living in an economy. It considers the level of poverty and deprivation of a community in a country.
  • The Multidimensional Poverty Index assesses poverty at an individual level.

Measures of Development

The indicators for measuring development include openness of the economy to international trade, political stability and security, malnutrition levels, GDP per capita, GNI per capita, unemployment levels, exchange rates etc.

Some of the most used indices are:

The indices of measuring developments are, The Human development index

The Human poverty index 

The Genuine Progress Indicator index

The Multidimensional poverty index 

The most used index measuring development is the Human Development Index (HDI). It consists of three components: health, education, and standard of living. Each component has an equal weighting of 33%.

Development is measured by considering the social and economic factors that affect the standard of living of people in a country. For example, real GDP per capita, literacy rates, access to safe water, and political stability and security.

Measuring development refers to the use of various human economic indicators, development indices, correlations, and statistics in order to compare the level of social and economic freedom between countries.

Final Measures of Development Quiz

Question

What is the difference between economic growth and economic development?

Show answer

Answer

Economic growth reflects quantitative changes in a country's economy, such as growth of national income or per capita income. For example, an increase in GDP and GNI per capita. 


Economic development is concerned with the standard of living of the people and freedoms available to them as citizens. It considers factors such as changes in income, economic investments and access to healthcare.

Show question

Question

Which of the following is not considered in calculating HDI?

Show answer

Answer

Happiness

Show question

Question

Name two indicators that measure economic development. 

Show answer

Answer

Any two from:

  1. HDI - Human Development Index
  2. HPI - Human Poverty Index
  3. Multidimensional Poverty Index
  4. GPI - Genuine Progress Indicator 

Show question

Question

What are economic development indicators used for?

Show answer

Answer

They are used to measure the well-being of people by considering factors that influence the standard of living in an economy.

Show question

Question

Each component of the HDI has an equal weight of __%

Show answer

Answer

33

Show question

Question

Finish the sentence: 

The closer the HDI score is to 1, the ________

Show answer

Answer

more developed the country is considered (by HDI standards).

Show question

Question

A country with a high HDI score has a high GDP rank.

Show answer

Answer

False

Show question

Question

What are some strengths of the HDI?

Show answer

Answer

Some strengths of HDI are: 

  • Reliable. The information is regularly updated on an annual basis, and sourced reliably, ensuring that the information is accurate.
  • Accurate. It is superior to single indicators as it uses two types of social data (health and education) along with one type of economic data, which gives a broader perspective. Therefore, making it a more accurate measure. 
  • Useful. It is a very useful tool for governments aiming to devise policies focusing on economic and human development. 

Show question

Question

What are some weaknesses of the HDI?

Show answer

Answer

Some weaknesses are:

  • Simplicity. It has been criticized for being too simple, and therefore unable to give a real representation of the level of development in an economy. This is backed with the argument that economic and human development are much broader concepts with far greater dimensions than as captured in the HDI. 
  • Not equally weighted. All the factors used to calculate a country's HDI have equal weight, but there is a concern that wealth (GNI) still has too much weight in HDI weighting, which leaves room for richer countries to artificially manipulate their rankings. In addition, GNI does not take into consideration the hidden economy - which tends to make up, larger proportion of less developed countries' economies. 

Show question

Question

What is the hidden economy?

Show answer

Answer

The hidden economy involves economic statistics that are not measured by the government and ignore government regulations and rules.

Show question

Question

What are some other criticisms of the HDI?

Show answer

Answer

Some other criticisms are: 

  1. A long-life expectancy is not equivalent to a high quality of life.

  2. The number of years people spend in school doesn't accurately measure the quality of education.

  3. The HDI alone does not measure the extent of inequality in the country, as it is possible to have a satisfactory HDI rank yet a huge income gap between the very wealthy and very poor. 

  4. It fails to give account as to whether the development is sustainable.

Show question

Question

What is the Genuine Progress Indicator (GPI)?

Show answer

Answer

The GPI builds off GDP as an economic indicator by including measures of the impact of economic growth on the environment, as well as various social factors. 


The GPI takes GDP into consideration while also measuring the negative impacts of growth.

Show question

Question

What is the Human Poverty Index (HPI)?

Show answer

Answer

The HPI is used to complement the HDI. It is an indication of the standard of living in an economy, which considers the level of poverty and deprivation of a community in a country. 

Show question

Question

What are the two indices the HPI uses to measure poverty?

Show answer

Answer

  1. HPI-1 which is used to measure developing countries.
  2. HPI-2 which is used for Organization for Economic Co-operation and Development (OECD) developed economies.

Show question

Question

What is the Multidimensional Poverty Index?

Show answer

Answer

It is an index that assesses poverty at an individual level. 

Show question

Question

Name three factors that affect happiness.

Show answer

Answer

Any three from:

  • Income
  • Quality of consumption
  • Quality of work
  • Welfare of family members
  • Leisure
  • Environment
  • Politics 
  • Non-economic factors such as religious freedom.  

Show question

Question

What index do economists use to measure happiness?

Show answer

Answer

Gross Domestic Happiness (GHD) index

Show question

Question

What is the neoclassical economic view on happiness?

Show answer

Answer

From the neoclassical economic perspective, higher income levels correlate with higher levels of utility and economic welfare, as a person is more able to purchase the goods and services - food, shelter, healthcare, and education - that would improve their quality of life.

Show question

Question

What does the Easterlin Paradox show?

Show answer

Answer

That when countries attain a certain level of per capita income, happiness doesn't increase beyond that point.

Show question

60%

of the users don't pass the Measures of Development quiz! Will you pass the quiz?

Start Quiz

Discover the right content for your subjects

No need to cheat if you have everything you need to succeed! Packed into one app!

Study Plan

Be perfectly prepared on time with an individual plan.

Quizzes

Test your knowledge with gamified quizzes.

Flashcards

Create and find flashcards in record time.

Notes

Create beautiful notes faster than ever before.

Study Sets

Have all your study materials in one place.

Documents

Upload unlimited documents and save them online.

Study Analytics

Identify your study strength and weaknesses.

Weekly Goals

Set individual study goals and earn points reaching them.

Smart Reminders

Stop procrastinating with our study reminders.

Rewards

Earn points, unlock badges and level up while studying.

Magic Marker

Create flashcards in notes completely automatically.

Smart Formatting

Create the most beautiful study materials using our templates.

Sign up to highlight and take notes. It’s 100% free.