Economics of Development: Per Capita Income

Economics of Development: Key Concepts

• Purchasing Power Parity (PPP) indicates that relative prices of goods vary by country; poorer countries generally have lower prices for basic services like meals and haircuts.
• Per capita income (PCY) is often misleading as a sole measure of development; poverty and income distribution also play critical roles.
• Low productivity in agriculture and high expenditure on necessities are common traits in countries with low PCY.
• Investment and savings levels tend to be low in underdeveloped nations, along with outdated technology and poor human capital.
• Exports in poorer countries are often limited to primary commodities.

Measuring Poverty

• Headcount Index identifies the number of individuals living below the poverty line ($1.90 a day at PPP) with approximately 900 million classified as poor globally.
• Poverty Gap assesses the average shortfall from the poverty line compared to income levels below it, illustrating the depth of poverty.
• Food Energy Method calculates the population lacking sufficient income for basic nutritional needs, showing variability across countries.

Global Poverty Statistics

• Significant reductions in poverty since 1990, particularly in East Asia; populations living in poverty decreased from 996 million to 147 million between 1990 and 2012.
• The poverty rate in Sub-Saharan Africa remains high; about 42.7% of its population falls below the poverty line by 2012.
• Global poverty dropped from nearly 2 billion in 1990 to about 897 million in 2012.

Randomised Control Trials (RCTs)

• RCTs are employed to determine effective poverty alleviation strategies by comparing experimental and control groups dynamically over time.
• Challenges include the potential for unrepresentative samples and biased outcomes as participants might alter their behavior due to being in an experiment.

Human Development Index (HDI)

• HDI evaluates development based on life expectancy, educational attainment, and per capita income at PPP.
• Index values range from 0 (minimum) to 1 (maximum); average HDI represents overall development effectiveness.

Multidimensional Poverty Index (MPI)

• MPI considers multiple poverty aspects: education, health, and living standards, assigning weights to various indicators.
• A person is considered multidimensionally poor if they lack one-third of the weighted indicators; current estimates suggest around 800 million individuals are affected.

Economic Growth and Catch-Up Potential

• Poor nations must grow faster than wealthy nations to catch up; an example given indicates it could take 300 years for a poor country growing at 4% to match a rich country growing at 3%.
• At a growth rate of 2%, a typical poor nation might take 150 years to reach the living standards of wealthier counterparts.

Key Learning Objectives

• Understand measurements of income inequality and the development gap on global scales.
• Comprehend the PPP as a critical factor in comparing living standards internationally.
• Recognize the limitations of PCY as a development metric.
• Familiarity with different poverty measurement methods and their implications.
• Recognize the role of RCTs in poverty alleviation strategies.
• Knowledge of the World Bank's poverty reduction approaches and indices like HDI and MPI.

Chapter Summary Insights

• The disparity between rich and poor nations continues to grow, with rising Gini ratios indicating increased inequality.
• The number living on less than $1.90 has decreased, but absolute poverty remains a significant global challenge.
• PCY's correlation with underdevelopment traits highlights the need for broader measures of economic health.
• Development metrics like HDI and MPI provide comprehensive insights beyond income alone.

Explore the concept of Per Capita Income (PCY) as a critical measure of development. This quiz assesses your understanding of how PCY varies across countries and its significance in evaluating living standards through Purchasing Power Parity (PPP) rates. Test your knowledge of economic indicators and their implications for development.