Exercises: Development and well-being indicators

Explain the difference between economic growth and development. Can a country's GDP grow without improving the lives of the majority? Give a reasoned example.

What does the Human Development Index (HDI) measure and which three dimensions does it combine? Explain why it is considered a more comprehensive measure than GDP per capita.

Name three quality-of-life indicators other than GDP (related, for example, to health, education, the environment or leisure time) and explain what each one captures that GDP does not.

Explain in your own words what a country's development is and what dimensions it includes besides income (health, education, freedoms, the environment). Why is development said to be "multidimensional"?

What does life expectancy at birth measure and what does it tell us about a country? Two countries with the same income per capita have life expectancies of $74$ and $83$ years: what hypotheses would you make about their healthcare systems, their diets or their inequality?

What do the literacy rate and the average years of schooling measure? Explain why education is both a sign of development and one of its causes: what chain connects it to future income?

Development approaches talk about expanding people's "capabilities" and real freedoms: being able to read, living healthily, participating, choosing your own life project. Explain with an example why a person with income but without freedom or without health is not truly "developed".

What does the per capita carbon footprint measure? Reason why environmental indicators form part of future well-being even though they do not measure today's life: what is the relationship between current emissions and the development of the next generations?

Two imaginary countries: Kolia has an income per capita of $\text{€}\ 40,000$ and a medium HDI; Osia has $\text{€}\ 28,000$ and a very high HDI.

1. a) How is this combination possible? Explain what Osia must be doing right.
2. b) Which country would you choose to live in and what criterion do you use to decide?

Give three reasons why GDP does not accurately measure well-being, focusing on unpaid work, the shadow economy and environmental damage. For each one, explain with an example how it distorts the measure.

The figure compares three imaginary countries using two indicators: income per capita in thousands of euros (bars) and the score on a quality-of-life index from $0$ to $100$ (dots).

1. a) Which country has the best combination of income and quality of life? Justify your answer using the graph.
2. b) Which country seems to "buy" little quality of life with its income? What might be going wrong there?

Three fictitious countries: Alia has income per capita of $\text{€}\ 30,000$, life expectancy of $80$ years and $12$ average years of schooling; Bora has $\text{€}\ 24,000$, $82$ years and $14$ years of schooling; Cira has $\text{€}\ 34,000$, $76$ years and $10$ years of schooling.

1. a) Build a reasoned development ranking and explain how you have weighted income, health and education.
2. b) What value judgement did you make when weighting? Compare your ranking with one based only on income and comment on the differences.

An earthquake destroys part of a city. The following year, the region's GDP rises strongly thanks to reconstruction.

1. a) Explain why GDP grows even though residents are worse off than before the earthquake: what does GDP count and what does it not count?
2. b) What complementary indicator would better reflect the situation (wealth or assets destroyed, perceived well-being)? Reason your answer.

If two neighbours each look after their own children, GDP records nothing; if they decide to pay each other to look after the other's children, GDP rises, even though the work done is the same.

1. a) Explain the paradox and what it says about what GDP measures (market transactions).
2. b) Reason how this affects GDP comparisons between countries or between periods with different levels of women's participation in paid work.

Two countries: one has high income, very polluted air and extremely long working hours; the other has average income, clean air and more free time.

1. a) What indicators would you ask for, besides income, to decide where to live? Justify each one.
2. b) Explain why that decision mixes data and personal judgements, and what that says about "best country to live in" rankings.

You are asked to assess whether your city "is developed" beyond its income.

1. a) Propose four objective pieces of data you would collect (health, education, the environment, safety or cohesion) and explain what each one contributes.
2. b) Add a survey of residents: what two questions would you ask about their lives and why do subjective data count too?

A region depends on a highly polluting mine: local GDP is high, but air quality is poor, life expectancy is low and young people are leaving.

1. a) Assess the region's "well-being" using several indicators, not just economic ones.
2. b) Propose two measures to improve its development without shutting down activity all at once.

Design a quality-of-life index for your city.

1. a) Choose five variables (with their unit of measurement) and explain why each one deserves to be in the index.
2. b) How would you weight them? Justify your decision and mention a practical difficulty in collecting the data.

