As economic growth and economic development work on different areas of the economy, their respective progress is measured in different ways. Measuring economic growth and development comes with unique criteria for each. Below, we explore how each process is measured to determine accurate results and measuring the growth of an economy, as well as how to measure the intangible factors that are related to economic development.
Measuring Economic Growth: GDP
The Gross Domestic Product (GDP) is a measure of the market value of goods and services provided by a country over a period of time, often one year or one quarter. The GDP is calculated by estimating the gross output of goods and services by the country, and subtracting the intermediate consumption (the cost of materials and services used to produce the goods or services sold).
Growth is not indicated by the GDP itself, but rather growth is determined by the percentage in increase of the GDP from one time period to another.
Just measuring nominal GDP does not take into account income made by foreigners in a country or income made by citizens in other countries. For this purpose, the measurement of Gross National Product (GNP, or Gross National Income, GNI) can be used instead to account for money made by citizens abroad and not accidentally including money that was not earned by a country’s citizens.
GDP also does not serve as the best system in order to compare factors such as cost of living for each country. It also doesn’t measure the distribution of wealth per capita. When comparing GDP rates, it is important to adjust for inflation in order to get an accurate percentage rate of growth.
Measuring Economic Development: HDI
The United Nations Development Programme (UNDP) often publishes their measurement of human development in their Human Development Report. The report acquires its calculations by utilizing the Human Development Index (HDI). The HDI was first devised in 1990 as a means of shifting the focus from purely income to human-centric economics. In 2010, a revised HDI was developed to account for inequality in a country. This is sometimes referred to as an IHDI, or the Inequality-adjusted Human Development Index, and is considered far more accurate than the initial HDI, though some still find the old formula useful in some applications. The HDI takes several different factors into consideration to provide some measure on the social and economic development of a population. As of the 2010 revision, the four main criteria used to determine the HDI are:
Older versions of the HDI took slightly different variables into consideration, such as the adult literacy rates. The newer Inequality-adjusted index factors this in by means of expected years of schooling.
Instead of simply using the nominal GDP, using GDP per capita allows for a clearer picture of wealth distribution and standard of living among the country’s population. To even out exchange rates between countries for basis of comparison, money is converted to PPP dollars, or purchasing power parity.
Efforts in economic development will affect the standard of living in one of these four ways, which will cause the numbers to shift over time.