II. Comparing Levels Of Development
Countries are unequally endowed with natural resources. For example, some countries benefit from fertile
agricultural soils, while others have to put a lot of effort into artificial soil amelioration. Some
countries have discovered rich oil and gas deposits within their territories, while others have to
import most “fossil” fuels. In the past a lack or wealth of natural
resources made a big difference in countries' development. But today a wealth of natural resources
is not the most important determinant of development success. Consider such high-income countries as
Japan or the Republic of Korea. Their high economic development allows them to use their limited natural
wealth much more productively (efficiently) than would be possible in many less developed countries.
The productivity with which countries use their productive
resources - physical capital, human
capital, and natural capital - is widely recognized
as the main indicator of their level of economic development.
Theoretically, then, economists comparing the development of different countries should calculate
how productively they are using their capital. But such calculations are extremely challenging, primarily
because of the difficulty of putting values on elements of natural and human capital. In practice economists
use gross national product (GNP) per capita or gross
domestic product (GDP) per capita for the same purpose. These statistical indicators are easier
to calculate, provide a rough measure of the relative productivity with which different countries use
their resources, and measure the relative material welfare in different countries, whether this welfare
results from good fortune with respect to land and natural resources or from superior productivity
in their use.
Gross Domestic Product and Gross National Product
GDP is calculated as the value of the total final output of all goods and services produced in a single
year within a country’s boundaries. GNP is GDP plus incomes received by residents from abroad
minus incomes claimed by nonresidents.
There are two ways of calculating GDP and GNP:
- By adding together all the incomes in the economy - wages, interest, profits, and rents.
- By adding together all the expenditures in the economy- consumption, investment, government purchases
of goods and services, and net exports (exports minus imports).
In theory, the results of both calculations should be the same. Because one person’s expenditure
is always another person’s income, the sum of expenditures must equal the sum of incomes. When
the calculations include expenditures made or incomes received by a country's citizens in their transactions
with foreign countries, the result is GNP. When the calculations are made exclusive of expenditures
or incomes that originated beyond a country’s boundaries, the result is GDP.
GNP may be much less than GDP if much of the income from a country’s production flows to foreign
persons or firms. For example, in 1994 Chile’s GNP was 5 percent smaller than its GDP. If a country’s
citizens or firms hold large amounts of the stocks and bonds of other countries’ firms or governments,
and receive income from them, GNP may be greater than GDP. In Saudi Arabia, for instance, GNP exceeded
GDP by 7 percent in 1994. For most countries, however, these statistical indicators differ insignificantly.
GDP and GNP can serve as indicators of the scale of a country's economy. But to judge a country's
level of economic development, these indicators have to be divided by the country's population. GDP per
capita and GNP per capita show the approximate amount
of goods and services that each person in a country would be able to buy in a year if incomes were
divided equally (Figure 2.1). That is why these measures are also often called "per
In the Data Tables at the end of this book
GNP per capita is shown not only in U.S. dollars but also in PPP dollars - that is, adjusted with the
help of a purchasing power parity (PPP) conversion
factor. The PPP conversion factor shows the number of units of a country's currency required to buy
the same amount of goods and services in the domestic market as one dollar would buy in the United
States. By applying this conversion factor, one can, for example, convert a country's nominal GNP
per capita (expressed in U.S. dollars in accordance with the market exchange rate of the national currency)
into its real GNP per capita (an indicator adjusted
for the difference in prices for the same goods and services between this country and the United States,
and independent of the fluctuations of the national currency exchange rate). GNP in PPP terms thus
provides a better comparison of average income or consumption between economies.
In developing countries real GNP per capita is usually higher than nominal GNP per capita, while
in developed countries it is often lower (Table 2.1). Thus the gap between
real per capita incomes in developed and developing countries is smaller than the gap between nominal
per capita incomes.
Table 2-1. Nominal and real GNP per capita in various countries, 1999
||GNP per capita
|GNP per capita
Although they reflect the average incomes in a country, GNP per capita and GDP per capita have numerous
limitations when it comes to measuring people's actual well-being. They do not show how equitably a
country's income is distributed. They do not account for pollution, environmental degradation, and
resource depletion. They do not register unpaid work done within the family and community, or work
done in the shadow (gray) economy. And they attach
equal importance to "goods" (such as medicines) and "bads" (cigarettes, chemical weapons) while ignoring
the value of leisure and human freedom. Thus, to judge the relative quality of life in different countries,
one should also take into account other indicators showing, for instance, the distribution of income
and incidence of poverty (see Chapters 5 and 6),
people's health and longevity (Chapter 8), access to education (Chapter 7),
the quality of the environment (Chapter 10), and more. Experts also use
composite statistical indicators of development (Chapter 15).
Grouping Countries by Their Level of Development
Different organizations use different criteria to group countries by their level of development.
The World Bank, for instance, uses GNP per capita to classify countries as low-income (GNP per capita
of $765 or less in 1995), middle-income (including lower-middle-income, $766 to $3,035, and upper-middle-income,
$3,036 to $9,385), or high-income ($9,386 or more; Map 2.1).
A more popular, though apparently more disputable, approach involves dividing all countries into "developing" and "developed"—despite
the general understanding that even the most developed countries are still undergoing development.
Dividing countries into "less developed" and "more developed" does not help much,
because it is unclear where to draw the line between the two groups. In the absence of a single criterion
of a country's development, such divisions can only be based on convention among researchers. For example,
it is conventional in the World Bank to refer to low-income and middle-income countries as "developing," and
to refer to high-income countries as "industrial" or "developed."
relatively accurate classification of countries into “developing” and “developed” based
on their per capita income does not, however, work well in all cases. There is, for instance, a group
of "high-income developing countries" that includes Israel, Kuwait, Singapore, and the United
Arab Emirates. These countries are considered developing because of their economic structure or because
of the official opinion of their governments, although their incomes formally place them among developed
Another challenge is presented by many of the countries with “transition” or “formerly
planned” economies—that is, countries undergoing a transition from centrally planned to
market economies. On the one hand, none of these countries has achieved the established threshold of
high per capita income. But on the other, many of them are highly industrialized. This is one reason
their classification by the World Bank is currently “under review.” Note that in the World
Bank’s World Development Report 1982 these same countries were classified as “industrial
nonmarket,” and in current United Nations publications most of them are still grouped among “industrial” countries.
In 1999 fewer than 1 of every 6 people in the world lived in high-income (developed) countries, and
almost 2 of every 6 lived in transition economies—including
21 percent of the world population in China alone (Figure 2.2).