Measurement of Economic Development

Generally, economic development is a process of change over a long period of time.

Though there are several criteria or principles to measure the economic development, yet none provides a satisfactory and universally acceptable index of economic development.

Hence, it is a complex problem to answer about the measuring of economic development.

R.G. Lipsey maintains that there are many possible measures of a country’s degree of development, income per head, the percentage of resources unexploited, capital per head, saving per head and amount of social capital. But more commonly used criteria of economic development are increase in national income, per capita real income, comparative concept, standard of living and economic welfare of the community etc.

Let us make a detailed study of these measurements for better understanding:

1. National Income as an Index of Development:

There is a group of certain economists which maintains the growth of national income should be considered most suitable index of economic development. They are Simon Kuznets, Meier and Baldwin, Hicks D. Samuelson, Pigon and Kuznets who favored this method as a basis for measuring economic development. For this purpose, net national product (NNP) is preferred to gross national product (GNP) as it gives a better idea about the progress of a nation.

According to Prof. Meier and Baldwin, “If an increase in per capita income is taken as the measure of economic development, we would be in the awkward position of having to say that a country had not developed if its real national income, had risen but population had also risen at the same rate.”

Similarly, Prof. Me de maintains that, “Total income is a more appropriate concept to measure welfare than income per capita.” Therefore, in measurable economic development, the most appropriate measure will be to include final goods and services produced but we must allow for the wastage of machinery and other capital goods during the process of production.

Arguments in Favour of National Income:

There are certain arguments for stressing real national income as a measurement of economic development.

They are:

(i) A larger real national income is normally a pre-requisite for an increase in real per capita income and hence, a rising national income can be taken as a token of economic development.

(ii) If per capita income is used for measuring economic development, the population problem may be concealed, since population has already been divided out. In this context, Prof. Simon Kuznets writes, “The choice of per capita, per unit or any similar measure to gauge the rate of economic growth carried with it danger of neglecting the denominator of the ratio.”

(iii) If an increase in per capita income is taken as the measure of economic development, we are likely to be put in an awkward situation of saying that a country has not developed if its real national income has increased but its population has also increased at the same rate.

Arguments against National Income:

Despite the favourable arguments, national income as a measure of economic development suffers from certain shortcomings:

(i) It cannot definitely be said that economic welfare has increased if the national and even the per capita income may be rising unless the distribution of income is equitable.

(ii) Expansion of national and per capita income cannot be identified with enrichment because the composition of the total output is also important. For example, an expansion of total output could be accompanied by a depletion of natural resources or it could compose of only armaments or could consist of merely a greater output of capital goods.

(iii) It must not only consider what is produced but also how it is produced. It is possible that when real national output grows, the real costs i.e., ‘pain and sacrifice’ of the society may also grow.

(iv)It is difficult to determine proper deflators to eliminate the effects of price changes in an underdeveloped countries.

(v) It is also complicated when average income is rising but unemployment exists due to the rapid growth of population, thus, such a situation is not consistent with the development.

2. Per Capita Real Income:

Some economists believe that economic growth is meaningless if it does not improve the standard of living of the common masses. Thus, they say that the meaning of economic development is to increase aggregate output. Such a view holds that economic development be defined as a process by which the real per capita income increases over a long period time. Harvey Leibenstein, Rostow, Baran, Buchanan and many others favour the use of per capita output as an index of economic development.

The UNO experts in their report on ‘Measures of Economic Development of Under-developed Countries’ have also accepted this measurement of development. Charles P. Kindleberger also suggested the same method with proper precautions in computing the national income data.

Arguments in favour of per Capita Real Income:

The aim of economic development is to raise the living standard of the people and through this to raise consumption level. This can be, estimated through per capita income rather than national income. If national income of a country goes up but the per capita income is not increasing, that will not raise the living standard of the people. That way, per capita income is a better measure of economic development than the national income.

The increase in per capita income is a good measure of economic development. In the advanced countries, per capita income has been on continuous increases because the growth rate of national income is greater than the growth rate of population. This has raised the economic lot of the people. In underdeveloped countries, there is very less capacity to produce per head. So, as the capacity to produce goes up these economies proceed towards economic development.

Increase in per capita income can be better index of an increase in the welfare of the people. In advanced countries, national income has increased much faster than the growth rate of population. It means the per capita real income has been constantly increasing and this has led to the increase in welfare of the people. That way, per capita income can be considered a better index of the welfare of the people.

Arguments against Per Capita Real Income:

The real per capita income, a measure of economic development has been severely criticized by Jacob Viner, Kuznet etc.

(a) According to Meier and Baldwin, “If an increase in per capita income were taken as the measure of development, we would be in the awkward position of having to say that a country had not developed if its real national income had risen, but population has also risen at the same time.”

If in a country an increase in national income is offset by the increase in population, then we would be bound to say that no economic development has taken place. Similarly, if national income in a country has not gone up but population has reduced due to epidemic or war, in that case we would be bound to conclude that economic development is taking place.

(b) When we divide national income by population, the problem of population in that case is ignored. It confines the scope of the study.

(c) In this measure, distributive aspect has been ignored. If national income goes up but there is unequal distribution of income among different sections of the society, in that case rise in national income will be meaningless.

(d) In the underdeveloped countries where per capita income is regarded as a measure of economic development, with the increase in per capita income of these countries, there is also increase in unemployment, poverty and income inequalities. This cannot be regarded as development.

(e) Economic growth is multi-dimensional concept which involves not only increase in money income but also improvement in social activities like education, public health, greater leisure etc. Such improvements cannot be measured by changes in per capita real income.

