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Approaches to International Comparisons of Human
Development
Beyond GDP• French President Nicolas Sarkozy calls for
commission to study alternative measures of welfare.
Economist Link
FT Link
Critique of GDP as Measure of Welfare
1. Need better measures of economic performance
2. Don’t measure production, measure well-being.
3. Well-being is multi-dimensional and not just about income.
4. Use subjective measures as well as objective measures.
5. Pragmatically measure sustainable economy.
6. Physical measures of environment
Commission on the Measurement of Economic Performance and Social Progress
1. Better Measures of Economic Performance
• Services especially are not adjusted for quality.
• Government services are measured by inputs but quality of outputs is not measured.
• Some expenditures (military, police, security) are defensive and don’t add to welfare.
How do we measure value-added of non-market goods?
• Production of government bodies and non-market institutions is measured at cost.
• Value of housing services of owner-occupied housing valued at imputed rental value, i.e. market rent of similar housing stock.
• Value of non-compensated household work valued at zero.
2. Measure Well Being
A. Measure income and consumption
B. Give More Prominence to Distribution of Income.
C. Incorporate Measures of Leisure
National Income vs. Domestic Income
• Net Factor Income [NFI] is income earned on overseas work or investments minus income generated domestically but paid to foreigners.
GNI GDPGross National Income Gross Domestic Product
= income earned by national residents
= income created within domestic borders.
GNI = GDI +NFI
A. Income vs. Output
UN Main Aggregates Link
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 201190.0%
95.0%
100.0%
105.0%
110.0%
115.0%
120.0%
Macau: GDP/GNI
B. Consumption vs. Production
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
5000
10000
15000
20000
25000
Household final consumption expenditure per Capita, PPP
Hong Kong Singapore
Co
nst
ant
2005
in
tern
atio
nal
B. Distribution of Income
• GDP per Capita shows how much income people have if all income were split evenly.
• But income is never split evenly and evenness of division varies across countries.
• Examine the distribution of income
Why?
Rawls: Justice as Fairness• Welfare of all individuals within a society
have a non-negotiable value and must be considered when considering social welfare.
• To consider welfare of all individuals, must consider the system of distribution.
• “Veil of Ignorance” Only pure-hearted way to think about system of distribution is to think about it from the standpoint of someone who does not know where they will fall in the distribution.
• “Difference Principle.” Link
Median Income
• Per Capita Income = Total Income divided by Total Population
• Median Income = Income of the person in the
precise middle of the distribution.
Better representative of the typical person.
Estimating the Median
• Estimate the median by examining the per capita income of people in the middle percentile.
• In China, middle income 20% of the population makes 14.66% of the GDP. Per capita income of the middle is
World Development Indicators China, 2005Income share held by third 20% 14.66GDP per capita, PPP (constant 2005 international $) 4114.57352
.1466 .14660 .
.2 .2t t
t t
GDP GDP3 15 98
POP POP
Distribution of IncomeWorld Development Indicators: 2000-2005
Income share held by
0
10
20
30
40
50
60
70
0 1 2 3 4 5
Quintile
%
China Sweden Brazil
Quintile: Twenty % of the Population
Cumulative Distribution
Quintile China lowest 20% 5.73 second 20% 9.8 third 20% 14.66 fourth 20% 22 highest 20% 47.81
Cumulative0.00% 0
20.00% 5.7340.00% 15.5360.00% 30.1980.00% 52.19
100.00% 100
• What fraction of income is earned by the population below a certain fraction.
Lorenz CurveMapping the Cumulative Distribution
Cumulative Distribution: China 2005
0
10
20
30
40
50
60
70
80
90
100
0.00% 20.00% 40.00% 60.00% 80.00% 100.00%
%
Evenly distributed economy looks like a 45% line
Cumulative Distribution: Perfectly Even Economy
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 20% 40% 60% 80% 100%
%
Cumulative Distribution0% 0%
20% 20%40% 40%60% 60%80% 80%
100% 100%
Gini Coefficient• Size of the gap
between the Lorenz curve is the key measure of economic inequality.
• A country’s Gini coefficient is equivalent to the size of the area between its Lorenz curve and the 45º angle
Lorenz Curve
0
10
20
30
40
50
60
70
80
90
100
0.00% 20.00% 40.00% 60.00% 80.00% 100.00%
%
Perfect China
Estimating the Gini Coefficient
• Size of the Gini Coefficient is the size of the triangle under the perfect Lorenz curve minus the area under a country’s Lorenz curve (multiplied by 2 for normalization)
1. Area under the triangle is (1 x 1)/2 = ½
2. Break the country’s Lorenz curve into trapezoids. Find the area of each trapezoid.
China
0
1
0.5219
0.3019
0.1533
0.0573
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 1 2 3 4 5
%
5 Trapezoids
.2
.2.2.2.2
Quintile
LCq-1
If total range is divided into q = 1,…Q evenly spaced points with LCq = Lorenz cuve at point q, the area of the trapezoid is
LCq
1/Q
1
1 1
2 q qLC LCQ
Ex. q= 4, the 4th Quintile
And
So the area of the 4th of 5 trapezoids is
4 .5219ChinaqLC
3 .3019ChinaqLC
4 3 .5219 .3019.2 .2
2 20.0
LC LC
8238
Estimating the Gini Coefficient3. Add up the area of all the trapezoids
4. Subtract from area of triangle (1/2) than double to normalize
5. Multiply by 100 to get index
11
11 1 2*.30688 .38624
Q
q qq
Gini LC LCQ
38.62GINI
By breaking population into deciles we could get an even more accurate estimate
Country Name GINIBrazil 56.4China 41.5Sweden 25
C. Leisure
• Time Use Surveys National statistical agencies increasingly take surveys of how people are using their time to give a better measure of leisure.
