Skip to main content

Measuring Economic Development - introduction

In this section we consider the following sub-topics in detail
  • Single indicators
  • Composite indicators

Single indicators

You need to be able to:

Distinguish between GDP per capita figures and
GNI per capita figures.

As we saw in Macroeconomics, there are various measures of national income and economic growth. GDP and GNP are two of these single indicators. GDP considers all output that has been domestically produced, whereas GNP, now often referred to as GNI (or Gross National Income) takes into account net property income from abroad or paid abroad.

Few less developed countries (LDC's) have national companies operating in overseas markets, but there is a good chance that they will have foreign multinational companies (MNCs) operating in their country.

Developing economies often offer a good low cost base for production for MNCs, which attracts them to locate there.

However, MNCs tend to return profits overseas to where the parent company is located, rather than reinvesting in the local economies where they are located and operate. This can mean large net outflows of profit from developing economies.

In addition, the large overseas debts of many LDC's results in further large outflows in the form of interest payments.

So, if we want a measure of national income to focus on domestic development, it may be better to look at GDP figures, rather than GNP. However, for many reasons this measure may not be adequate.

You need to be able to:

Compare and contrast the GDP per capita figures and the GNI per capita figures for economically more developed
countries and economically less developed countries.

The main point here is that if MNCs from developed countries set up in an LDC and they then proceed to exploit the LDC by repatriating (sending home) profits and resources, the GNI per capita figure could be smaller than GDP per capita.

You need to be able to:

Distinguish between GDP per capita figures and GDP per capita figures at purchasing power parity (PPP) exchange

Remember that Purchasing Power Parity removes the effects of changing exchange rates so that cross-country comparisons can be made. (Big Mac anyone?)