Economic Development

Contact Information

• Email: Nancy.Virts@csun.edu• Phone: 818-677-2434 or 2462• Office: BB 4256 • Office Hours: Tuesday and Thursday 1-2,

Thursday 6-7 and by appointment

Contact

• My website can be found through the Econ Dept website under faculty.

• It has class syllabus , readings and other course materials

• I will post any powerpoints of lectures used

• I will contact you by University Email

Class rules

• DO NOT DISRUPT THE CLASS IN ANY WAY– No Talking– No Cell Phones– Computers may be used only to look at class

material– No Reading of Other Material

Suggestions for Success

• Read the syllabus, have it available at home and school

• Attend class both physically and mentally• Have a regular study schedule• Do not take this class if you cannot come

every week.

Course Requirements

• One Midterm– Essay– worth 100 points

• Paper – Worth 100 points

• Comprehensive final– Will be given only on date scheduled which is

December 9 at 8 pm– Worth 200 points

• Economic growth is very uneven• A look at a satellite photo taken makes this

very clear• Not all area with light have same standard of

living• Some dark areas have low population density

but not all

Why isn’t the whole world developed?

• Differences in resources• Differences in culture• Maybe part of the answer but not all of it• Consider the next satellite photo of North and

South Korea, countries with similar resources and culture

Why do we care about economic growth?

• Economic Growth is connected to well being• Correlation between GDP per capita and life

expectancy and literacy

GDP, Life Expectancy, and Literacy

Copyright©2004 South-Western

Cost of slow growth in India

• Economic growth was slow in India prior to 1981

• After economic reforms were implemented in the 1980s, per capita growth increased from 1.4 % per year to 2.89 in the 1980s, 4.19% in 1990s and 6.78% from 2001-2006

• Swaminathan S. Anklesaria Aiyar estimates that if economic reforms had taken place 10 years earlier, 14.5 million infant deaths could have been avoided

• In addition there would have bee 261 million fewer illiterates, and 109 million fewer poor people.

No Easy Answers

• Will look at growth and development from different perspectives

• Before growth can be explained it must be measured.

• How do we measure size of economy?

Measurement Issues

• When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.

• Before WWII there were no statistics to measure the size of the whole economy

THE MEASUREMENT OF GROSS DOMESTIC PRODUCT

• Gross domestic product (GDP) is a measure of the income and expenditures of an economy.

• It is the total market value of all final goods and services produced within a country in a given period of time.

Measurement of GDP

• GDP is the Market Value . . .”– Output is valued at market prices.– Cannot add eggs to cars to oranges directly– GDP is a weighted average– When prices are determined in markets they

reflect the marginal value people place on them.

Measurement of GDP

• Of All Final . . .”– It records only the value of final goods, not

intermediate goods (the value is counted only once).

– If a baker buys flour, it is not part of GDP, the bread produced from it is. If you buy flour in the supermarket it is part of GDP.

Measurement of GDP

• Goods and Services . . . “– It includes both goods (food, clothing, cars) and

services (haircuts, doctor visits). • Includes only those goods and services

produced in market– Not those produced at home

• A women marries her gardener and GDP falls• Important to remember because in developing

countries many goods may be produced outside the market

– No illegal goods• Prostitution is part of GDP in Nevada, not CA• Important to remember differences in legal structure

when comparing different countries

Measurement of GDP

• “ . . . Within a Country . . .”– It measures the value of production within the

geographic confines of a country.

• GNP is a similar measure– total value of all final goods and services produced

by a country’s citizens regardless of where produced.

GDP and Welfare

• GDP is the best single measure of the economic well-being of a society.

• GDP per person tells us the income and expenditure of the average person in the economy.

• Higher GDP per person indicates a higher standard of living.

• GDP is not a perfect measure of the happiness or quality of life, however.

GDP and Welfare

• Some things that contribute to well-being are not included in GDP.– The value of leisure.– The value of a clean environment.– The value of almost all activity that takes place

outside of markets, such as the value of the time parents spend with their children and the value of volunteer work

Problems with GDP measurement for developing economies

• Does not include non traded goods– Home production– Illegal activities

• Data may not be accurate– Limited resources for data collection– Difficult to count production in agricultural area– Incentive to under report production to avoid

taxes etc

Growth vs Development

• Growth rate of GDP may rise without development– Discovery of oil or other natural resources

• Development measured by increases in literacy, health care etc.

• Most of the time they are correlated but not always

GDP per Capita

• GDP per Capita is GDP per person– GDP/population

• GDP and GDP per capita can be different– China vs. Switzerland

• Which measure is best depends on the problem– Marketing Rolex watches vs. KFC

Example Ghana

year GDP (PPP) (billion dollars)

GDP per capita(PPP) dollars

2007 32.56 1400

2008 34.94 1500

2009 36.58 1500

Real Vs. Nominal

• Nominal GDP values the production of goods and services at current prices.

• Real GDP values the production of goods and services at constant prices

Real vs. Nominal

• An accurate view of the economy requires adjusting nominal to real GDP by using a measure of inflation like the GDP deflator or the CPI.

Nominal to Real GDP

• Converting Nominal GDP to Real GDP– Nominal GDP is converted to real GDP as follows:

R eal G D PN o m in a l G D P

G D P d efla to r2 0 X X2 0 X X

2 0 X X

1 0 0

Or CPI20xx

• CPI is calculated by finding how the cost of purchasing a fixed basket of goods changes over time

• Problems to be aware of include– Substitution bias (If relative prices change the

composition of the basket shifts)– Quality changes

• How do we compare GDP between different countries with different currencies?

• Exchange rates – How much one currency trades for another– Determined by the supply and demand for

currency which depends on traded goods only– Fluctuate daily

• Many goods, like Big Macs are not traded between countries.– Services like haircuts, rents etc,

• These tend to be much cheaper in poor countries than developed countries

Purchasing Power Parity

• If exchange rates are used to compare the size if these countries to developed countries will make them seem smaller than the really are.

• Should use PPP to compare size of economies across countries– Calculated by taking a basket of goods and finding

how much it costs in different countries

How much difference does it make?

• For Ghana in 2009• GDP in official exchange rate was 14.76 billion

dollars• GDP in PPP was 36.58 billion dollars

Alternate Measures

• Life expectancy, infant mortality, height by age can all be used to judge standard of living

Growth Calculations

• Growth rate for a year is calculated by (GDPt+1 –GDPt )/GDPt

• Growth rate over N years is calculated by GDPt+N=GDPt(1+g)N

Examples

• Nominal GDP for Ghana was 16.7 billion dollars in 2008 and 14.9 billion in 2007. What was the rate of growth?

• (16.7-14.9) /14.9 = .12 or 12%

• Do you think these numbers are using exchange rates or PPP?

• Real GDP growth in Ghana was 7.3%, what was happening to prices?

• Prices were Rising

Examples

• If the GDP of Ghana is 16.7 billion dollars in 2008 and growth rate of GDP is 5% for 10 years, how much will GDP be in 2018?

• GDP 2018=16.7(1+.05)10=27.2