An Assignment
On
Relationship between GDP & HDI

Submitted ToCourse Instructor Of B-University of DhakaDepartment of Banking |

Submitted ByMd. Yasir ArafatId No. 62B.B.A 13th BatchDepartment of BankingUniversity of Dhaka |

Date of Submission08.o7.09 |

Introduction to GDP A region's gross domestic product, or GDP, is one of the ways of measuring the size of its economy. The GDP of a country is defined as the total market value of all final goods and services produced within a country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time.

Components of GDP
Each of the variables C (Consumption), I (Investment), G (Government spending) and X − M (Net Exports) (where GDP = C + I + G + (X − M) as above)
C (Consumption) is private consumption in the economy. This includes most personal expenditures of households such as food, rent, medical expenses and so on but does not include new housing.
I (Investment) is defined as investments by business or households in capital. Examples of investment by a business include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment. In contrast to its colloquial meaning, 'Investment' in GDP does not mean purchases of financial products. Buying financial products is classed as 'saving', as opposed to investment. The distinction is (in theory) clear: if money is converted into goods or services, it is investment; but, if you buy a bond or a share of stock, this transfer payment is excluded from the GDP sum. That is because the stocks and bonds affect the financial capital which in turn affects the production and sales which in turn affects the investments. So stocks and bonds indirectly affect the GDP. Although such purchases would be called investments in normal speech, from the total-economy point of view, this is simply swapping of deeds, and not part of real production or the GDP formula.
G (Government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.
X (Exports) is gross exports. GDP captures the amount a country produces, including goods and services produced for other nations' consumption, therefore exports are added.
M (Imports) is gross imports. Imports are subtracted since imported goods will be included in the terms G, I, or C, and must be deducted to avoid counting foreign supply as domestic

Examples of GDP component variables
Examples of C, I, G, and NX(net exports): If you spend money to renovate your hotel so that occupancy rates increase, that is private investment, but if you buy shares in a consortium to do the same thing it is saving. The former is included when measuring GDP (in I), the latter is not. However, when the consortium conducted its own expenditure on renovation, that expenditure would be included in GDP.
For example, if a hotel is a private home then renovation spending would be measured as Consumption, but if a government agency is converting the hotel into an office for civil servants the renovation spending would be measured as part of public sector spending (G).
If the renovation involves the purchase of a chandelier from abroad, that spending would also be counted as an increase in imports, so that NX would fall and the total GDP is affected by the purchase. (This highlights the fact that GDP is intended to measure domestic production rather than total consumption or spending. Spending is really a convenient means of estimating production.)

Types of GDP

There are two types of GDP

* Nominal GDP
Nominal GDP is GDP evaluated at current market prices. Therefore, nominal GDP will include all of the changes in market prices that have occurred during the current year due to inflation or deflation. Inflation is defined as a rise in the overall price level, and deflation is defined as a fall in the overall price level. In order to abstract from changes in the overall price level, another measure of GDP called real GDP is often used. Real GDP is GDP evaluated at the market prices of some base year. For example, if 1990 were chosen as the base year, then real GDP for 1995 is calculated by taking the quantities of all goods and services purchased in 1995 and multiplying them by their 1990 prices.

* Real GDP
Real gross domestic product (GDP) is a macroeconomic measure of the size of an economy adjusted for price changes and inflation. It measures in constant prices the output of final goods and services and incomes within an economy. The formula for its definition is [(Nominal GDP)/(GDP deflator)] x 100, however, it is not calculated in this way. Real GDP is calculated as prices in the "base year" times quantities in the current year, such that production is held constant for the value of currency. Real GDP for a given year is the given year's nominal GDP stated in the based-year price level. Real GDP growth on an annual basis is the nominal and abnormal GDP growth rate adjusted for inflation and expressed as a percentage.