(f) The data of per capita national income are often inaccurate misleading and unreliable because of imperfections in national income data, and its computation. That way, per capita real income cannot be free from weaknesses. Despite these drawbacks in the measure of real per capita income, many countries have adopted this measure as an indicator of economic development.

3. Economic Welfare as an Index of Economic Development:

Keeping in view the drawbacks of real national income and real per capita measures of economic development, some economists like Coline Clark, Kindleberger, D. Bright Singh, Hersick etc. suggested economic welfare as the measure of economic development.

The term economic welfare can be understood in two ways:

(a) When there is equal distribution of national income among all the sections of the society. It raises economic welfare.

(b) When the purchasing power of money goes up, even then there is an increase in the level of economic welfare. The purchasing power of money can go up when with the increase in national income there is also increase in the prices of goods. That means economic welfare can increase if price stability is ensured.

Thus economic welfare can boost with equal distribution of income and price stability. Higher the level of economic welfare, higher will be extent of economic development and vice-versa.

Arguments against Welfare Index:

In order to assess economic welfare, it is essential to know the nature of national income and the social cost of production. We face lot a practical difficulties while estimating these economic factors. It is on account of this reason that many economists do not consider economic welfare as a good measure of economic development. Also the concept of welfare is subjective in nature which cannot be measured. Also welfare is a relative term which differs from person to person.

4. Comparative Concept:

Economic development is a comparative concept and it can easily be understood and measured. In a simple way, from comparative concept, we can ascertain how much the economic development has been attained in a country.

The comparison can be made by two methods over time period:

(а) Comparison within the country.

(b) Comparison with other countries.

(a) Comparison within the Country:

To compare the economic development of a country over time, we will have to consider the long period and divide it into different phases. For instance, national income in 1990 is Rs. 1,000 crores which rose to Rs, 1,200 crores in 1995 and Rs. 1,800 crores in 2000.

In 2000, it has been registered of amounting Rs. 2,250 crores. Therefore, within the period of five years i.e., from 1990 to 1995 national income increases to the extent of 20 percent (200×100/1000=20%). Form 1995-2000, it rose to 50 percent (600×100/1200) and from 1995-2000, it rose 25 percent (450×100/1800=25%). This can also be drawn with the help of diagram.

The above stated figure exhibits that national income in 1990 was Rs. 1,000 which rose to Rs. 1,200 crores in 1995 and Rs. 1,800 crores in 2000: Therefore, rise in national income over five years period is 20 percent, 50 percent and 25 percent respectively.

(b) Comparison with Other Countries. In this Figures 2 time, is shown on the horizontal axis and national income on vertical axis OY. The curve PP’ depicts the path of development (showing slow rise in income) of country MM’ curve shows the path of development of country B.

In the beginning of the time periods, country B is at a much higher level of national income than country A.But in the meanwhile, the rate of development of country A becomes higher than rate of development of country B. At point E i.e., time period 5, national incomes of both the countries are equal.

In the long run or after time interval, national income of country A becomes higher than of country B. In this way, we can say that country A is more developing economy and country B is a comparatively decaying economy.

5. Measurement through Occupational Pattern:

The distribution of working population in different occupations is also regarded as a criteria for the measurement of economic development. Some economists regard the changes in the occupational structure as a source for measuring the nature of economic development. According to Colin Clark there is deep relation between the occupational structure and economic development. He has divided the occupational structure in three sectors.

(1) Primary Sector:

It includes agriculture, fisheries, forestry, mining etc.

(2) Secondary Sector:

It consists of manufacturing, trade, construction etc.

(3) Tertiary Sector:

It includes services, banking, transport, etc. In under-developed countries, majority of the working population in engaged in primary sector. On the contrary, in developed countries the majority of the working population works in tertiary sector.

A shift in occupational distribution of population from primary sector to secondary and territory sectors shows the movement towards economic development when a country makes economic progress, its working population begins to shift from primary sector to secondary and tertiary sectors. Thus, with economic development the percentage of population engaged in primary sector declines, while the percentage of population working in secondary and tertiary sectors increases.

Here we should note that the measurement of economic development through occupational patterns is not considered as satisfactory on following grounds:

(i) It is not possible to clearly classify the occupations in an underdeveloped economy in three distinct categories

(ii) Secondly, in the early stages of development, the activities of tertiary sector like transport, communications, trade etc. are inadequate and insufficient. Consequently the chances of employment in these activities are very restricted.

6. Standard of Living Criterion:

Another method to measure economic development is the standard of living. According to this view, standard of living and not rise in per capita income or national income should be considered an indicator of economic development. The very objective of development is to provide better life to its people through improvement or upliftment of the standard of living. In other words, it refers to increase in average consumption level of the individual. But, this criteria is not practicably true.

Let us suppose, national income and per capita both increase but the government mops up this income with the way of heavy dose of taxation or compulsory deposit scheme or any other method, in such a situation, there is no possibility to raise to average consumption level i.e., standard of living.

Moreover, in poor countries, propensity to consume is already high and stern efforts are made to reduce superfluous consumption in order to encourage savings and capital formation. Again ‘standard of living’ is also subjective which cannot be determined with objective criterion.

Which is the Best Measure of Economic Development?

After studying all the above methods of measurement of economic development we are likely to be confused and the question might arise as to which of the above measures of economic development is the best. Answer depends on the objective of measuring economic development. However, after considering form different point of view it may be concluded that GNP or per capita is the best method of measuring economic development.

In the words of Prof. R.G. Lipsey, “Whatsoever changes there may be in future in the measurement of economic development they cannot fully replace gross national product (GNP).” Economists and U.N. Organisations use GNP per capita as the measurement of economic development.