1The idea in one paragraph

Economic growth is an increase in real output, and one number measures it. Economic development is the wider and slower improvement in what people in a country are actually able to do and to be: to live a long and healthy life, to be educated, to have a decent and secure income, to be treated equally, and to have all of that still available to the people who come next. No single number measures that, so economists use several — some single indicators, each watching one dimension, and some composite indicators that combine dimensions into one score. Every one of them captures something and misses something, and in this subtopic the mark is almost always in the thing it misses.

2Growth and development are not the same thing

Start with the two definitions, because a question that says "distinguish" is testing exactly this.

• Economic growth is an increase in real output over a period of time, usually measured as the percentage change in real GDP, and better measured per person so that a country whose population is growing faster than its output does not look as though it is getting richer.
• Economic development is a sustained improvement in living standards, well-being, opportunities and freedoms. It is multidimensional, which means it has several parts that can move separately, so it cannot be summarised honestly by one number.

Figure 1 puts the two in the right relation. Growth sits inside development as one of its parts, not beside it as an equal, and not on top of it as the same thing under another name.

The dimensions the guide has you measure are income, health, education, equity, and the environment. Each has its own indicators, each can move while the others stand still, and the interesting questions in this subtopic are all about what happens when they do.

3Income per person, and the four steps to a comparable figure

Income is where measurement starts, because it is the dimension with the oldest and cleanest data. Getting from raw output to a figure you can put next to another country's takes four steps, and Figure 2 is the sequence.

Step 1: GDP. Gross domestic product is the total value of all final goods and services produced inside a country's borders in a period.

Step 2: GNI. Gross national income is GDP plus the income residents earn abroad, minus the income foreigners earn inside the country. The adjustment matters for development. A country with a large foreign-owned mining or manufacturing sector produces a great deal inside its borders, but much of the profit leaves as soon as it is earned, so its GNI is well below its GDP and GNI is the closer measure of what the country actually has to spend.

Step 3: per person. Divide by the population, so that a large country and a small one can be compared.

Step 4: at PPP. Purchasing power parity converts currencies at a rate that makes the same basket of goods cost the same amount everywhere, instead of at the market exchange rate. It matters because market exchange rates move for reasons that have nothing to do with what a wage buys at home — a speculative flow, an interest rate decision, all the causes in 4.5 Exchange rates — while a haircut in one country still costs what a haircut costs. Converting at PPP removes the price level from the comparison.

Take Norvant, whose figures run through the rest of these notes. Norvant produces $120bn inside its borders. Its residents earn $2bn abroad; foreign owners earn $14bn inside Norvant. So GNI = 120 + 2 − 14 = $108bn. Its population is 9 million, so GNI per person = 108,000,000,000 ÷ 9,000,000 = $12,000 at PPP. Its neighbour Tenara, whose economy leans on a single exported resource, reaches $22,000.

That is the most comparable income figure we can build. It still misses four things, and a question about the limitations of GDP or GNI per person wants these.

• It is an average. It says nothing about who receives the income. Two countries with identical GNI per person can have completely different distributions.
• It only counts what is paid for. Subsistence farming, care given at home, and the whole informal economy are producing real welfare and are largely invisible in it.
• It does not care what was produced. A hospital and a prison add the same amount to output for the same cost.
• It does not subtract what was used up. Output that comes from clearing a forest or emptying a fishery counts as income, when part of it is really the sale of an asset. That gap is the whole reason for 4.7 Sustainable development.

4The single indicators, and what each one misses

A single indicator measures one dimension of development on its own. The guide names five groups. Figure 3 lays them out with what each captures in the middle column and what each hides on the right.

Health indicators include life expectancy at birth, infant and under-five mortality, maternal mortality, and the number of people per doctor. They show whether income is actually reaching food, clean water, sanitation and primary care, which income alone cannot tell you. What they miss is illness that does not kill — the disease that keeps somebody out of work for years without appearing in a mortality figure — and the gap between a capital city and a rural district, which a national average erases.

Education indicators include the adult literacy rate, mean years of schooling, expected years of schooling, enrolment ratios and the pupil-teacher ratio. They show access to education and the human capital a country is building for later. What they miss is learning itself: years counted in a seat are not the same as being able to read, and a country can raise enrolment without raising attainment.