Observe the following data from three countries in 2023:

• Country A: GDP per capita = 46,000 €; Gini Index = 0.39; Average life satisfaction = 6.2 out of 10.

• Country B: GDP per capita = 29,000 €; Gini Index = 0.24; Average life satisfaction = 7.5 out of 10.

• Country C: GDP per capita = 2,800 €; Gini Index = 0.44; Average life satisfaction = 3.9 out of 10.

1. a) Use the Easterlin paradox and the law of diminishing marginal utility of income to explain why the jump in income between country C and country B generates a substantial increase in subjective well-being, while between country B and country A the relationship seems to reverse.
2. b) An analyst states: "To achieve the life satisfaction of country B, country A simply needs to accelerate its economic growth." Refute their statement by proposing at least two dimensions of development (relying on indicators such as the HDI or the OECD Better Life Index) that GDP does not capture and that explain this difference.

The fictional country "Austral" managed to quadruple its GDP per capita in two decades by attracting foreign textile assembly factories and maintaining very low wages. However, over the last ten years its wages have grown compared to poorer neighboring countries, multinationals are starting to offshore, and growth has stagnated at 0.8 % per year, failing to converge with high-income countries.

1. a) Diagnose why the competitive advantages that allowed Austral to escape extreme poverty are no longer effective for sustained growth (the "middle-income trap").
2. b) Design two structural policies to overcome this stagnation and justify why these reforms entail greater technical difficulties and higher short-term political costs than the initial measures of opening up to maquiladoras.

Imagine two societies with identical prices and cost of living:

• In Society A, your net annual salary is 38,000 € and the average salary of your fellow citizens is 24,000 €.

• In Society B, your net annual salary is 52,000 € and the average salary of your fellow citizens is 75,000 €.

1. a) Predict in which of the two societies an average person would tend to report higher life satisfaction according to the relative income hypothesis, and explain the economic mechanism that justifies it (positional goods or "status race").
2. b) If individual well-being depends heavily on relative standing and not just on the absolute level of consumption, what dilemma does this pose for an economic policy focused exclusively on maximizing GDP? Justify what corrective role progressive taxes could play in this scenario.

The president of a Government declares in the budget debate: "Our absolute economic priority must be for GDP to grow above 3 %, because when GDP increases, the social well-being and sustainability of a country are automatically guaranteed."

1. a) Refute the president's claim by providing two concrete examples where an increase in GDP causes or conceals an actual deterioration in citizens' quality of life.
2. b) If GDP has such well-known limitations for measuring well-being, why do Ministries of Economy and international organizations continue to use it as the core macroeconomic indicator? Justify at least two operational advantages of GDP compared to composite quality-of-life indices.
3. c) Design an alternative dashboard with three key non-monetary indicators and explain what practical measurement or periodicity difficulties the Government would face when trying to govern based on them.

The country of San Marcos allocates 5 % of its public resources to funding universities and teaching hospitals. However, 60 % of its medical graduates and 50 % of its engineers emigrate to advanced economies shortly after graduating. The remittances they send back already account for 11 % of the national GDP and sustain their families' immediate consumption, but the country's rural health centres suffer from a critical staff shortage and no local technology industry is taking off.

1. a) Evaluate whether this migratory flow fosters long-term development or perpetuates an economic dependency trap. Justify your answer by analysing the opportunity cost of lost human capital versus the money multiplier effect of remittances.
2. b) To solve the problem, a member of parliament proposes confiscating 25 % of remittances and withholding university degrees for five years. Dismiss this proposal as inefficient and design two alternative policies (one aimed at cooperation agreements with recipient countries and the other at internal professional incentives) that increase human capital without violating rights.

A team of advisors proposes to a low-income country that it replicate point by point the economic strategy that Spain followed between 1959 and 1985 to achieve development: massively promote traditional export manufacturing intensive in cheap labour, attract low-cost mass tourism, and encourage the emigration of workers to neighbouring countries to capture foreign currency.

1. a) Argue why two of the pillars of Spanish growth from that period would hardly work today in a developing economy, considering current global factors such as industrial automation, climate change, or global value chains.
2. b) Identify two institutional or capital accumulation (human, technological, or regulatory) reforms from the Spanish case that do remain fully valid, and justify how that country should adapt them today to avoid a vulnerable or unsustainable growth model.