Understanding the Economic Cycle

Introduction

All countries experience regular ups and downs in the growth of output, jobs, income and spending. These fluctuations form what is known as the economic or business cycle.

Boom

A boom occurs when real national output is rising at a rate faster than the trend rate of growth. Some of the characteristics of a boom include:

• A fast growth of consumption helped by rising real incomes, strong confidence and a surge in house prices and other forms of personal wealth
• A pick up in the demand for capital goods as businesses invest in extra capacity to meet rising demand and to make higher profits
• More jobs and falling unemployment and higher real wages for people in work
• High demand for imports which may cause the economy to run a larger trade deficit because it cannot supply all of the goods and services that consumers are buying
• Government tax revenues will be rising as people earn and spend more and companies are making larger profits – this gives the government money to increase spending in priority areas such as education, the environment, health and transport
• An increase in inflationary pressures if the economy overheats and has a positive output gap.

The UK enjoyed sustained growth over the last fifteen from 1993 through to the end of 2008 but for better examples of booming countries we have to look overseas. The obvious example is China whose growth has been astonishing. And many other emerging market countries have experienced a decade or more of phenomenally rapid increases in the size of their economies. The BRIC countries have interested economists interested in understanding their fast rates of growth and development. In addition to China, the BRIC nations include Brazil, Russia and India.

Slowdown

• A slowdown occurs when the rate of growth decelerates – but national output is still rising
• If the economy grows without falling into recession, this is called a soft-landing.

Recession

Recession and rising unemployment

“There is a risk is that productive capacity in the UK economy could be permanently lost, as temporary job losses morph into long-term unemployment due to job-seekers losing skills and dropping out of the labour market”

Source: IMF Blog, August 2011

A recession means a fall in the level of national output i.e. a period when growth is negative, leading to a contraction in employment , incomes and profits .

• The simple definition:

• A fall in real GDP for two consecutive quarters i.e. six months

• The more detailed definition:

• A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

There are many symptoms of a recession – here is a selection of key indicators:

• A fall in purchases of components and raw materials from supply-chain businesses
• Rising unemployment and fewer job vacancies
• A rise in the number of business failures including high profile names such as Woolworths
• A decline in consumer and business confidence
• A contraction in consumer spending & a rise in the percentage of income saved
• A drop in the value of exports and imports of goods and services
• Deep price discounts offered by businesses in a bid to sell excess stocks
• Heavy de-stocking as businesses look to cut unsold stocks when demand is weak
• Government tax revenues are falling and welfare spending is rising
• The budget (fiscal) deficit is rising quickly

The difference between a recession and a depression

• A slump or a depression is a prolonged and deep recession leading to a significant fall in output and average living standards
• A depression is where real GDP falls by more than 10% from the peak of the cycle to the trough.

What are the main causes of a recession?

• Recessions are unusual. To some economists they are an inevitable feature of a market economy because of the cyclical nature of output, demand and employment.
• Every recession is different! It is undeniable that the global credit crunch has been hugely significant in causing the downturn even though macroeconomic policy has tried hard to prevent it.

The 2009 recession was the result of a combination of domestic and external economic factors and forces:

• The collapse of the British property boom – falling house prices hit wealth and led to a large contraction in new house building
• Reductions in real disposable incomes due to wages rising less quickly than prices
• A sharp fall in consumer confidence – made worse by rising unemployment – leading to an increase in household saving – Keynes called this the ‘paradox of thrift.’ (see the chapter on Keynesian economics)
• External events – such as recession in the UK’s major trading partners including the USA (which accounts for 15% of UK trade) and the Euro Area (which has 55% of UK trade)
• UK exports declined because of recession in major trading partners and this hit manufacturing industry and other businesses that supply export firms
• Cut-backs in production have led to a negative multiplier effect causing a decline in demand for consumer services and lower sales and profits for supply-chain businesses
• The credit crunch caused the supply of credit to dry up affecting many businesses and home-owners
• Falling profits and weaker demand has caused a fall in business sector capital investment – known as the negative accelerator effect.
• Unemployment has started to rise early in the downturn – a reflection of our flexible labour market and sticky wages

An important evaluation point is that, in a recession, some businesses are affected more than others.

