There are many ways to measure economic development.  In this video, I provide a brief introduction to some of the most commonly used ones, drawing distinctions between measures of development, growth, and inequality.

Economic development

Economic development refers to the overall level of prosperity in a country.  It is most commonly measured by the gross domestic product (GDP).  GDP measures the total market value of all goods and services produced in an economy.  When we seek to compare this over time and across countries, we will standardize it in several ways.  One is to divide GDP by the population of a country, giving us GDP per capita.  Another is to refer to “constant” or “real” dollars – essentially taking into account variation in the value in currencies over time.

Other measures of development will take matters such as the cost of living into account.  Purchasing Power Parity (PPP) does just that.

Economic growth

Economic growth refers to change in GDP over time.  Most Western economies are set up to require positive growth rates of at least 2% to keep standards of living and development consistent.  Economies starting off at a low level of development often experience much higher levels of growth as they develop, but very high growth can be accompanied by inflation and other factors that later depress growth.  When countries have a negative growth rate, it is called economic contraction.

Inequality

The last set of measures used to measure countries’ economies are measures of inequality – how evenly income is distributed between the rich and poor in a country.  Inequality can be thought of in three ways:

1. Poverty rate.  A country’s poverty line is the level of income needed to maintain a basic standard of living in that country.  The poverty rate is the percent of people living below that line.
2. Deciles and quintiles.  Measures of the distribution of income in a country are also measured in quintiles – examining the income levels of people in the top and bottom 20% of the country, for example. 
3. Finally, one common measure of income inequality is called the Gini coefficient.  It takes into consideration how much wealth is held by which percentage of the population and is measured ranging from 0 to 1, with higher numbers meaning more inequality. 

These measures all refer to income and economic production. There are many other ways to measure development and prosperity, including access to public services, and measures of health and education, such as the infant mortality rate and literacy rate.  The measure you choose should depend on what outcome you are interested in – quality of life or economic production.