GDP of Bangladesh (In Millions)

Nominal GDP Growth vs. Real GDP Growth
GDP, or Gross Domestic Product is the value of all the goods and services produced in a country. The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. On the other hand, Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year. An example:
Suppose in the year 2000, the economy of a country produced $100 billion worth of goods and services based on year 2000 prices. Since we're using 2000 as a basis year, the nominal and real GDP are the same. In the year 2001, the economy produced $110B worth of goods and services based on year 2001 prices. Those same goods and services are instead valued at $105B if year 2000 prices are used. Then:
Year 2000 Nominal GDP = $100B, Real GDP = $100B
Year 2001 Nominal GDP = $110B, Real GDP = $105B
Nominal GDP Growth Rate = 10%
Real GDP Growth Rate = 5%
Once again, if inflation is positive, then the Nominal GDP and Nominal GDP Growth Rate will be less than their nominal counterparts. The difference between Nominal GDP and Real GDP is used to measure inflation in a statistic called The GDP Deflator.
Measurement of GDP

* International standards
The international standard for measuring GDP is contained in the book System of National Accounts (1993), which was prepared by representatives of the International Monetary Fund, European Union, Organization for Economic Co-operation and Development, United Nations and World Bank. The publication is normally referred to as SNA93 to distinguish it from the previous edition published in 1968 (called SNA68)
SNA93 provides a set of rules and procedures for the measurement of national accounts. The standards are designed to be flexible, to allow for differences in local statistical needs and conditions.

* National measurement
Within each country GDP is normally measured by a national government statistical agency, as private sector organizations normally do not have access to the information required (especially information on expenditure and production by governments).

* Interest rates
Net interest expense is a transfer payment in all sectors except the financial sector. Net interest expenses in the financial sector are seen as production and value added and are added to GDP.

Three approaches to measuring GDP
1. Expenditures approach:
The total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M))
GDP = C + I + G + (X-I)
2. Income approach (NI = National Income)
Using the income approach, GDP is calculated by adding up the factor incomes to the factors of production in the society. These include
Employee compensation + corporate profits + Proprietor's Income + Rental income + Net Interest
3. Value added approach:
The value of sales of goods - purchase of intermediate goods to produce the goods sold

Standard of living and GDP
GDP per capita is not a measurement of the standard of living in an economy. However, it is often used as such an indicator, on the rationale that all citizens would benefit from their country's increased economic production. Similarly, GDP per capita is not a measure of personal income. GDP may increase while incomes for the majority of a country's citizens may even decrease or change disproportionally. For example, in the US from 1990 to 2006 the earnings (adjusted for inflation) of individual workers, in private industry and services, increased by less than 0.5% per year while GDP (adjusted for inflation)increased about 3.6% per year over the same period.

Advantage of GDP
The major advantages of GDP per capita as an indicator of standard of living are that it is measured frequently, widely and consistently; frequently in that most countries provide information on GDP on a quarterly basis (which allows a user to spot trends more quickly), widely in that some measure of GDP is available for practically every country in the world (allowing crude comparisons between the standard of living in different countries), and consistently in that the technical definitions used within GDP are relatively consistent between countries, and so there can be confidence that the same thing is being measured in each country.

Disadvantage of GDP
The major disadvantage of using GDP as an indicator of standard of living is that it is not, strictly speaking, a measure of standard of living. GDP is intended to be a measure of particular types of economic activity within a country. Nothing about the definition of GDP suggests that it is necessarily a measure of standard of living. For instance, in an extreme example, a country which exported 100 per cent of its production and imported nothing would still have a high GDP, but a very poor standard of living.
The argument in favor of using GDP is not that it is a good indicator of standard of living, but rather that (all other things being equal) standard of living tends to increase when GDP per capita increases. This makes GDP a proxy for standard of living, rather than a direct measure of it. GDP per capita can also be seen as a proxy of labor productivity. As the productivity of the workers increases, employers must compete for them by paying higher wages. Conversely, if productivity is low, then wages must be low or the businesses will not be able to make a profit.

