Transcript Principles of Microeconomics

Lucas (1988)
“By the problem of development I mean simply
the problem of accounting for the observed
pattern, across countries and across time, in
levels and rates of growth of per capita income.
This may seem too narrow a definition, and
perhaps it is, but thinking about income
patterns will necessarily involve us in thinking
about many other aspects of societies too, so I
would suggest that we withhold judgment on
the scope of this definition until we have a
clearer idea of where it leads us.”
Streeten (1994)
“[W]e should never lose sight of the ultimate
purpose of the exercise, to treat men and
women as ends, to improve the human
condition, to enlarge people’s choices…[A]
unity of interests would exist if there were rigid
links between economic production (as
measured by income per head) and human
development (reflected by human indicators
such as life expectancy or literacy, or
achievements such as self-respect, not easily
measured). But these two sets of indicators are
not very closely related.”
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
per-capita Gross National Product the perhead value of final goods and services
produced by the people of a country over a
given year
per capita Gross Domestic Product the perhead value of final goods and services
produced within a nation’s boarders over a
given year


The Exchange Rate Method: Each country’s
currency is converted into a common currency
(usually US$) and divided by the country’s
population.
In World Bank Data: Data are converted from
national currency to current U.S. $ using the World
Bank Atlas method.
◦ This involves using a 3-year average of exchange rates to
smooth the effects of transitory exchange rate fluctuations.



Problems:
Underreported income or non-measurable income in LDCs
Prices for many goods in all countries are not appropriately
reflected in exchange rates

Purchasing Power Parity (PPP): idea that similar
foreign and domestic goods or (basket of goods)
should have the same price in terms of the same
currency.
◦ How much money is needed to purchase the same basket
of goods in 2 countries?
◦ It is the Purchasing Power of a country’s currency required
to purchase the same basket of goods/services that a US$
will buy in the US.
◦ International prices are constructed for large baskets of
goods & services (400-700 goods) by averaging prices
(expressed, say in US$ - Phome/PUS) for each good over all
countries.
 then averaged across categories to get 150 relative prices.

Purchasing Power Parity (PPP)
◦ National Income is then estimated by valuing its output at
these international PPP prices.
◦ Recall, since the price of non-traded goods are lower in
LDCs (since wages are lower), the PPP measurements of
national income are higher than the exchange rate method.
World Development Indicators, Online
Ethiopia
Switzerland
GNI per capita
(2010)
GNI per capita
PPP (2010)
$390
$1,040
$71,530
$50,170
182% difference 42% difference

Start with Income Distribution
Romania
South Africa
Per Capita
GDP
(2005 PPP)
6,845
7,641
Share of
poorest 20%
Share of
richest 20%
8.0
3.0
38
63
Source: World Development Indicators
2000
Romania
South Africa
2011
Romania
South Africa
Life Expectancy
at birth
Expected
years of
schooling
Mean years
of
schooling
GNI per
capita (2005
PPP)
70.5
54.8
12
13.1
9.9
8.2
6,759
7,338
74
52.8
14.9
13.1
10.4
8.5
11,046
9,469
Source: UN Human Development Report, 2011

Human Development Index (HDI)
◦ Developed by the United Nations Development Program
(UNDP)
 HDI ranks all countries on a scale of 0 (lowest
human development) to 1 (highest development)
 (1/3) longevity: life expectancy at birth
 (1/3) knowledge: expected years of schooling and
mean years of schooling
 (1/3) standard of living: real per capita income
adjusted for the differing PPP of each country’s
currency
Romania
South Africa
Per Capita
GDP
(2005 PPP)
6,845
7,641
Share of
poorest 20%
Share of
richest 20%
8.0
3
38
63
Source: World Development Indicators
2000
Romania
South Africa
2011
Romania
South Africa
Life Expectancy
at birth
Expected
years of
schooling
Mean years
of
schooling
GNI per
capita (2005
PPP)
HDI
Value
70.5
54.8
12
13.1
9.9
8.2
6,759
7,338
.704
.616
74
52.8
14.9
13.1
10.4
8.5
11,046
9,469
.779
.619
Source: UN Human Development Report, 2011
HDI
Rank
50th
124th
Source: UN Human Development Report, 2011
Indicator
Agriculture as a % of GDP, 2010
Rural Population as a % of total,
Low
Income
Countries
25%
72%
Middle
Income
Countries
10%
51%
High
Income
Countries
1%
22%
33
11
61%
71
19
8
83%
39
12
8
98%
6
9%
2%
2%
2010
Birth Rates (per 1000), 2009
Death Rates (per 1000), 2009
Adult Literacy Rates, 2009
Infant Mortality Rate (per 1000
live births), 2009
Raw Agricultural Materials as a
% of Total Exports, 2010
Source: World Development Indicators
(2006)
Indicator
Agriculture as a % of GDP, 2010
Rural Population as a % of total,
Low
Income
Countries
25%
72%
Middle
Income
Countries
10%
51%
High
Income
Countries
1%
22%
33
11
61%
71
19
8
83%
39
12
8
98%
6
9%
2%
2%
2010
Birth Rates (per 1000), 2009
Death Rates (per 1000), 2009
Adult Literacy Rates, 2009
Infant Mortality Rate (per 1000
live births), 2009
Raw Agricultural Materials as a
% of Total Exports, 2010
Source: World Development Indicators
(2006)
Indicator
Agriculture as a % of GDP, 2010
Rural Population as a % of total,
Low
Income
Countries
25%
72%
Middle
Income
Countries
10%
51%
High
Income
Countries
1%
22%
33
11
61%
71
19
8
83%
39
12
8
98%
6
9%
2%
2%
2010
Birth Rates (per 1000), 2009
Death Rates (per 1000), 2009
Adult Literacy Rates, 2009
Infant Mortality Rate (per 1000
live births), 2009
Raw Agricultural Materials as a
% of Total Exports, 2010
Source: World Development Indicators
(2006)