The extent of the effects will depend on the type of business, the market it operates in and the nature of the product sold

When real incomes are falling, we would expect to see a decline in demand for products with a highincome elasticity of demand – typically these goods and services are regarded as luxury items by consumers, things that they might choose to do without when the economy is having a bad time.

Demand for products with negative income elasticity (i.e. inferior goods) might rise during a recession!

Slow Recovery for the UK

The British economy which contracted 6.4pc in the downturn, has rebounded 2.5pc, and is still 3.9pc below its peak. This recovery is taking longer to take root than from any 20th Century recession bar the Great Depression

Source: News reports, August 2011

Recovery

• A recovery occurs when real national output picks up from the trough reached at the low point of the recession.
• The pace of recovery depends on how quickly AD starts to rise after a downturn. And, the extent to which producers raise output and rebuild their stock levels in anticipation of a rise in demand
• The state of business confidence plays a key role here. Any recovery might be subdued if businesses anticipate that a recovery will be temporary or weak in scale.

A recovery might follow a deliberate attempt to stimulate demand. In the UK a number of strategies have been used to boost confidence and demand and prevent the recession turning into a damaging depression:

• Cuts in interest rates – the policy interest rate fell to 0.5% in the Autumn of 2008 and they have stayed at this low level ever since (0.5% at the time of writing in August 2012)
• A rise in government borrowing – the budget deficit rose above £150bn in 2009 and government borrowing is likely to remain high for some time to come despite attempts to cut it
• A policy of quantitative easing (QE) by the Bank of England to pump more money into the banking system in a bid to increase the supply of loans – now worth more than £325 billion.
• A temporary cut in the rate of VAT from 17.5% to 15% (now reversed – VAT rose to 20% in 2011)
• The launch of a car scrappage scheme for older cars worth up to £2000 per car and a consumer subsidy for households replacing their old boilers.

Why has the economic recovery in the UK economy been so weak?
The year 2009 saw the UK economy suffer a deep recession with a fall in real GDP of 4.4% and a steep rise in the unemployment rate. There was an encouraging recovery in national output in 2009 with real GDP growing close to the estimated trend rate of growth. 

Since then however the pace of expansion in the UK economy has slowed down with growth of only 0.7% in 2011 and even weaker growth forecast for 2012. Indeed in the 2nd quarter of 2012, data showed that the British economy had fallen into a second recession – known as a double-dip. 

The level of real GDP remains well below the peak reached at the end of the last economic cycle. Many commentators are forecasting that recovery will continue to be slow in the next couple of years and this poses big risks for households, businesses and the government.

Key economics indicators for the United Kingdom	2007	2008	2009	2010	2011	2012
Real GDP (% change)	3.5	-1.1	-4.4	2.1	0.7	0.5
Consumer spending (% change)	2.7	-1.5	-3.5	1.2	-1.2	0.8
Government spending (% change)	0.6	1.6	-0.1	1.5	0.1	-0.7
Capital investment spending (% change)	8.1	-4.8	-13.4	3.1	-1.2	-0.9
Exports of goods and services (% change)	-1.3	1.3	-9.5	7.4	4.6	1.9
Imports of goods and services (% change)	-0.9	-1.2	-12.2	8.6	1.2	1.5
Unemployment rate (% of labour force)	5.4	5.7	7.6	7.9	8.1	8.6
Government fiscal balance (% of GDP)	-2.8	-5.0	-11.0	-10.3	-8.4	-7.7
Short-term interest rate (per cent)	6.0	5.5	1.2	0.7	0.9	1.0
Consumer price index (% change)	2.3	3.6	2.2	3.3	4.5	2.6
Balance of Payments, current account balance (% of GDP)	-2.5	-1.4	-1.5	-3.3	-1.9	-2.1
Source: OECD World Economic Outlook, May 2012. Data for 2012 is a forecast

Why is the UK finding it hard to achieve a decent recovery in output and jobs? As always when we study macroeconomics, there are many factors at work. The UK is an open economy and our fortunes are affected not just by domestic events and policies but also what is happening in the global system.

