OxfordAQA International AS and A-level Economics: Measuring growth, development and living standards (9640)

This guide teaches section 3.4.3.1 of the OxfordAQA International AS and A-level Economics (9640) specification, version 1.2: measuring economic growth, development and living standards. Section 3.4 is extra International A2 content, examined in Unit 4, which builds on Units 1 and 2. Quantitative skills (section 3.5) may be assessed in any unit, so the calculations below count as part of this topic. Every country, currency and number here is invented for illustration. Track progress with the OxfordAQA Economics hub and the printable checklist. Use the revision notes, the practice questions and the free diagnostics. For growth and the cycle in the earlier units, see economic growth and the economic cycle.

What the specification asks for

Content	What you must be able to do
Growth versus development	Distinguish them and judge how far one needs the other
MEDCs, emerging economies, LEDCs	Describe general characteristics
Real national income; GDP, GNI, NNI	Measure growth; know how the three differ
HDI, IHDI, MPI	Explain what each shows and its weaknesses
Infant mortality, literacy, inequality	Use as further indicators
Sustainable development	Link well-being now and in future
Living standards over time and between countries; PPP	Compare fairly
Real GDP per head	Assess strengths and weaknesses
Environmental and social limits	Evaluate the costs of growth

You do not need detailed knowledge of how national income is measured, but you must know how GDP, GNI and NNI differ and the limitations of each indicator.

Growth and development

Economic growth is an increase in real national income (real output) over time. Development is a wider idea: lasting improvement in people’s well-being, including health, education, freedom from poverty and a fairer spread of income. Growth is usually measured by one number; development needs several.

The two can come apart. A country can grow quickly on the sale of one mineral while most households see nothing: growth without development. A country can cut child deaths with cheap vaccination and clean water while income per head barely moves: development without much growth. Evaluation: growth usually helps because it raises tax revenue for schools and clinics, but it is neither necessary nor sufficient. Sharing and spending matter.

Types of economy

The specification asks for general characteristics only. These are tendencies, not rules, and countries sit on a spectrum.

Feature	MEDC	Emerging economy	LEDC
Income per head	High	Middle and rising fast	Low
Main sector	Services	Industry growing, services rising	Agriculture or primary exports
Health and education	High life expectancy, near-universal schooling	Improving quickly	Low life expectancy, high infant mortality, lower literacy
Population	Slow growth, ageing	Falling birth rates, urbanising	Fast growth, young
Inequality	Moderate to high	Often widening	Often high, with a large informal sector
Trade and investment	Diversified exports, outward investment	Rising manufactured exports, FDI inflows	Few export products, aid dependence

Measuring growth

Real national income is national income adjusted for price changes, so a rise reflects more output rather than higher prices. Real national income is the main measure of growth.

GDP, GNI and NNI. GDP is the value of everything produced within a country’s borders in a year, whoever owns the firms. Gross National Income (GNI) adds income that residents earn abroad and subtracts income paid to foreign owners. Net National Income (NNI) is GNI minus capital depreciation, the wear on machines and buildings.

Worked example (Country B, invented, billions of currency units). GDP is 640. Residents receive 21 from abroad and foreign owners take 58.

• GNI = 640 + 21 − 58 = 603.
• Depreciation is 54, so NNI = 603 − 54 = 549.
• With a population of 20 million, GDP per head is 32,000, GNI per head 30,150 and NNI per head 27,450.

GNI is below GDP because foreign owners take out more than residents bring in. NNI is lower again because some output only replaces worn-out capital.

Real growth. To remove inflation, divide nominal output by the price index, where the base year equals 100.

Worked example (Country A, invented). Nominal GDP rises from 412 to 455 while the price index goes from 100 to 106.5.

• Nominal growth = (455 − 412) ÷ 412 × 100 = 10.4%.
• Real GDP in the new year, at base prices = 455 ÷ 1.065 = 427.2.
• Real growth = (427.2 − 412) ÷ 412 × 100 = 3.7%.

Actual growth is a rise in real output; potential growth is a rise in capacity, such as a rightward move of the long-run aggregate supply curve.

Indicators of development

Human Development Index (HDI). A composite index from 0 to 1 combining three dimensions: a long and healthy life (life expectancy), knowledge (schooling) and a decent standard of living (income per head at PPP). Each dimension gets an index from 0 to 1, and HDI is their geometric mean, so a low score on one dimension cannot be fully hidden by a high score on another.

Worked example (Country S, invented, with goalposts fixed for the example). Life expectancy is 72 years, goalposts 20 and 85. Income per head is 8,000 at PPP, goalposts 100 and 75,000. The education index is 0.64.

• Health index = (72 − 20) ÷ (85 − 20) = 0.800.
• Income index = ln(8,000 ÷ 100) ÷ ln(75,000 ÷ 100) = 4.382 ÷ 6.620 = 0.662.
• HDI = (0.800 × 0.64 × 0.662)^(1/3) = 0.697, slightly below the arithmetic mean of 0.701.

Income enters through a logarithm because extra income adds less to well-being as people get richer. Doubling income adds 0.105 to the income index at any starting level, so a rise from 2,000 to 4,000 counts the same as 8,000 to 16,000.

Inequality-adjusted HDI (IHDI). HDI discounted for unequal distribution in each dimension. IHDI equals HDI only when there is perfect equality. If HDI is 0.720 and IHDI is 0.612, the loss is (0.720 − 0.612) ÷ 0.720 = 15.0%.

