Economic Indicators of Development

International organizations such as the World Bank prefer to measure development using economic indicators. There are three main economic indicators which are used to give an indication of the overall economic health of a country:

Three Economic Indicators of Development

  • Gross Domestic Product (GDP) is the total economic value of goods and services (expressed in US dollars) produced within the borders of a country in the course of a year and available for consumption in the market place.
  • Gross National Product (GNP) is the same but includes the value of all services produced at home and abroad. A country such as Ghana will have a relatively similar GDP to GNP because it doesn’t have many companies which produce things abroad: most production takes place within Ghana. America, on the other hand, which is where many Transnational Corporations are based, has a much higher GNP than GDP – Think about MacDonald’s for example –all of those Big Macs sold outside of the USA won’t appear in the GDP of the USA but will appear in the GNP.
  • Gross National Income (GNI) a hideous oversimplification of this is that it’s ‘Gross Domestic Product + the additional income that self-employed people pay themselves +income received from abroad’. This matters to a lot of developing countries who don’t produce much but have large diasporas, or populations living permanently abroad. Take Gambia for example (the country Paul Mendy takes your old toys to at Christmas) – 1/6th of its GNI is from money sent by relatives who abroad, this would not be included in either GDP or GNP.

You get slightly different country rankings if you use GNP or GDP rather than GNI. Don’t worry too much about the differences between the above – with a few exceptions* most developing countries tend to have similar GDPs, GNPs and GNI*s.

GDP and GNI per capita in India
*If you look at India’s Gross Domestic Product, it is the 7th richest country in the world, but if you look at its Gross National Income per Capita, it falls to 151st, due to its enormous population, abut also due to the fact that it consumes a lot of the goods it produces itself, so it doesn’t export much, so there’s not a lot of income coming into the country.

Two further important terms – ‘Per Capita’ and ‘Purchasing Power Parity’

  • Gross National Product Per Capita – GDP/ GNP are often divided by the total population of a country in order to provide a figure per head of population, known as GDP/ GNP per capita.
  • The cost of living varies in different countries – so one dollar will buy you a lot more rice in India than it would in America. Purchasing Power Parity figures for GNI per capita factor in the cost of living which is useful as it gives you more of an idea of the actual standard of living in that country for the average person.

Gross National Income Per Capita

This section provides a closer look different levels of ‘development’ according to this particular economic indicator. Remember, global rankings will vary depending on whether you use GNI, GNP, or GDP. 

One measurement of development The World Bank uses is Gross National Income (GNI), which can be crudely defined as the total value of goods and services produced in a country in a year plus any income from abroad. If you divide GNI by the number of people in the country, you get the average amount of income per person, or GNI per capita.

GNI per capita is widely regarded as a good indicator of the general standard of living in a country, and it is a good starting point for giving us an idea of the extent of global inequalities between countries. For example, the United Kingdom has a GNI per capita of about $43 000, while India has a GNI per capita of about $1600, which is more than 20 times greater.

The World Bank’s map of countries by Gross National Income per capita map is a useful, interactive resources to easily find out how most countries fair by this indicator of development. 

The World Bank’s Four Income Categories

The World Bank categorises countries into one of four categories based Gross National Income per capita (per head): high, upper middle, lower middle and low income countries.

GNI per capita world bank 2014.png

  • High income = $12,736 or more – about 60 countries, including most of Europe
  • Upper middle income = $4,126 – $12,735 – about 60 countries, includes South Africa and China
  • Lower middle income = $1,046 – $4,125 – about 50 countries, mostly in Africa, includes India
  • Low income = $1,045 or less – about 30 countries, mostly in Sub-Saharan

 

Comparing countries by GNI per Capita and total GDP

Top ten countries – GNI per capita

Monaco.jpg

Monaco – ranked number 1 in the world for GNI per capita

1  Monaco 186,950
2  Liechtenstein 115,530
 Bermuda (UK) 106,140
3  Norway 93,820
 Channel Islands (UK) 65,440
4  Qatar 85,430
5   Switzerland 84,180
 Isle of Man (UK) 83,930
6  Luxembourg 77,000
7  Australia 60,070
8  Denmark 58,590
9  Sweden 57,810
10  United States 54,960

Top ten countries Total by Gross Domestic Product

United States.jpg

The United States – ranked number 1 in the world for total GDP

1  United States 18,561,930
 European Union[n 1][19] 17,110,523
2  China[n 2] 11,391,619
3  Japan 4,730,300
4  Germany 3,494,900
5  United Kingdom 2,649,890
6  France 2,488,280
7  India 2,250,990
8  Italy 1,852,500
9  Brazil 1,769,600
10  San Marino 64,443

Question to consider: Why do you think the top ten countries are so different when judged by total GDP compared to GNI per capita?

Evaluating the Usefulness of Economic Indicators of Development

Three Advantages of using GDP/ GNP/ GNI as an indicator of development

  1. GNI figures provide a snap-shot indication of the huge difference between the more developed and less developed countries. In 2016, the GNP per capita in the UK was $43000 while in India it was only $1600. This means that there is 20 times as much money per person in the UK compared to in India
  2. Gross National Income figures are also closely correlated with social development – generally speaking the higher the GNI per capita, the better the education and health indicators are in a country.
  3. Total GDP figures give us an indication of who the most powerful nations are on earth in terms of military power. It’s not a perfect correlation, but the USA, China, Russia and the UK are all in the top ten for GDP and they are the biggest arms producers and consumers in the world too.

Four limitations of using GDP/ GNP/ GNI as an indicators of development

  1. Quality of life (Social Development) may be higher or lower than suggested by GNP per capita.
  2. They don’t tell us about inequalities within countries. The USA has one of the highest GNPs in the world but some extreme poverty.
  3. A lot of production in developing countries may not be included. For example, subsistence based production is consumed locally in the community, and not sold in the market place. Similarly goods obtained illegally on the black market are not included in GNP measurement
  4. They are very western concepts, equating production and economic growth with development. Some countries may not want economic growth and have different goals (Bhutan)

The United States – economically developed but socially retarded? 

The USA is a good example of a country that demonstrates why we can’t rely on economic indicators alone to give us a valid indication of how developed a country is. Despite ranking number 1 for total GDP, the USA does a lot worse on many social indicators of development – See this post – ‘The USA – an undeveloped country?’ for more details.

Review Questions 

  • Define Gross National Income Per Capita and be able to identify some high income and lower income countries.
  • Explain the difference between GNI, GDP, GNP, and understand the significance of Purchasing Power Parity.
  • Outline three strengths of using economic indicators of development
  • Outline at least three reasons why GNP may not be valid measurements of ‘development’
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