Why is GDP growth so difficult to forecast?

When economists make forecasts about the future path for an economy they have to accept the inevitability of forecast errors. Conditions in the economy are always changing and no macroeconomic model can hope to cope with the fluctuations and volatility of indicators such as inflation, exchange rates and global commodity prices. GDP growth is hard to forecast – the chart above is the one produced by the Bank of England when they publish their quarterly Inflation Report. The projection area is their forecast, notice how the uncertainty grows as we move further from the present. In 2014, the range of probabilities for real GDP growth in the UK stretches from -1% (recession) to over 5% (very strong growth). The graph above is a probability fan chart, the darker the area, the higher is the probability attached to the outcome.

IGCSE A level notes, Price mechanism

Introduction

Adam Smith’s Invisible Hand

Adam Smith, one of the Founding Fathers of economics described the “invisible hand of the price mechanism” in which the hidden-hand of the market operating in a competitive market through the pursuit of self-interest allocated resources in society’s best interest.

This remains a view held by free-market economists who believe in the virtues of an economy with minimalgovernment intervention.

The price mechanism describes the means by which millions of decisions taken by consumers and businesses interact to determine the allocation of scarce resources between competing uses

The price mechanism plays three important functions in a market:

1/ Signalling function

• Prices perform a signalling function – they adjust to demonstrate where resources are required, and where they are not
• Prices rise and fall to reflect scarcities and surpluses
• If prices are rising because of high demand from consumers, this is a signal to suppliers to expand production to meet the higher demand
• If there is excess supply in the market the price mechanism will help to eliminate a surplus of a good by allowing the market price to fall.

In the example on the right, an increase in market supply causes a fall in the relative prices of digital cameras and prompts an expansion along the market demand curve

2/ Transmission of preferences

• Through their choices consumers send information to producers about the changing nature of needs and wants
• Higher prices act as an incentive to raise output because the supplier stands to make a better profit.
• When demand is weaker in a recession then supply contracts as producers cut back on output.

One of the features of a market economy system is that decision-making is decentralised i.e. there is no single body responsible for deciding what is to be produced and in what quantities. This is a remarkable feature of an organic market system.

3/ Rationing function

• Prices serve to ration scarce resources when demand in a market outstrips supply.
• When there is a shortage, the price is bid up – leaving only those with the willingness and ability to pay to purchase the product. Be it the demand for tickets among England supporters for an Ashes cricket series or the demand for a rare antique, the market price acts a rationing device to equate demand with supply.
• The popularity of auctions as a means of allocating resources is worth considering as a means of allocating resources and clearing a market.

Mixed and Command Economies and Prices

• Most economies are mixed economies, comprising not only a market sector, but also a non-market sector, where the government (or state) uses planning to provide public goods and services such as police, roads and merit goods such as education, libraries and health.
• In a command economy, planning directs resources to where the state thinks there is greatest need. Following the collapse of communism in the late 1980s and early 1990s, the market-based economy is now the dominant system in most countries – even though we are increasingly aware of manyimperfections in the operation of the market.

Prices and incentives

• Incentives matter! For competitive markets to work efficiently all ‘economic agents’ (i.e. consumers and producers) must respond to appropriate price signals in the market.

• Market failure occurs when the signalling and incentive functions of the price mechanism fail to operate optimally leading to a loss of economic and social welfare. For example, the market may fail to take into account the external costs and benefits arising from production and consumption.  Consumer preferences for goods and services may be based on imperfect information on the costs and benefits of a particular decision to buy and consume a product.

