GEOG 2400 GEOGRAPHY OF WORLD DEVELOPMENT

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GEOG 2400 - GEOGRAPHY OF WORLD DEVELOPMENT

• The Measured Wealth of Nations and Income
  Inequality Issues Within and Between Nations

Spring 2002
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The Wealth of a Nation

• Over 200 years ago, Adam Smith wrote The annual
  labour of every nation is the fund which
  originally supplies it with all the necessities
  and conveniences of life which it annually
  consumes.
• This concept underlies our notions of GDP and
  GNP, measures used by finance experts of each
  nation to quantify the wealth of that nation as
  determined by the sum of expenditures required to
  support this consumption of goods and services.
• GDP Gross Domestic Product
• GNP Gross National Product
• GDP was pioneered by US (Simon Kuznets) during WW
  II to help track and manage our war effort
  production.

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GDP or GNP?

• Gross Domestic Product - the total value (amount
  spent) of the production of goods and services in
  an economy minus imports of goods and services.
• Gross National Product - GDP plus the net income
  from abroad (profits or losses of overseas
  investments/assets accruing to the nations
  economy).
• GDP and GNP use final (consumer) expenditures
  i.e. private final expenditure government final
  expenditure increase in stocks gross fixed
  capital formation exports of goods and
  services.
• This prevents double counting e.g. price paid to
  farmer for milk by dairy, price paid dairy by
  supermarket, price paid supermarket by shopper.

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General Rules of Thumb

• From the point of view of assessing development,
  GNP is generally used when considering indices
  such as debt servicing or aid (e.g. External Debt
  as GNP) that involves international accounting.
• GDP is generally used when assessing the wealth
  of individuals (e.g. GDP/capita) across nations.
• Where national accounting is deficient and
  particularly where much of the economy does not
  take place in organized markets (i.e. the
  shadow or informal economy with barter systems,
  undeclared cash-in-hand payments, etc.), GDP/GNP
  values will be grossly underestimated.
• OECD nation data will thus usually be more
  reliable than developing nation data.

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GDP reliability

• Since GDP/cap has both a numerator and a
  denominator, errors in calculating both can
  introduce over or underestimates in this
  indicator.
• Clearly, national accounting procedures, income
  declaration patterns, population census counts,
  etc. will differ between nations and is generally
  less precise and/or complete in the poorer
  nations.
• However, if both GDP and population are
  underestimated (or more rarely, over-estimated),
  errors will somewhat cancel out.
• GDP figures, where available, are usually fairly
  good at capturing the overall visible economy.

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GDP Diverging

• Last year's HDR (UNDP 2000) graphed the income
  range of the richest and poorest five nations
  over 172 years - the divergence is astounding.
• The ratio between the richest nations income and
  the poorest is now over 701, up from 31 in
  1820, 111 in 1913, 351 in 1950 and 441 in
  1973.
• Growth in GDP does not always mean progress for
  all peoples - GDP/capita and GDP/capita growth
  figures mask internal wealth distribution
  patterns (e.g. in Brazil, GDP growth 1971-89 was
  3, but the GDP share of the poorest 20 grew
  only 0.8).

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More Troubles with GDP

• Doesnt distinguish between good and bad forms of
  expenditures in terms of actual economic well
  being e.g. expenditures on medical services to
  treat avoidable illnesses, the clean up of an
  environmental disaster, or on weapons used to
  fight a civil war.
• Does not take into account the degradation and
  depletion of natural resources (e.g. forests,
  soils) and social capital (educational standards)
  which will be needed to sustain and increase
  future GDP.
• Doesnt value leisure time or conservation -
  i.e. the value associated with not working or not
  consuming.
• Thus GDP and GDP growth doesnt completely equate
  with level of well-being.
• Many ecologically-minded economists believe we
  need a different index of welfare e.g. ISEW/GPI
  (see graphs).

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Population Factors In

• Why has the gap in GDP/cap been increasing?
  Multiple dimensions, one of which is population
  increase and demographic structure.
• LDCs generally have higher population growth
  rates (r2-3) and consequently, increasingly
  youthful (economically unproductive)
  populations.
• For GDP/cap to grow, the production of goods and
  services in an economy has to grow at a
  proportionately faster rate per annum than the
  increase in population. The bigger the
  difference, the faster/larger the GDP/cap
  increase.
• The industrialized nations have seen total GDP
  consistently rise at a much faster rate than
  population whereas many LDCs have seen smaller
  relative increases and in several cases, GDP has
  risen more slowly than population causing GDP/cap
  to fall.

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The Demographic Transition

• As pointed out in an earlier class, the
  industrialized nations have gone through a
  demographic transition that has paralleled their
  economic transition from rural/agricultural to
  urban/industrial.
• A drastic decline in death rates has been
  followed (with a lag) by a similar decline in
  their birth rates.
• Declining death rates has resulted in significant
  increases in longevity, with average life
  expectancy at birth increasing to 77 in the most
  developed nations (Japan80) (note it is around
  50 in the least developed nations).
• A large percentage of the population is
  economically active and it has been relatively
  easy to grow the total GDP faster than the
  population due to the employment of technology
  and rapid rises in per worker productivity and
  average value of goods and services produced.

