Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Searching for a broader measure: Human Development Index (HDI)

The great thing about having a high GDP per capita (PPP) is that on average people in that country have high living standards. Furthermore, countries with high levels of income tend to have high life expectancy, low illiteracy, low infant mortality and lots of other good things. Even in ‘happiness surveys’, people in richer countries tend to report higher levels of happiness and well-being, even though people are on average no happier today than they were 50 years ago (when the world was much poorer).

But sometimes a country can have a relatively large GDP per capita

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    and at the same time not have all the other good stuff usually associated with having a high income. For example, Equatorial Guinea, a country in Central Africa, has a per capita income (PPP) of over
    

$25,000. But the people of Equatorial Guinea don’t have a decent standard of living. In fact, most of them don’t have access to safe drinking water and around 1 in 5 children die before the age of five.

In order to focus more attention on the ‘things that really matter’ and not just on GDP, prominent development economists Amartya Sen and Mahbub ul Haq created an index that they argue does a better job of measuring living standards: the Human Development Index (HDI). The HDI combines information on three different indices:

Life Expectancy Index: Calculated using how long someone can expect to live from birth


Education Index: Calculated using the mean years of schooling and expected years of schooling


Income Index: Calculated using income per capita

Even though Equatorial Guinea is the richest country in Africa (per capita), its HDI is way down the list at 144th in the world. Thus, HDI is a broader measure than GDP per capita and penalises countries (by way of lowering their world ranking) that have high incomes but don’t convert these high incomes into positive outcomes for their people.

Despite HDI’s appeal as a ‘better’ measure of living standards than income per capita, it never really took off. This is probably because countries such as Equatorial Guinea, with high incomes but low HDI, are very much an anomaly. Most countries with a high GDP per capita (PPP) have a high HDI. Similarly, most countries with a low GDP per capita have a low HDI. This is because countries with high incomes tend to have highly educated populations with high life expectancy and those with low incomes usually do not.