Secondary markets

• Secondary markets occur when buyers and sellers are prepared to use a second market to re-sell items that have already been purchased.
• Perhaps the best example is the secondary market in tickets for concerts and sporting-events.

Do ticket touts provide a valuable service to a market? Or should they be banned by law?

Government intervention in the market mechanism

• Often the incentives that consumers and producers have can be changed by government intervention in markets
• For example a change in relative prices brought about by the introduction of government subsidies and taxation.

Agents may not always respond to incentives in the manner in which textbook economics suggests.

The “law of unintended consequences” encapsulates the idea that government intervention can often be misguided of have unintended consequences! (See the final chapter on government failure) 

economic resources-Igcse, gceo A level notes

Introduction

Finite resources and sustainability

There are only a finite - or limited - number of workers, machines, acres of land and reserves of oil and other natural resources on the earth.  Because most resources are finite, we cannot produce an unlimited number of different goods and services. Indeed by supplying more for an ever-growing and richer population we are in danger of destroying the natural resources of the planet.

Our ecological footprint affects the sustainability of economies and has huge implications for future living standards. Environmental pressure groups such as Friends of the Earth and Greenpeace seek to highlight the permanent damage to the stock of natural resources and the dangers from rapid development and the effects of global warming.

The Worldwide Fund for Nature has claimed that the natural world is being degraded "at a rate unprecedented in human history" and has warned that if demand continues at the current rate, two planets will be needed to meet global demand by 2050. Resources are being consumed faster than the planet can replace them

One issue is the threat posed by the shortage of water as the world’s demand for household and commercial use continues to grow each year. Experts predict that half the world's population will be affected by water shortages in just 20 years' time. During the 20th century the world population increased fourfold, but the amount of freshwater that it used increased nine times over. Already 2.8 billion people live in areas of high water stress. For more on this issue visit the World Heath Organisation’s special web site on water scarcity.

At the heart of improving resource sustainability is the idea of de-coupling – a process of trying to increase the efficiency with which resources are used and breaking the link between increasing demand and resource depletion.

Factors of Production

Land:

• Land includes all natural physical resources – e.g. fertile farm land, the benefits from a temperate climate or the harnessing of wind power and solar power and other forms of renewable energy.
• Some nations are richly endowed with natural resources and then specialise in the their extraction and production – for example – the high productivity of the vast expanse of farm land in Canada and the United States and the oil sands in Alberta, Canada. Other countries are reliant on importing these resources.

Labour:

• Labour is the human input into production.
• An increase in the size and the quality of the labour force is vital if a country wants to achievegrowth. In recent years the issue of the migration of labour has become important. Can migrant workers help to solve labour shortages? What are the long-term effects on the countries who suffer a drain or loss of workers through migration?
  

Capital:

• Capital goods are used to produce other consumer goods and services in the future
• Fixed capital includes machinery, equipment, new technology, factories and other buildings
• Working capital means stocks of finished and semi-finished goods (or components) that will be either consumed in the near future or will be made into consumer goods

New items of capital machinery, buildings or technology are used to boost the productivity of labour. For example, improved technology in farming has vastly increased productivity and allowed millions of people to move from working on the land into more valuable jobs in other industries.

  Infrastructure – a crucial type of capital

Examples of infrastructure include road & rail networks; airports & docks; telecommunications e.g. cables and satellites to enable web access.

The World Bank regards infrastructure as an essential pillar for economic growth in developing countries. India is often cited as a country whose growth prospects are being limited by weaknesses in national infrastructure.

Entrepreneurship

An entrepreneur is an individual who supplies products to a market to make a profit.

Entrepreneurs will usually invest their own financial capital in a business and take on the risks. Their main reward is the profit made from running the business.

