‘Hdi Is A Composite Index That Is A Far Better Representative Indicator Of Economic Development Than Gnp Per Capita.’ Discuss

Studying development is essentially about measuring how developed one country is compared to other countries or to the same country in the past. It is common knowledge that each country is aiming to be defined as developed. For us is to determine which measure is a better representative of how country is developed HDI or GNP per capita.

Firstly, we will define what economic development is. Secondly we will compare Gross National Product and Gross Domestic Product. Thirdly, we will outline the problems with these indicators. Finally, we will try to find out whether HDI is a solution to the problems identified in GNP/GDP.

What is economic development?

As the definition states economic development is a “sustainable increase in living standards that implies increased per capita income, better education and health as well as environmental protection.” In Process of Economic Development (J.M. Cypher and J.L. Dietz) defines two different ways of measuring economic growth and development. First is the income per person/economic growth (GNP/GDP) and second which describes development as a “complex, multi-faced notion” and that it should be captured by broader means than income like for example HDI. Others differ the ways of measuring development by dividing it to economic development and human development. Where economic development is a measure of how wealthy a country is - and of how this wealth is generated and human development measures the extent to which people have access to wealth, jobs, knowledge, nutrition, health, leisure and safety.

However before we focus on defining both indicators we need to see what is meant by development. Dictionaries state that it is an act of improving by expanding, enlarging or refining. Also it can be a process in which something passes by degrees to a different stage (especially a more advanced or mature stage). The last but not the least is that it is a state in which things are improving and that kind of development is of our interest.

Gross National Product (GNP) vs. Gross Domestic Product (GDP)

After discussing what is development alone let us focus on the indicators which define how countries are developed. First discussed by us will be Gross National Product. GNP is the total value of all final goods and services produced by a country's factors of production and sold on the market in a given time period. The difference between GDP is that the income can be derived from sources within (like GDP) or outside the country’s borders. The values differ because none of today’s world economies is so hermetic to the rest of the world that it would not derive any income outside its boundaries. Hermetic in the sense that there are no flows of investment between country and migration of workers.

Let us show it on an example. If “A” has foreign direct investments (FDI) outside “A”, and “A” loans money from its banks to “B”, than flow of profits, dividends or interest this income will be a part of “A” GNP but not GDP. On the other hand aforementioned FDI of “B” in “A” will create income within “A” borders and therefore would be included in “A” GDP. Though not all that income will be “A” GNP.

Next type of income flow between “A” and “B” that can result in differences between GDP and GNP is due to abovementioned migration of work forces. We can argue that as they work outside the borders none of their income would be part of “A” GDP. However they often leave their families inside the “A” borders and as the way of supporting them they send a portion of their income within “A” frontier.

As a real example we may quote the figures for Ireland. The GDP in 2005 was €161,163m and the GNP just €135,914m (World Bank). This was calculated in nominal GNP which measures the value of output during a given year using the prices prevailing during that year. Over time, the general levels of prices rise due to inflation, leading to an increase in nominal GNP even if the volume of goods and services produced is unchanged. On the other hand we have real GNP which measures the value of output in two or more different years by valuing the goods and services adjusted for inflation.

Problems with GNP/GDP

GNP is merely a gross measure of market activity which counts only money transactions and excludes goods and services (like taking care, cleaning, food preparation) that people provide each other free. In terms of developed economies like United Kingdom it would not be a huge difference, however in less developed countries much of its production takes place in the household economy like growing crops and farming animals for the purpose of the household not selling. Therefore it would not be included in countries GNP/GDP.

The World Bank itself recognizes many of these problems. Although they reflect the average incomes in a country, GNP per capita and GDP per capita have numerous limitations when it comes to measuring people’s actual well-being. Taking as example countries which dig oil, where sheikhs earn millions and other live in poverty, the GNP per capita will count them equal dividing their income and not showing how equitably income is distributed.

They do not account for pollution, environmental degradation, and resource depletion. As a result of the problems outlined above, much of GDP can be composed of: fixing mistakes and social failures from the past borrowing resources from the future, and shifting functions from the traditional household and community to the monetary economy.

World Bank acknowledges that history offers a number of examples where economic growth was not followed by similar progress in human development and growth was achieved at the cost of greater inequity, higher unemployment, weakened democracy, loss of cultural identity, or over-consumption of resources needed by future generations.

Just as there are states that have not benefited from economic growth, there are also states, like Kerala, a state in India, which have raised the standard of living without economic growth. (http://multinationalmonitor.org/hyper/mm0795.08.html) The GDP per capita in Kerala is about $1,000 a year, around $200 less than the Indian average. However, despite low per capita incomes, Kerala’s 31 million people have achieved nearly total