History of the human development concept

For decades, the economic growth paradigm dominated the national development discourse. However, in the 1980s unemployment levels escalated; and access to social services deteriorated in many countries including some industrialized countries while at the same time, economic production was expanding. In other words, high rates of economic growth did not automatically translate into improved human well-being. During the same period, some countries were registering improvement in human well-being with modest economic growth. These raised questions around the nature, distribution and quality of economic growth. It became clear that economic growth alone is not an Adequate yardstick for a country’s level of development. The need for a conceptual shift and alternative policy options that create a balance between economic growth and protection of the interest of poor and marginalized members of society became imperative. The HDI, which was introduced in the first Human Development Report published in 1990, was response to this demand. The idea of a composite index that measures socio-economic progress was
Conceived by Mahbub ul Haq a renowned economist, whose vision was to come up with one measure which is as crude as the GDP, but “not as blind to social aspects of human lives as the GNP

What is the Human Development Index (HDI)?

The HDI serves as a frame of reference for both social and economic development. It is a summary measure for monitoring long-term progress in a country’s average level of human development in three basic dimensions: a long and healthy life, access to knowledge and a decent standard of living. It sets a minimum and a maximum for each dimension, called goalposts, and shows where each country stands in relation to these goalposts, expressed as a value between 0 and 1.The life expectancy component of the HDI is calculated using a minimum value for life expectancy of25 years and maximum value of 85 years. This is because even with HIV/AIDS it is unlikely for life expectancy at birth to fall below 25 years. The knowledge component of the HDI is measured by adult literacy rates and the combined gross enrolment ratio in primary, secondary and tertiary education, weighted to give adult literacy more importance (two-thirds). While at the national level it is unlikely for any of the knowledge indicators to assume a zero value, at disaggregated levels, it is possible for some population sub-groups to score very low on the indicators. For this reason, the lower end of the goalpost is set at 0 and the upper end at 100 per cent.

For a decent standard of living, which is measured by GDP per capita in purchasing power parity(PPP) US Dollar terms, the goalpost for minimum income is $100 (PPP) and the maximum is $40,000(PPP). GDP per capita is converted into PPP terms to eliminate differences in national price levels in order to make standards of living comparable across countries. In the calculation of the HDI, a logarithm of income is used to reflect the diminishing importance of income with increasing GDP. This is premised on the belief that people do not need an infinite amount of money for a decent quality of life. The scores for the three HDI components are then averaged in an overall index. The HDI is currently calculated for 177 countries and areas for which data are available. While the concept of human development is much broader than this composite measure, the Differs a powerful alternative to GDP as a summary measure of human well-being. It provides a useful entry point into other rich information contained in the indicator tables covering a wide range of human development issues presented each year in the Human Development Reports.

What the HDI reveals
The HDI reveals that some countries do better on human development with relatively low GDPs per capita. For example, Italy’s GDP per capita is only about two-thirds of that of the United States but the two countries have similar HDI values
Figure 1: GDP vs. HDI; comparing Italy and US
Disaggregating the HDI by income quintiles for countries for which representative data are available is also revealing. For instance, the gap between the value for the richest 20 per cent and the poorest20 per cent of households in the United States is about 17 per cent. This is similar to the gap between average HDIs for the United States and Cuba respectively. In other words, while the richest 20 per cent in the United States would be at the top of the HDI league table, the poorest 20 per cent would-be at the same human development level as people living in Cuba

Figure 2: Human development index by income groups

The variation in HDI value marked by unequal opportunities and capabilities calls for public policies aimed at equalizing opportunities and choices. Apart from the moral imperative to overcome extreme inequalities in income, access to education and health, inequalities pose a threat to national and global securities.

Future Possibilities

Since its introduction in 1990, the HDI’s analytical framework, methodology and data have been subjected to rigorous scrutiny. Some of the major criticisms have led to major refinements of the methodology and component indicators but the index continues to evolve. For example, the HDI by income groups, calculated for 15 countries (13 developing and 2 developed) with data and published in the 2006 HDR, points to a need for bringing out inequalities in HDI for evidence-based planning. This is one area that the HDRO would like to extend to as many countries as data availability would allow.

