The Frontier of Development EconomicsI. Rich and Poor Countries(1) What is included in GNP? GNP: Gross national product Sum of the value of finished goods and services produced by a society during a given year Excludes intermediate goods Includes income earned by citizens of the country (wage and profit) Inside and outside the countryGDP: Gross domestic product Sum of the value of finished goods and services produced within the borders of a country Including income earned by resident foreignersQPEXGDP EX-exchange rate P-price, market price Q-quantity(2) A. price distortion (P) Relative price. Wage difference-endowment and scarcity of resource. Bubble economyB. Rule of country Service, education, lawey.C. Official exchange rate between U.S. dollars and each national currency.tt1t GDPGDPGDP(%) RateGrowth According to World Bank Development Report, GDP in term of U.S. dollars. Many goods and services are non-traded, such as electric power, services. (3) Japans economic growthYearGNP per capitaGrowth rate (in U.S $)Growth rate (real) 198110603 1.83.6 198210070 -5.3 (Exchange rate)3.2 19839760 -3.1 (Exchange rate)3.6 198410010 2.64.3 198510950 9.45.0 198613200 20.5 (US$ devaluated)2.5 198717200 30.8 (US$ )4.2 198823570 36.5 (US$ )6.3 198925460 8.04.8 199026100 2.54.9 199126960 3.34.3 199228750 6.61.1 199331490 9.50.1 1994 0.7 After 1996, exchange rate of Japanese yuan . Growth rate . 19951.919963.8 1997 0.9 1998 -1.8(4) PPP: purchasing power parity One must measure the per capita income figures in a common currency. To pick a set of prices prevailing in one of the countries and use that set of prices to value the goods of all countries being compared.U.S.AIndiaQPValueQP (rupees)ValueSteel100m200/ton20 billion8m6000/ton48 billionLabor2m5000/per person10 billion4m30000/per person120 billionTotal GNP30 (US $)168 (rupees)Exchange rate is based on the ratio of the price of the traded goods. (U.S.$1=RS 30) Labor: retail sales personnel (million) For steel, in U.S. 200/tonin India 6000/tonexchange rate US$1Rs 30 2006000Using exchange rate conversion methodbillion $5.6 U.S.30168PPP: using U.S. prices for each individual product or services.Steel 8m*$200=$1.6 billion Retail Sales Personnel4m*$5000=$20billion GNP. $21.6billionGNP increases from 5.6 to 21.9 . 36 . 36 .211995Using Official Exchange Rate ConversionUsing Dollars Prices for Each ProductRatioU.S.26980269801.00U.K18700192601.03Canada19380211301.09France24990210300.84Japan39640221100.56Germany27510200700.73India34014004.12China62029204.71Singapore26730227700.85Hong Kong22990229500.99Mozambique8081010.13Tanzania1206405.33(5) Rich and Poor Country Low - income economies, GNP per capita in 1995$430. US$ Excluding China and India. U.S.$290High - income economies, US $ 249309 .5743024930After World War II, the gap was only 28Japan.except Asia andEast Middel Africa, Caribbean, America,Latin :SouthNorthLDC: less developed country.Rich / poor Country times58 1995times52 1985times38 1960times11 1870(6) Long - run Growth Who was the richest country 100 years ago? Level of real GDP per capita (Table)Long-Run Effects of Economic Growth (Table)Economic Growth Rate (Table)(7) Economic Growth Rise in national or per capita income and productEconomic development A rise in per capita income + fundamental changes in the structure of economy. -rise share of industry, service -increase percentage of people who live in cities -age structure changes -consumption patterns change, people no longer have to spend all their income on food, durable and leisure-time products and services.A key element in economic development is the people of the country must be major participants in the process that brought about these changes in structure.There can be no development without economic growth But economic growth does not necessary mean economic development.(8) Development Characteristic(TABLE)Energy use per capita (Figure)Rural population (%) (Figure)Life expectancy (Figure)II. Basic Theories of Development(1) Classical Economists Adam Smith - extension of markets as key element in economic growth tradelabor ofdivision -tion specializaFree trade increases the scope of specialization.David Ricardo Agriculture protectionJohn Mill Free trade and production for the market is the source of prosperity.Karl Marx Extension of market was important for economic developmentKeynesian Growth Model Harrod-DomarBasic Assumption: a.Savings are assumed to be proportional to income S = sy S saving s average propensity to save y incomeb. Labor force L is assumed to grow at a constant exogenous rate n.(or )nLtLLnLtLLPercentage change in labor. c.No technical innovation d. Capital does not depreciateQ Potential output y Actual output k total capital kr required capital.Labo