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Tuesday, 8 March 2011

Measurement of Economic Development

The economist have adopted different methods of measure economic development . Generally, there are four methods of measuring economic development.

Real national income refers to the country's total output of final goods and services in real term rather than in money terms. Thus, the economic development is regarded as an increase in gross national product of a country over a long period of time .A long run expansion in production can be achieved and rural development. in this measure, the phrase over a long period of time implies a sustained increase in the real income. thus price changes will be considered while calculating real gross national product.A short period rise in national income which occurs during the upswing of the business cycle does not constitute economic development.

This measure fail in to be an indicator of economic development on the following grounds.
1. If a rise in real national income is accompanied by a faster growth rate in population.
2. It tells us nothing about the distribution of income in the economy.
3. There are number of goods and services which are difficult to be accessed in money terms.
4. The national income would work out to be many time the actual by double counting.
5. Income earned through illegal activities is not included in national income e.g. bribery, smuggling etc.
6. There arises the difficulty of including transfer payment in the national income.
7. It is shortage of correct statistical data due to lack of trained staff.
8. There is not accurate information regarding income of the people due to no maintenance of their accounts.
9. The transfer payment can not become a part of national income.
10. The expenditure of depreciation allowances, accidental damages repair etc is not included in national income.
Therefore, GNP cannot be regarded as a perfect indicator of economic development.

Economic development is defined as the process whereby real per capita income of a country increases over long period of time. the real per capita income is regarded a an index of development. if it rises, this means that the value of goods and services revived by the average man has all improvement in the living conditions of people of a country.An in increase in real per capita income is regarded as the best available index of economic development.

These are the merits for adopting real per capita income as the measure of economic development.
1. it can be calculated easily.
2. it is available almost all countries.
3. it focuses on development for eradicating poverty and to raise the standard of living through increased flow of goods and services.
4. it indicates the social and economic structure of the societies.
5. it is a good indicator for classifying the levels of development of different countries.

This has its own demerits or short coming which are as below:-
1. it ignores the resultant distribution of national income and it can be taken as a partial index of economic welfare.
2. it ignores the composition and quality of goods and services. Hence despite, rising of per capita income, the economic welfare of common man may not have improved.
3. it ignores the social opportunity costs of development in the form of changing beliefs, values and attitude during the process of change.
4. the valuation of goods and services tends to be biased.
5. the population figures in most of the less developed countries are not accurate.
6. Economic figures are not accurate due to many reasons.
7. in self employed sector , it is not easy task to estimate the income because a large segment of subsistence sector remains un-monetized in most of the less developed countries.

There is a tendency to measure the economic development from the point of view economic welfare.economic development is regraded as a process whereby there is an increase in the consumption of goods and services of individual.
According to Okum and Richardson,
"Economic development is sustained and secular improvement in materiel well being which may consider to be reflected in an increasing flow of goods and services."

( i ) Consumptions of goods and services depends on the tastes and preference of individuals. Therefore, it is not correct to have the same weight in preparing the welfare index of individuals.
( ii ) if the total output is composed of capital goods, it may be at the cost of a reduced output of consumer goods.
( iii ) the output may be valued at market prices where as economic welfare is measured by an increase in real national income.
( iv ) from the economic welfare point of view we must consider not only , what is produced but how it is produced.
( v ) we cannot equate an increase in output per head with an increase in economic welfare.

Some economist have tried to measure economic development in terms of physical quality of life index. the physical quality of life index consists of some social indicators.
the social indicators are listed as under:
( i ) health facilities.
( ii ) food and nutrition.
( iii ) education including literacy and skills.
( iv ) employment opportunities and conditions of work.
( v ) transport and communication facilities.
( vi ) consumption of basic necessities.
( vii ) housing including house-hold facilities.
( viii ) recreation and entertainments.
( ix ) social security.
( x ) political rights.

Some problems may arise in constructing a common index of physical quality of life as an indicator of economic development of country.
( i ) There is no uniform policy among the economists as to number and type of items to be included in this index.For example UNRISD ( United Nations Research Institute for Social Development) used eleven to eighteen items.On the other hand Morris D.Morris uses only three items i.e. life expectancy at birth, infant mortality and literacy rate in constructing a physical quality of life index.
( ii ) There is a problem of assigning weights to the various items which may depend upon the social economic and political set up of a country.
( iii ) The social indicators are concerned with current welfare and are not related to the future.
( iv ) The majority of indicators are inputs and not outputs such as education, health etc.
( v ) The indicators involve value judgments.

For the sake of simplicity economists and organizations use per capita income as the measure of economic development.


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