Commission on the Measurement of Economic Performance and Social Progress
France Germany USA Korea Japan Hong Kong
943
1,079
1,174
1,478
1,342
1,573
Hours Worked per Working Age Adult, 2011
3. Multidimensional Measures of Well-being
A. Material living standards;B. Health;C. Education;D. Personal activities including workE. Political Voice and GovernanceF. Social connections and relationshipsG. EnvironmentH. Insecurity
Capabilities as Development
• Economic philosopher Amartya Sen argues that because of diversities of needs and ambitions of people, development should be defined as “advancing richness of human life.” Link
• Sen defines capability: “(i.e. the opportunity to achieve valuable combinations of human functionings — what a person is able to do or be)” Link
Positive Freedom
Measures of Development
FunctioningsThings to Do or
Be That we Value &
Have Reason to Value
ResourcesThings that we
have
CapabilitiesSet of
functionings That might be
achieved
UtilitySubjective
Satisfaction
Money, commodities
Different People value different functionings
Different People require different level of resources to achieve functionings
Activity, roles
Deprivation, Poverty Constraints on Capabilities
Human Development Index
• Under Mahbub al-Haq, UN constructs an index of human development to measure people’s opportunity to make choices abou their lives Link
• Emphasizes health, education and income as proxies for capabilities of achieving functionalities.
Human Development Index• Combine three measures of welfare
1. Income2. Health3. Education
http://hdrstats.undp.org/en/tables/default.html
Create Comparable Index• Compare the value of a development
indicator with its hypothetical or observed maximum and minimum. – Assess how well a country is doing filling the
gap between
actual value - minimum valueDimension Index =
maximum value - minimum value
Scaling variables chosen based on history
http://hdr.undp.org/en/media/HDR_2010_EN_TechNotes_reprint.pdf
Example: Health
0.
actual value - 20 actual value - 20Health Index =
83.2 - 20 63.274.7 - 20 54.7
Malaysia Health Index = 86663.2 63.2
Combine Multiple IndicatorsGeometric Average
• If you have N indicators multiply all of the indices by each other then
1 2 ....NNI I I I
HDI vs. GNI
• Studies quantitative measurements that assess “happiness” often using survey methods which rely on self-reporting on subjective well-being.
• Suppose the top of the ladder represents the best possible life for you and the bottom of the ladder the worst possible life. Where on this ladder do you feel you personally stand at the present time?.
4. Subjective Measures
- 10 - . - .- 0
R. Veenhoven, World Database of Happiness, collection Happiness in Nations Link
Comparisons of Happiness• Happiness research develops many
results for individuals.
WomenPeople with lots of friendsThe young and oldMarried and cohabiting peopleThe highly educatedThe healthyThose with high income
The unemployedNewly divorced and separated people
Andrew Oswald Esmee Fairbank Lecture 2006
Happier Less Happy
Money and Happiness
• Set Point Theory: Everyone has own personal level of happiness which can be temporarily moved by events but not for long. (Short run only).– Focus illusion: People evaluate happiness
relative to some idea. Idea changes with circumstances.
• Capabilities Theory: Money expands freedoms (Long run only)
Easterlin Paradox• Modern international evidence suggests a
strong correlation between GDP per capita and average level of happiness.
• GDP per Person Rises over time, but subjective measures of Well Being do not. Explanation: People get happiness from relative income, economic growth is like a treadmill.
Link
Proto-text: In general, how happy would you say you are?:- very happy- fairly happy- not very happy
Very = 3...not very = 1 USA Happiness: 1 to 3 Point Scale
2
2.05
2.1
2.15
2.2
2.25
2.3
2.35
2.4
1946
1963
1971
1973
1975
1977
1980
1983
1985
1987
1989
1991
1993
1996
2000
2004
2006
Cite as: R. Veenhoven, World Database of Happiness, collection Happiness in Nations, Overview of happiness surveys using Measure type: 111B / 3-step verbal Happiness, viewed on 2011-09-02 at http://worlddatabaseofhappiness.eur.nl
Does Money Buy Happiness
Deaton, Angus, 2008, http://www.nber.org/papers/w13317
World Happiness Report UN Sustainable Development Solutions Network
• Updated data for a variety of “happiness” studies
• World Happiness Report
http://worlddatabaseofhappiness.eur.nl/
Critiques of Subjective Measures
1. Orthodox: Study Revealed Behavior through Actions not Words
2. No precise definition of “happiness” which may have different meaning to different people or across countries or across languages.
3. Measures of happiness may be biased by phrasings or ordering of questions.
4. Is Happiness the purpose of life?
5. Pragmatic Approaches to Sustainable GDP
A. Natural Capital Accounting
B. Green GDP
A. Natural Capital Accounting
• Gross Capital Formation is the Accumulation of Physical Man-made assets.
• Sustainable GDP: Subtract extraction of sub-soil assets from GDP as disinvestment.
• Critique: Also add the accumulation of sub-soil assets
Link
“Green GDPTwo Methods
• EDP1 = GDP - Imputed treatment cost • EDP2 = GDP – Environmental degradation costs
GREEN ACCOUNTING PRACTICE IN CHINA
(Draft Report) April 2008 http://www.caep.org.cn/english/paper/Green-GDP-Accounting-Pratice-in-China-Draft-by-UNEP-Tongji-Team.pdf
6. Physical Measures of the Environment
A. Economic Value of Environmental Damage
B. Millennium Development Goals
Millennium Development Indicators
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