Another future plan is to construct a separate HDI for women and for men to better present gender inequalities in human development. But this depends on reliable data on income for women and for men.

There are also discussions around capturing the environment dimension of human development either as part of the HDI or as a new index. However, these discussions are at a very early stage and data availability will inform any the final decision.

HDI of Bangladesh

Over the last 10 years Bangladesh has made impressive gains in key human development indicators. In the 2004 UNDP Human Development Report, Bangladesh ranked 138 among 177 countries with an HDI score of 0.509, which places it among countries considered to have achieved medium human development. This is the result of macroeconomic stability, low population growth, increase in women’s empowerment, reduction in aid dependence, food self-sufficiency, effective disaster management capacity, promoting non-governmental organizations (NGOs), free and fair parliamentary elections, a vibrant, pluralist, democratic civil society marked by cultural activism and developmental debates, and an active and free press.

Through the adoption and implementation of sound policies and strategies, Bangladesh has managed to sustain a large measure of economic stability and macroeconomic growth. Throughout the 1990s, the economy grew by an average of 4.75 percent per year.
Gross Domestic Product (GDP) per capita has grown steadily from US$ 273 in 1990-91 to US$ 441 (or $1400 in PPP). As a result, the Human Poverty Index for Bangladesh fell from 61 in 1983 to 42.2, an achievement that was all the more remarkable given that the pace of income poverty reduction was only one percent point per year. Nonetheless 63 million people continue to live below the poverty line. There has, however, been a steep decline in the number of hardcore poor from 36.75 percent in 1983-83 to just under twenty percent or approximately 30 million people. Despite these significant achievements, much will need to be done to ensure the right to survival and to achieve the MDG target of halving the proportion of the poor, and the hungry and malnourished.

Significant investments in disaster preparedness, including the development of early warning systems and the creation of a wide network of flood and cyclone shelters, has seen a significant decrease in the number of lives lost each year. However, natural disasters are still responsible for significant property losses with major consequences for the poor. There is therefore scope for continued improvement in terms of disaster mitigation and recovery that is targeted to the most vulnerable populations

There has been a significant increase in the reports of violence across Bangladesh. Accurate information regarding the nature and extent of violence in the country remains scarce due to lack of data. There is, however, an emerging “culture of violence” which is of rising concern. Violence within the family remains the most under-reported crime in Bangladesh. Cases of marital violence are routinely labelled as “domestic disputes”, and as such do not merit assistance within families, let alone police intervention. This reflects, among other things, the existing patrimonial social structures that force woman into passive acceptance of violence. According to government statistics, one woman is subjected to violence every hour

Though the Bangladesh Constitution is committed to the equality of rights of all citizens, there still remain significant sections of the population who are unable to realise their right to development. A part of the process will necessarily involve ensuring that the most marginalised and vulnerable groups – women, minorities, children and others – do not get left behind amidst an overall positive scenario. It is also important to focus on the guarantee of human security with the basic norms of justice as a pre-condition for human development. The commitment to a transparent government through the use of information technology for development is one means of promoting accountability. The decentralisation of administrative and financial responsibilities would help to accelerate the process. These are all important steps towards ensuring that citizens have ownership over the development process. Finally, it is necessary to focus on the crosscutting issues of good governance and environmental sustainability to ensure the achievement of the MDGs and national development objectives. In the circumstances, one of the biggest challenges to the Government remains ensuring the right to participation and protection of the people of Bangladesh

The United Nations Development Program (UNDP) introduced a new way of measuring development by combining indicators of life expectancy, educational attainment and income into a composite human development index, the HDI.

The breakthrough for the HDI was the creation of a single statistic which was to serve as a frame of reference for both social and economic development. The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows where each country stands in relation to these goalposts, expressed as a value between 0 and 1.