Economic and social inequality indicators include the Gini coefficient and the Lorenz curve from 3.4, the ratio of the richest fifth's income to the poorest fifth's, and the Palma ratio. They show the spread that an average hides, which is the single most useful correction to a GNI per person figure. What they miss is wealth, which is distributed far more unequally than income almost everywhere, and inequality that is not monetary at all: by sex, by region, by ethnicity, by disability.

Energy indicators include energy use per person, the share of households with electricity, the share cooking on clean fuel, and the energy mix. They show industrial capacity at one end and household conditions at the other, and the household measures are close to a direct reading of living standards: a home with light can study in the evening, a home with cold storage wastes less food. What they miss is whether high energy use is productive or simply wasted, and who inside a country is connected.

Environmental indicators include carbon dioxide emissions per person, concentrations of fine particulates in the air, forest area and access to safely managed water. They show the part of the bill that GDP never books. What they miss is a matter of accounting: emissions are usually counted where goods are made rather than where they are bought, so a country that imports its manufactured goods looks cleaner than its consumption really is.

Notice the pattern. Every indicator in Figure 3 has a right-hand column, and in an evaluation question the right-hand column is where the marks are. A definition earns one mark. A definition followed by what the measure cannot see earns the rest.

5Composite indicators: the HDI, built from the ground up

A composite indicator combines several indicators from different dimensions into one score, usually on a scale from 0 to 1. The best known is the Human Development Index, and you should be able to say what it is made of rather than only what it is called.

The HDI has three dimensions and four indicators.

• A long and healthy life, measured by life expectancy at birth.
• Knowledge, measured by mean years of schooling for adults and expected years of schooling for children starting school.
• A decent standard of living, measured by GNI per person at PPP, in natural logarithms so that each extra dollar counts for less at high incomes than at low ones.

Each indicator is turned into an index between 0 and 1 by placing it between a fixed minimum and maximum, the "goalposts": life expectancy between 20 and 85 years, mean years of schooling between 0 and 15, expected years between 0 and 18, GNI per person between $100 and $75,000. The three dimension indices are then combined as a geometric mean, the cube root of their product, rather than an ordinary average. That choice does real work: a geometric mean punishes an uneven profile, so a country cannot fully make up for a weak dimension with a strong one, which is the whole point of calling development multidimensional.

Work it through for Norvant. Life expectancy 72 years, mean years of schooling 8.2, expected years of schooling 12.0, GNI per person $12,000.

• Health index = (72 − 20) ÷ (85 − 20) = 52 ÷ 65 = 0.800
• Education index = the average of 8.2 ÷ 15 = 0.547 and 12.0 ÷ 18 = 0.667, which is 0.607
• Income index = (ln 12 000 − ln 100) ÷ (ln 75 000 − ln 100) = 4.787 ÷ 6.620 = 0.723
• HDI = (0.800 × 0.607 × 0.723) raised to the power one third = 0.705

Now Tenara, whose resource income is much higher but whose people live shorter lives and spend fewer years in school: life expectancy 62, mean years of schooling 5.5, expected years 10.4, GNI per person $22,000. Its indices come out at 0.646, 0.472 and 0.815, and its HDI at 0.629.

Figure 5 is the reason composite indicators exist. Ranked by income, Tenara is nearly twice Norvant. Ranked by HDI, the order reverses, because the index refuses to let one strong dimension stand in for two weak ones. Neither ranking is wrong; they are answers to different questions, and the point of the pair is that "which country is more developed" is not a question a single number settles.

The HDI has limitations, and an evaluation question wants them.

• It is still an average, so it says nothing about distribution. That is what the IHDI in section 6 exists to repair.
• It leaves out whole dimensions: the environment, political freedom and participation, security, and equality between women and men.
• The weights are a choice. Equal weighting of the three dimensions is a judgement by the people who built the index, not a finding.
• Small differences are not meaningful. Two countries a few thousandths apart are, for practical purposes, the same, and the data behind the components carries error larger than that.

6The other three composites

The Inequality-adjusted Human Development Index, IHDI. The same three dimensions as the HDI, but each dimension index is discounted according to how unequally that dimension is distributed within the country. If health, education and income were spread perfectly evenly, the IHDI would equal the HDI; every gap between them is a loss to inequality. Figure 7 shows the size of that loss for our two economies.

