Economic Development Todaro & Smith Slides Ch 2 Updated Spring 2019.pptx

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Economic Development, 12 th Edition M. P. Todaro and S. C. Smith Slides for Chapter Two Updated 2019
2.1 Defining the Developing World The World Bank ranks countries on Gross National Income (GNI) per capita Low-Income Countries (LICs) Lower-Middle Income Countries (LMCs) Upper-Middle Income Countries (UMCs) High-income OECD countries Other high-income countries (See Table 2.1 and Figure 2.1)
Table 2.1 Classification of Economies by Region and Income, 2013
Table 2.1 Classification of Economies by Region and Income, 2013 (continued)
Table 2.1 Classification of Economies by Region and Income, 2013 (continued)
2.2 Basic Indicators of Development: Real Income, Health, and Education Gross National Income (GNI) Gross Domestic Product (GDP) PPP method instead of exchange rates as conversion factors (see Figure 2.2)
Purchasing Power Parity Adjustment* (*Note: This is a Simple Heuristic Version to give a sense of the process– This Simplified Version Makes No Allowance for Consumer Substitution; for details see Ch. 2, note 6.) (1) P ij q ij Expenditure, item i, country j International relative price, for item j (relative to the U.S. by convention) (2) P ij P i (us) Divide (1) by (2) to derive value at U.S. prices: P ij q ij P ij P i (us) Sum up for country j, get GNI for country j valued at US prices
*An Aside on Adjusting PPP for Consumer Substitution Adjustments are made because otherwise the resulting PPP measure would essentially assume that relative prices prevailing in the U.S. (i.e., the numeraire currency) also prevail elsewhere: The problem: this would imply the resulting total incomes would not be “base-country invariant”: they would differ if, e.g., conversions were made to the UK pound sterling). Accounting for relative price differences recognizes substitutions people make toward lower-priced goods in their market basket; and thus gives a more accurate comparison of living standards. Non-PPP adjusted figures provide a useful indicator of the ability of a nation to buy goods and services in dollars abroad; but they are fundamentally misleading regarding the ability to buy domestically. Sources and details in Economic Development , 12 th Ed, Ch. 2, note 6.
Figure 2.1 Nations of the World, Classified by GNI Per Capita Source: Data from Atlas of Global Development , 4th ed., pp. 16-17: World Bank and Collins. 2013. ATLAS OF GLOBAL DEVELOPMENT: A VISUAL GUIDE TO THE WORLD’S GREATEST CHALLENGES, FOURTH EDITION . Washington, DC and Glasgow: World Bank and Collins. doi: 10.1596/978-0-8213-9757-2. License: Creative Commons Attribution CC BY 3.0
Note on National Income Definitions and Calculations The “Atlas” method for computing Gross National Income (GNI) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad Data are in current U.S. dollars converted using the World Bank Atlas method Gross national income, in purchasing power parity, is GNI converted to international

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