Renewable and Finite Resources

Renewable resources are commodities such as solar energy, oxygen, biomass, fish stocks or forestry that is inexhaustible or replaceable over time providing that the rate of extraction of the resource is less than the natural rate at which the resource renews itself. (This is important!)

This is a key issue in environmental economics, for example the over-extraction of fish stocks, and theglobal risks of permanent water shortages resulting

Finite resources cannot be renewed. For example with plastics, crude oil, coal, natural gas and other items produced from fossil fuels, no mechanisms exist to replenish them.

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IGCE,Economic Growth - Productivity & Economic Development, A LEVEL Notes

Economic Growth - Productivity & Economic Development

Introduction

Productivity is a measure of the efficiency with which a country combines capital and labour to produce more with the same level of factor inputs. We commonly focus on labour productivity measured by output per person employed or output per person hour.

A better measure of productivity growth is total factor productivity which takes into account changes in the amount of capital to use and also changes in the size of the labour force.

If the size of the capital stock grows by 3% and the employed workforce expands by 2% and output (GDP) increases by 8%, then total factor productivity has increased by 3%.

Productivity is an important determinant of living standards – it quantifies how an economy uses the resources it has available, by relating the quantity of inputs to output. As the adage goes, productivity isn't everything, but in the long run it’s almost everything.
Higher productivity can lead to:

• Lower unit costs: These cost savings might be passed onto consumers in lower prices, encouraging higher demand, more output and an increase in employment.
• Improved competitiveness and trade performance: Productivity growth and lower unit costs are key determinants of the competitiveness of firms in global markets.
• Higher profits: Efficiency gains are a source of larger profits for companies which might be re-invested to support the long term growth of the business.
• Higher wages: Businesses can afford higher wages when their workers are more efficient.
• Economic growth: If an economy can raise the rate of growth of productivity then the trend growth of national output can pick up.
• Productivity improvements mean that labour can be released from one industry and be made available for another – for example, rising efficiency in farming will increase production yields and provide more food either to export or to supply a growing urban population.
• If the size of the economy is bigger, higher wages will boost consumption, generate more tax revenue to pay for public goods and perhaps give freedom for tax cuts on people and businesses.

The Productivity Gap

Productivity varies hugely across nations. The Millennium Development Goals Report for 2012 stated that the dollar value of output per worker in the developed regions of the world was $64,319 in 2011, compared with an average of $13,077 in developing regions.

A table of selected data on output per worker employed is shown below.

Output per worker  ($000, at constant 2005 prices, PPP adjusted)	1991	2011
Sub-Saharan Africa	5	6
Southern Asia	4	9
South-Eastern Asia	6	10
Latin America and the Caribbean	20	23
Developing regions	6	13
Developed regions	48	64

What are the main determinants of factor productivity in a country?

For example, South Korea has achieved sustained improvements in labour productivity – a key factor behind escaping the middle-income trap.

Our chart below tracks the annual change in output per worker employed and real GDP. Higher productivity growth is a key reason why South Korea has now become a high-income member of the OECD.

Case Study – Productivity Gains in China

China has achieved impressive gains in productivity in recent years. Some of this is undoubtedly the huge spending on capital investment which has grown to nearly 50% of China’s GDP. The labour force has also grown although this is scheduled to level off and then decline in the years ahead.

What has driven improvements in Chinese total factor productivity?