Norvant's HDI of 0.705 falls to an IHDI of 0.520, a loss of 26%. Tenara's 0.629 falls to 0.478, a loss of 24%. The number worth quoting in an answer is not either index on its own but the distance between them, because that distance is a direct measure of how much of a country's average achievement its own distribution takes away. The limitation is practical: the IHDI needs household survey data on the distribution of all three dimensions, and many countries do not collect it often or well.

The Gender Inequality Index, GII. Three dimensions, measuring the gap between women and men: reproductive health, through the maternal mortality ratio and the adolescent birth rate; empowerment, through the share of parliamentary seats and of secondary education attainment by sex; and the labour market, through labour force participation by sex. It puts a number on the dimension that the HDI averages away.

Read its direction carefully, because this is the classic slip. The GII runs from 0 to 1 with 0 meaning women and men fare equally and 1 meaning as unequal as the index can register. It runs the opposite way round to the HDI. A country with a high HDI and a high GII is an ordinary combination, not a contradiction.

The Happy Planet Index, HPI. It combines how long people live with how good they report their lives to be, and sets that against the ecological footprint, the area of land and sea one person's consumption requires. It therefore asks a question none of the others ask: what is a long and satisfying life costing the planet, and could everyone have one? The limitations are that experienced well-being is a survey answer and moves with things well outside economics, that the footprint is an estimate built on many assumptions, and that the exact formula has been revised more than once, so figures from different years are not always comparable.

7Strengths and limitations of the approaches

This is the AO3 line in the extract, and it carries the part (b) marks. Handle it by comparing the two families rather than listing indicators again.

Single indicators are simple, quickly understood, published for almost every country, and available sooner after the year they describe. Each one measures one thing and measures it directly, so a change in it is easy to explain. Their weakness is the other side of the same coin: one dimension is not development, and anybody arguing a case can choose the indicator that supports it and leave the rest out.

Composite indicators force the discussion to be multidimensional. They are harder to flatter with a single policy, they put countries on one comparable scale, and a well-built one, such as the HDI with its geometric mean, refuses to let strength in one dimension cover weakness in another. Their weakness is that the single number hides the trade-off inside it: two countries can reach the same HDI by completely different routes, and the score does not say which. The weights are a judgement. The components need data that the countries with the most pressing development questions are often the least able to supply. And a score can move because a statistical method or a goalpost was revised rather than because anything happened to anybody.

Two limitations apply to every measure in this subtopic, and naming them lifts an answer.

Data quality. Indicators are only as good as the statistical services that produce them. Subsistence and informal activity, which can be a large share of what people actually live on, are estimated rather than counted, and censuses and household surveys are years apart.

Development is a normative idea. Choosing what to measure is choosing what development means. An index that leaves out political freedom is making a claim about whether political freedom is part of development, and it makes that claim silently. Say so in a part (b) and you are evaluating rather than describing.

8The possible relationship between growth and development

The last line of the extract asks whether the two go together. The honest answer is that they often do, that nothing makes them, and that the interesting cases are the ones where they part. Figure 8 draws all three histories from the same starting point.

Growth carrying development. Higher output raises incomes, which lifts households above subsistence; it raises the tax base, which pays for clinics, schools, water and roads; and the jobs it creates are themselves a route out of poverty. Growth is not development, but it is the usual source of the money development is bought with, and a country with no growth at all has a much harder task.

Growth without development. Output rises and the indicators of well-being do not. It happens when the gains go to a narrow group, so that average income rises while median income does not. It happens when growth sits in an enclave — a mine or an oil field with few links to the rest of the economy, and with profits owned abroad, which is why GDP and GNI come apart. It happens when growth is bought by running down a forest, a fishery or an aquifer, so that the output of one decade is taken out of the next. And it happens when nothing raises the health and education of the people doing the work.

Development without growth. Indicators of well-being improve while output is flat. Existing revenue is spent differently, on primary care and basic schooling rather than on prestige projects; income is redistributed; clean water and sanitation reach more households; or discrimination that kept part of the population out of work or school is removed. These gains are real and they are limited: without growth there is a ceiling on how far they can go, since you can only redistribute and re-prioritise what already exists.

The conclusion an examiner wants is a conditional one. Growth raises the chance of development, and whether it delivers depends on who receives the gains, what they are spent on, and what is being used up to produce them. 4.9 Barriers to economic growth and/or economic development explains what stops the link from working, and it is the right unit to point at when a question asks why the link failed in a particular economy.