The construction of Human Development Index requires two steps to be adopted.
1. Construction of relevant indices.
2. Taking the simple average of the indices.
1. Construction of Relevant Indices:
(a) Fixing minimum and maximum value for each indicator of Human Development. While constructing indices the first step is to fix minimum and maximum values of each indicator, the minimum and maximum values fixed by the United Nations Organisation (UNO) for the year 1997 are as below:
PPP here means purchasing power parity. PPP GDP is calculated after eliminating price differences among countries.
These minimum and maximum values have been computed and published by UNO. These are standardized values and commonly applied to all countries.
(b) Computing Individual Indices. The construction of Human Development Index requires the computation of individual indices of all the indicators.
The formula for the construction of individual indices of the indicators is stated as under:
We shall be computing individual indices of educational attainment and adjusted real GDP per capita. We shall first calculate the actual, maximum and minimum values and then apply the formula discussed above.
In order to calculate Human Development Index we are required to construct the following three indices:
(i) Life expectancy index
(ii) Educational attainment index
(iii) Real GDP per capita index
(i) Life expectancy Index of India:
This index measures the degree of the achievement of the country regarding life expectancy of the people in a country. The value of index varies between 0-1. For example, the life expectancy index of India for the year 1997 is 0.63. It means that India’s life expectancy rate is 60% (0.60 x 100).
(ii) Educational attainment index:
This index measures the level of educational attainment of the people. The value of this index also varies between 0-1. Higher index shows higher level of educational attainment. India’s educational attainment rate at present is about 0.57 or 57%. Educational attainment of the people is one of the measure of the quality of life of the people.
(iii) Real GDP per capita index:
Real GDP per capita is also another significant measure of the quality of life of the people. Real GDP is calculated at constant prices. It shows the changes in physical production in real terms. Per capita real GDP is the GDP at constant prices divided by population. Real per capita GDP is also known as real per capita income. It is better measure of the quality of life of the people as compared to per capita income. Higher per capita GDP shows better quality of life of the people. At present out real GDP per capita index is about 0.49.
2. Taking the Simple Average of the three Indices:
After computing the life expectancy index, educational attainment index and real GDP per capita index, we are required to compute the simple average of the three indices.
We adopt the following formula for the calculation of simple average of the three indices:
Human Development Index (HDI):
It appears that India’s Human Development Index is 0.54. In other words, achievement of India’s human development is 54 (.54 x 100) percent. According to this index, India’s rank is human development is 132 out of a total of 174 countries. Canada has the first rank. Its Human Development Index is 0.932. The average Human Development Index of the world is 0.706. Here, in this case, we have seen that welfare of the people is directly related to Human Development Index. It means that higher human development is associated with higher welfare and vice-versa.
In nut shell, we can conclude that human Development Index is the measure of the quality of life of the people. Further Human Development Index (HDI) is better measure and indicator of the welfare of the people than national income. Human Development index is not restricted to the real per capita GDP but it considers longevity (life expectancy) and educational attainment also.