The educational component of the HDI is comprised of adult literacy rates and the combined gross enrolment ratio for primary, secondary and tertiary schooling, weighted to give adult literacy more significance in the statistic. Since the minimum adult literacy rate is 0% and the maximum is 100%, the literacy component of knowledge for a country where the literacy rate is 75% would be 0.75, the statistic for combined gross enrolment is calculated in a analogous manner.

The life expectancy component of the HDI is calculated using a minimum value for life expectancy of 25 years and maximum value of 85 years, so the longevity component for a country where life expectancy is 55 years would be 0.5.

For the wealth component, the goalpost for minimum income is $100 (PPP) and the maximum is $40,000 (PPP). The HDI uses the logarithm of income, to reflect the diminishing importance of income with increasing GDP. The scores for the three HDI components are then averaged in an overall index.

The life expectancy component was calculated on the basis of data on life expectancy from UN 2007; data on adult literacy rates from UNESCO Institute for Statistics 2003 and 2007; data on combined gross enrolment ratios from UNESCO Institute for Statistics 1999 and 2007; and data on GDP per capita (2005 PPP US$) from World Bank 2007.

HDI Position of Bangladesh of the given years

Correlation Analysis between GDP and HDI

By using the correlation analysis we can easily find out what types relation exist between HDI and GDP .Whether they are positively correlated or negatively correlated .To get the desired result we have to make a calculation on the following process. We have also used the following data. Year | GDP (X) | HDI (Y) | 2007 | 1311.01 | 0.536 | 2006 | 1223.01 | 0.524 | 2005 | 1123.84 | 0.514 | 2004 | 1052.79 | 0.504 | 2003 | 980.96 | 0.5 | 2002 | 925.61 | 0.497 | 2001 | 884.63 | 0.492 | 2000 | 840.22 | 0.489 | 1999 | 793.99 | 0.462 | 1998 | 756.93 | 0.437 |

Correlation Analysis Year | GDP (X) | (X-X)x | (X-X)2 | HDI (Y) | (Y-Y)y | (Y-Y)2 | xy | 2007 | 1311.01 | 321.711 | 103497.97 | 0.536 | 0.0405 | 0.001640 | 13.029 | 2006 | 1223.01 | 233.711 | 54620.83 | 0.524 | 0.0285 | 0.000812 | 6.661 | 2005 | 1123.84 | 134.541 | 18101.28 | 0.514 | 0.0185 | 0.000342 | 2.489 | 2004 | 1052.79 | 63.491 | 4031.11 | 0.504 | 0.0085 | 0.000072 | 0.540 | 2003 | 980.96 | -8.339 | 69.54 | 0.5 | 0.0045 | 0.000020 | -0.038 | 2002 | 925.61 | -63.689 | 4056.29 | 0.497 | 0.0015 | 0.000002 | -0.096 | 2001 | 884.63 | -104.669 | 10955.60 | 0.492 | -0.0035 | 0.000012 | 0.366 | 2000 | 840.22 | -149.079 | 22224.55 | 0.489 | -0.0065 | 0.000042 | 0.969 | 1999 | 793.99 | -195.309 | 38145.61 | 0.462 | -0.0335 | 0.001122 | 6.543 | 1998 | 756.93 | -232.369 | 53995.35 | 0.437 | -0.0585 | 0.003422 | 13.594 | | X=9892.99 | 0 | 309698.12 | Y =4.955 | 0.0000 | 0.007489 | 44.06 |

X=XN =9892.9910 =989.299
Y=YN =4.95510 =.4955 r=xy√x2y2 =43.9623o968.12×.007486 =43.96248.150 = .913

The Correlation between GDP and HDI is .913 which refers that there is highly positive correlation. That if the GDP in a given Year increases the HDI also increases on that year and if the GDP in a given year decreases the ranking will also decrease on that year.