Multidimensional Poverty Index (MPI). Counts overlapping deprivations in health, education and living standards (ten indicators in the published version). A person counts as MPI-poor when deprived across a third or more of the weighted indicators. MPI = H × A, where H is the share of people who are poor and A is the average share of indicators in which the poor are deprived.

Worked example (invented). In Country T, 32% of people are MPI-poor and they are deprived in 46% of weighted indicators on average. MPI = 0.32 × 0.46 = 0.147. In Country U, H is 20% and A is 40%, so MPI = 0.080. Country T is worse on both counts. MPI also falls if A falls while H stays the same, so it shows the depth of poverty and not just its extent.

Other indicators. The infant mortality rate is infant deaths under age one per 1,000 live births. If 612 infants die among 34,000 live births, the rate is 612 ÷ 34,000 × 1,000 = 18.0. If it falls to 16.0 the year after, that is a drop of 11.1%. Limitations: HDI ignores inequality and the environment, MPI depends on chosen weights, literacy ignores schooling quality, and each single indicator misses other dimensions. The literacy rate is the share of adults who can read and write: 6.3 million literate adults out of 8.4 million is 75%.

Measures of inequality. A Lorenz curve graphs how much income the poorest 20%, 40% and so on of households receive in total. The Gini coefficient is the area between the curve and the line of equality divided by the area under that line: 0 is perfect equality, 1 is one household holding everything. The quintile ratio divides the top fifth’s income share by the bottom fifth’s.

Worked example (Country V, invented). Income shares by quintile, poorest to richest: 4%, 8%, 13%, 21%, 54%.

• Cumulative shares: 4, 12, 25, 46, 100.
• Gini ≈ 0.452, found by taking the area under the curve in five strips and subtracting twice that area from 1.
• Quintile ratio = 54 ÷ 4 = 13.5.

For Country W, shares of 9, 13, 17, 22 and 39 give a Gini of about 0.276 and a ratio of 4.3, so income is far more equal. A grouped Gini ignores differences inside each fifth, so it slightly understates inequality.

Comparing living standards

Over time, use real GDP per head, which corrects for both inflation and population.

Worked example (Country C, invented). Real GDP rises from 360 to 441 over five years, while population rises from 18.0 million to 21.0 million.

• Total real growth = 22.5%.
• Real GDP per head goes from 20,000 to 21,000, a rise of 5.0%.
• Per year, that is about 4.1% for GDP but only about 1.0% per head.

When prices and money incomes both change, real change = (1 + nominal change) ÷ (1 + price change) − 1. Money income per head up 9% with prices up 6% gives 1.09 ÷ 1.06 − 1 = 2.8%, not 3%.

Between countries, converting at market exchange rates misleads, because those rates reflect traded goods, capital flows and speculation, and non-traded services such as haircuts and rent are cheaper in poorer countries. Purchasing power parity (PPP) exchange rates convert incomes using the relative cost of the same basket of goods and services.

Worked example (invented currencies). The basket costs 840 pol in Country P and 210 rin in Country R. The PPP rate is 840 ÷ 210 = 4 pol per rin. The market rate is 6 pol per rin. Country P’s GDP per head is 36,000 pol; Country R’s is 12,000 rin.

• At the market rate, Country P’s figure is 36,000 ÷ 6 = 6,000 rin, half of Country R’s.
• At PPP, it is 36,000 ÷ 4 = 9,000 rin, three quarters of Country R’s.

Growth rates need care too. A poor country growing 7% from 2,400 per head gains 168, while a rich country growing 2% from 45,000 gains 900, about 5.4 times as much. High percentage growth from a low base closes the absolute gap slowly or not at all.

Real GDP per head: strengths and weaknesses

Strengths: it is available for almost every country, updated often, consistent, and correlates with good outcomes such as life expectancy.

Weaknesses, each with a consequence:

• Averages hide distribution. Nine households earn 120, 140, 150, 160, 175, 190, 210, 260 and 1,295. The mean is 300 but the median is 175, so a typical household is far poorer than the mean implies.
• Non-market output is missed. Unpaid childcare, subsistence farming and the informal economy are counted poorly or not at all, which understates poorer countries.
• Composition is ignored. Output spent on weapons or repairing disaster damage raises GDP without raising well-being.
• Bads are not subtracted. Pollution and depleted resources reduce future living standards but do not reduce GDP.
• Leisure, freedom and safety are excluded.
• Comparisons depend on exchange rates unless PPP is used, and PPP baskets differ from what people buy.

Sustainability and limits to growth

Economic development is sustainable if it improves the well-being of current and future generations. Growth that uses up natural capital borrows from the future.

Illustrative adjustment (invented). Measured GDP is 500. Resource depletion is valued at 35 and pollution damage at 25. An adjusted figure is 500 − 35 − 25 = 440, 12% lower. The method is a teaching illustration, not an official measure.

Environmental limits include finite resources, climate change and loss of habitat. Social limits include congestion, rising inequality, weaker communities and long working hours. Evaluation: the limits depend on how output is produced; cleaner technology can loosen them if adopted in time.

Common errors

• Calling nominal growth “growth” without deflating by the price index.
• Dividing growth in total GDP by population growth instead of using (1 + g) ÷ (1 + p) − 1.
• Saying a high HDI means equality; that is what IHDI and Gini are for.
• Saying PPP removes all problems: it still uses average prices and averages incomes.

Official syllabus

OxfordAQA International AS and A-level Economics (9640) specification, version 1.2, section 3.4.3.1, published by OxfordAQA (first teaching September 2020, first A-level exams May/June 2022).