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Economic Conditions Analysis Chapter 2 part I

Economic Conditions Analysis Chapter 2 part I. Jamshed uz Zaman. Development Gap. World Income is distributed extremely unequally between nations and people North South: Rich and Poor Range of Income Difference (World Bank Classification) Low income countries ($420)

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Economic Conditions Analysis Chapter 2 part I

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  1. Economic Conditions Analysis Chapter 2 part I Jamshed uz Zaman

  2. Development Gap • World Income is distributed extremely unequally between nations and people • North South: Rich and Poor • Range of Income Difference (World Bank Classification) • Low income countries ($420) • Middle income countries • High income countries ($27.510) • Degree of Income Inequality Ethiopia $ 100 Switzerland $ 38,120

  3. Lorenz Curve Two Aspects of Measurement of Income Inequality 100% International Inequality (Inequality among nations) Global Inequality (Inequality between people across the world) These may be portrayed and measured respectively by • Lorenz Curve • Gini Coefficient 100% Population World Income Low income 60% 6% Middle income 15% 17% Rich 25% 77%

  4. Inequality Rising or Falling Absolute gap between rich and the poor is increasing Easterlin 1820 3:1 2000 380:1 Global Inequality: Gini 1988 0.63 1993 0.66

  5. Per Capita IncomeMeasurement and Comparability • Per Capita Income (PCY) can be used as an Index of Development • PCY measuring poverty has three problems • National Income Accounting is weak in many countries, • Subsistence production not included, • Use of deflator inappropriate, • Illiteracy, communications and other problems collecting data, • Converting Domestic Currency into common unit of account (USD) (Purchasing Power Parity), • Understatement of living standard

  6. Measurement and Comparability (Contd.) • (GNP/Population) ÷ Exchange rate • Living standard cannot be compared easily, • Official exchange rate may be different from market rate, • PPP not only depends on traded goods but also non-traded, • Real exchange rate should be used to measure PPP, • CPI or price level can be used ∑QiPia ∑QiPib Q is geometric mean of quantities of each commodities • PPP rate of exchange (PPPR) has to be used for better comparability GNP exchange rate ------------- ÷ ----------------------------- Population under or over valuation

  7. Characteristics and Obstacles • High proportion of labor force in agriculture, • Low agricultural productivity, • High proportion of expenditure on food and basic necessities, • Exports – Primary Products: Imports – Manufacturing products • Low level of technology • High birth rate/ falling death rate • Small Savings rate.

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