• Resource shifts: There has been a huge shift of resources out of relatively low productivity agriculture into more productive work in manufacturing industry and construction. Over half of the Chinese population now lives in urban areas.
• New technology and innovation: The willingness of Chinese businesses to adopt and exploit new production technologies and process innovations. Mobile telephony has expanded at a rapid rate
• FDI effects: High levels of foreign direct investment into China have boosted productivity – new manufacturing capacity and technology has lifted efficiency and may well have led to productivity spill-over effects among supply-chain businesses. For example, in April 2012, Samsung Electronics, the world’s biggest memory chip maker, unveiled plans to invest $7bn (£4.4bn) to build its first chip factory in China.
• Openness and global competition: The Chinese economy has become more open – trade is accounting for a rising share of national income – global competition is a stimulus for efficiency improvements
• Better infrastructure: Heavy state spending on critical infrastructure has improved the overall efficiency of the economy for example in reducing transport delays and increasing communication speeds
• Management: Restructuring of state-owned businesses has been a factor behind better productivity. The Economist magazine reported recently that “sophisticated methods of control, more productive use of assets and rapid globalisation have boosted productivity”
• Improved wages: There is strong pressure for mean wages to rise in China especially as the latest Five Year Plan emphasises the need to boost domestic demand. Will a number of years of rapid wage acceleration provide a boost to worker productivity?

Although China’s productivity improvements are impressive, the process of catch-up with advanced nations still has a long way to go. China’s labour productivity is about 12 per cent of that of the USA

Case study: Improving Productivity in Agriculture – Focus on the Indian Farm Sector

Some of the gains from rising farm productivity are expressed in the flow chart below. For India, despite attempts at land reform to boost the incentives for farmers, agricultural value added per worker expressed in real US dollars has grown slowly. The divergence between India and South Korea is striking.

The virtuous circle of rising agricultural productivity

In 2011, nearly 70% of Indians still live in the countryside and over half work on the farm but many are tenant farmers operating with short-term leases on their land and with little incentive to invest in machinery to improve farm yields and incomes. For example, annual rice yields in the Indian state of West Bengal remain at about half China’s level and below yields in Indonesia, Taiwan and Vietnam. Productivity is further hampered by inadequate infrastructure including poor roads and vulnerability to external climatic shocks such as droughts and floods.

Critics of India agriculture argue that whereas China has liberalized farming markets and encouraged farmers to build up surpluses to sell in local and regional markets, the India government spends too much money subsidizing fertilizer, power and water and price supports for certain farmers that have done little to stimulate diversification among rural producers.

Economic Development - Human Development Index (HDI), GCEO-IGCSE Notes

Economic Development - Human Development Index (HDI)

Introduction to the HDI

• The Human Development Index is published by the UNDP and focuses on longevity, basic education and minimal income. It tracks progress made by countries in improving these three outcomes.
• The inclusion of education and health indicators is a sign of successful government policies in providing access to important merit goods such as health care, sanitation and education.
• Knowledge: First an educational component made up of two statistics – mean years of schooling and expected years of schooling
• Long and healthy life: Second a life expectancy component is calculated using a minimum value for life expectancy of 25 years and maximum value of 85 years.
• A decent standard of living: The final element is gross national income (GNI) per capita adjusted to purchasing power parity standard (PPP).

The UNDP classifies each country into one of three development bins:

• Low human development for HDI scores between 0.0 and 0.5,
• Medium human development for HDI scores between 0.5 and 0.8
• High human development for HDI scores between 0.8 and 1.0.

Important note:
GNI is now used rather than GDP because of the growing size of remittances in the global economy and also the importance of international aid payments. For example, because of remittances from abroad, GNI in the Philippines greatly exceeds GDP
Log of income is used in the HDI calculation because income is instrumental to human development but higher incomes are assumed to have a declining contribution to human development

 Global Human Development Map for 2011

GNI per Capita - Purchasing Power Parity (PPP)

This is a method of currency valuation based on the idea that two identical goods in different countries should eventually cost the same. This is illustrated by the Big Mac index, which takes a Big Mac hamburger and compares its prices in different countries in order to establish the relative value of their currencies. If PPP holds true, then you can buy the same goods and services with £100 in London as you can in Glasgow, New York and Cape Town. There are many reasons why this will not be the case!

Human Development Index for 2010

A selection of data drawn from the Human Development Index is provided in the table below.