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Regional Demographic Progress
(source Wright Nebel, 2002)
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The Population Trap

• Many developing nations maintain very high crude
  birth rates/1000 (e.g. Asia 15-27, Africa 38)
  compared to the industrialized nations (e.g. USA
  14, European average 10).
• However, their crude death rates/1000 may be as
  low, or lower than the industrialized nations
  (e.g. USA 9, France 9, Central America region 5,
  Asia region 8). Growth rates can thus be well
  over 2, even 3 per annum.
• Developing nation populations are youthful with
  very high s of dependents under the age of 15 -
  for example, the proportion less than 15 in the
  USA 22, L.America 32, Africa 45
• With population growth so high, total GDP needs
  to grow proportionally faster to register
  significant improvements in GDP/cap.
• Without rapid increases in productivity and a
  switch to higher value products from raw
  materials, per capita wealth can stagnate and
  fall further behind.

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Bursting populations outstrip economic growth
(source Wright Nebel, 2002)
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Using GDP and GDP/cap

• Convenient, tangible, seems to provide generally
  meaningful comparisons, for example, US 6.6 x
  better off than Mexico.
• US GDP 1999 9.1 trillion or 32,400/cap
• Mexico GDP 1990 484 billion or 4,900/cap
• However, before making comparisons we need to
  make sure we have apples and apples.
• Specifically, we need to account for exchange
  rate problems and purchasing power differences
  (i.e. artificially over-valued or undervalued
  currencies differential market price levels for
  identical/similar products) to get a sense of
  true wealth.
• The International Comparison Project (ICP)
  establishes purchasing power parity in US for
  over 100 countries the other UNDP estimates are
  derived from US universities (U.Penn.).

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Baskets of Goods

• The PPP uses a similar survey as the Consumer
  Price Index, which tracks a basket of over 200
  goods and services purchased by an average
  citizen on a regular basis
• FOOD AND BEVERAGES (breakfast cereal, milk,
  coffee, chicken, wine, full service meals and
  snacks)
• HOUSING (rent of primary residence, owners'
  equivalent rent, fuel oil, bedroom furniture)
• APPAREL (men's shirts and sweaters, women's
  dresses, jewelry)
• TRANSPORTATION (new vehicles, airline fares,
  gasoline, vehicle insurance)
• MEDICAL CARE (prescription drugs and medical
  supplies, physicians' services, eyeglasses and
  eye care, hospital services)
• RECREATION (televisions, cable television, pets
  and pet products, sports equipment, admissions)
• EDUCATION AND COMMUNICATION (college tuition,
  postage, telephone services, computer software
  and accessories)
• OTHER GOODS AND SERVICES (tobacco and smoking
  products, haircuts and other personal services,
  funeral expenses).

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UNDPs PPP

• The PPP currency values reflect the number of
  units of a country's currency required to buy the
  same quantity of comparable goods and services in
  the local market as one U.S. dollar would buy in
  an average country.
• The average country is based on a composite of
  all participating countries, so no single country
  acts as the base country.
• US GDP 31,872/cap PPP and 32,400/cap
  unadjusted or 1.6.
• Mexico GDP 8,297/cap PPP and 4,900/cap
  unadjusted or 69.
• Each average American is thus only 4 x better off
  than each average Mexican in terms, not 6.6 x
  (and is this itself real?).
• The Economist tried to provide a more pop-culture
  approach by developing its famous BigMac PPP
  index using the ubiquitous McDonalds hamburgers
  and published exchange rates (e.g. in 2000 - US
  2.43, Malaysia 1.19, Mexico 2.09, Switz.
  3.97).

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INEQUALITY

• Increasing inequality between and within nations
  has been one or the most fundamental and marked
  outcomes of world development patterns.
• Simon Kuznets (1955) theorized that it was normal
  in the process of development, having observed
  the 19th century growth processes of the
  industrialized nations, for the development of a
  nations economy to be accompanied by an
  increased inequality in wealth distribution.
• Kuznets further suggested that this inequality
  would lessen once a certain level of average per
  capita income had been reached.
• Recent trends from the industrialized nations
  suggest that this may not be the case, since in
  many nations, inequality has been increasing (see
  Table 1.4 in your HDR 2001).
• The issue of inequality is fiercely debated
  between conservatives and liberals, free-market
  proponents and advocates of social democracy.
• Is it OK to have tremendous differences in wealth
  distribution if those with the least are
  nevertheless becoming better off?

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Lorenz Curves

• Within-nation inequality is generally measured
  with a Lorenz Curve, plotting of households or
  population on the X axis and share of household
  income or GDP on the Y axis, by quintiles (per
  20 of total X).
• The greater the curve away from the 45 degree
  straight-line, the greater the degree of
  inequality.

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Gini Extremes
100 80 60 40 20 0
100 80 60 40 20 0
0 20 40 60 80 100
0 20 40 60 80 100
Perfect equality
Extreme inequality
Gini 0.0 (min)
Gini 1.0 (max)
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Y
100
Richest 20
80
47
60
Percentage Share of Household Income
40
27
20
13
9
Poorest 20
4
0
0
20
40
60
80
100
100
X
Percentage of Households
Gini (20406080100)-(4132653100) 104
.100 52
(5100) (20406080100)
200
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Simple Gini Formula (as used in HDR to give value
of 0-100)
n
n
?
(xi)
-
?
(yi)
. 100
G
i1
i1
n
-
(n.100)
?
(xi)
i1
The bigger the G, the greater the inequality -
perfect equality 0, extreme inequality 100.
 
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Gini Coefficients by Region