Country	GNI per capita (2008 US$PPP)	HDI value	Inequality-adjusted HDI value (IHDI)	Life expectancy at birth (years)	Mean years of schooling (of adults) (years)
Norway	58,809	0.938	0.876	81.0	12.6
Australia	38,691	0.937	0.864	81.9	12.0
United States	47,093	0.902	0.799	79.6	12.4
Ireland	33,077	0.895	0.813	80.3	11.6
Canada	38,668	0.888	0.812	81.0	11.5
Sweden	36,936	0.885	0.824	81.3	11.6
Germany	35,308	0.885	0.814	80.2	12.2
Japan	34,692	0.884	Not available	83.2	11.5
Korea (Republic of)	29,517	0.877	0.731	79.8	11.6
France	34,340	0.872	0.792	81.6	10.4
Spain	29,661	0.863	0.779	81.3	10.4
Greece	27,580	0.855	0.768	79.7	10.5
Italy	29,619	0.854	0.752	81.4	9.7
United Kingdom	35,087	0.849	0.766	79.8	9.5
Hungary	17,472	0.805	0.736	73.9	11.7
Poland	17,803	0.795	0.709	76.0	10.0
Chile	13,561	0.783	0.634	78.8	9.7
Mexico	13,971	0.750	0.593	76.7	8.7
Russian Federation	15,258	0.719	0.636	67.2	8.8
Brazil	10,607	0.699	0.509	72.9	7.2
China	7,258	0.663	0.511	73.5	7.5
Sri Lanka	4,886	0.658	0.546	74.4	8.2
Thailand	8,000	0.654	0.516	69.3	6.6
South Africa	9,812	0.597	0.411	52.0	8.2
India	3,337	0.519	0.365	64.4	4.4
Kenya	1,627	0.470	0.320	55.6	7.0
Bangladesh	1,587	0.469	0.331	66.9	4.8
Nigeria	2,156	0.423	0.246	48.4	5.0
Côte d'Ivoire	1,624	0.397	0.254	58.4	3.3
Ethiopia	992	0.328	0.216	56.1	1.5
Sierra Leone	808	0.317	0.193	48.2	2.9
Niger	675	0.261	0.173	52.5	1.4
Zimbabwe	176	0.140	0.098	47.0	7.2

Note: IHDI: Inequality-adjusted HDI (a new measure introduced into 2010 Human Development Report)

Uneven progress but deep inequalities

• The world average HDI rose to 0.68 in 2010 from 0.57 in 1990, continuing the upward trend from 1970, when it stood at 0.48
• The fastest progress has been in East Asia & the Pacific, followed by South Asia and Arab States.
• All but 3 of the 135 countries have a higher level of human development today than in 1970
• The exceptions are the Democratic Republic of the Congo, Zambia and Zimbabwe
• From 1970 to 2010 real per capita income in developed countries increased 2.3 percent a year on average, compared with 1.5 percent for developing countries
• The real average income of people in 13 countries in the bottom quarter of today’s world income distribution is lower than in 1970

Limitations of the Human Development Index

The HDI notably fails to take account of qualitative factors, such as cultural identity and political freedoms (human security, gender opportunities and human rights for example).

Many argue that the HDI should become more human-centred and expanded to include more dimensions, ranging from gender equity to environmental biodiversity

The GNP per capita figure – and consequently the HDI figure – takes no account of income distribution. If income is unevenly distributed, then GNP per capita will be an inaccurate measure of the monetary well-being of the people. Inequitable development is not human development.

PPP values change very quickly and are likely to be inaccurate or misleading

The 2010 edition of the Human Development Report marked the launch of a new Inequality-adjusted HDIand also a Gender Inequality Index and a Multidimensional Poverty Index

Inequality HDI - The average loss in the HDI due to inequality is about 23 percent—that is, adjusted for inequality, the global HDI of 0.682 in 2011 would fall to 0.525.

Key point: the HDI is intended to allow economists to draw broad conclusions about which countries enjoyrelatively high standards of living, and which are, by comparison, under-developed.

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