Understanding HDI, GNH, GDP, Trade, and Economic Factors

Posted on Feb 22, 2025 in Economy

Understanding Key Economic Indicators and International Trade

Human Development Index (HDI)

The UN created the HDI to assess the development of countries, not just by GDP, but also by people’s level of literacy and life expectancy. This takes into account the GDP per capita index, education index, and life expectancy index.

Gross National Happiness Index (GNH)

Which country decided to base its policies on the Gross National Happiness Index instead of the GDP?

Bhutan’s principles have been set in policy through the Gross National Happiness Index, based on equitable social development, cultural preservation, conservation of the environment, and promotion of good governance.

Green GDP

The Green Gross Domestic Product is an index of economic growth with the environmental consequences of that growth factored into a country’s conventional GDP. Calculating Green GDP requires that net natural capital consumption, including resource depletion, environmental degradation, and protective and restorative environmental initiatives, be subtracted from the traditional GDP.

Reasons for Exporting Certain Products

  1. Relative Labor Productivity
  2. Relative supplies of capital, labor, and land and their use in the production
  3. Relative Bargaining Power

Trade Theories

Absolute Advantage

Countries with the highest level of labor productivity, or the lowest unit labor costs, can be competitive.

Comparative Advantage and Opportunity Cost

If the opportunity cost of producing a good is lower in a country than in other countries, it has a comparative advantage.

Factor Endowment Theory

Labor-abundant vs. Capital-abundant countries

  1. Heckscher-Ohlin: A country will export the good that uses intensively the factor of which the country is relatively well-endowed.
  2. Stolper-Samuelson: The increase in the relative price of a good increases the income of the factor that is used intensively.

World Trade Organization (WTO)

WTO negotiations address trade restrictions in at least three ways:

  1. Reducing tariff rates through multilateral negotiations.
  2. Binding tariff rates.
  3. Eliminating non-tariff barriers.

Main Reasons for Protectionism

  1. Dumping
  2. Chronic trade gap
  3. Employment protection
  4. Protecting infant sectors
  5. Protecting key/strategic industries
  6. Raising revenues for the government
  7. Response to recession/low demand

International Monetary Fund (IMF)

IMF Functions:

  1. Regulatory (administering the rules governing currency values and convertibility – approving devaluations)
  2. Financial (supplying supplementary liquidity when current account deficits)
  3. Consultative (providing a forum for cooperation among governments)

Where does the IMF get its money from? Loans, quotas, and interest rates. The quota is the country’s monetary contribution and is based on the country’s relative size in the global economy. IMF conditionality applies.

World Bank (WB)

The World Bank is an international financial institution that provides loans to countries for capital programs. Its official goal is the reduction of poverty, but all decisions must be guided by a commitment to the promotion of foreign investment, international trade, and the facilitation of capital investment.

Determinants of Exchange Rates

  1. Relative interest rates
  2. The demand for imports (D$)
  3. The demand for exports (S$)
  4. Investment opportunities
  5. Speculative sentiments
  6. Global trading patterns
  7. Changes in relative inflation rates

Appreciation: Exports (X) are expensive, Imports (M) are cheap. Depreciation: Exports (X) are cheap, Imports (M) are expensive.

Trade Barriers

Tariff Barriers

Non-Trade Barriers

Red tape: Excessive regulation that hinders or prevents actions or decision-making (e.g., import licenses, pre-shipment inspections, unreasonable standards pertaining to quality and safety).

Agricultural Negotiations – Domestic Support

  • Amber Box
  • Blue Box
  • Green Box

Types of Tariffs

  • Specific Tariff: Levied as a fixed charge for each unit of imported goods (e.g., $3 per barrel of oil).
  • Ad Valorem Tariff: Levied as a fraction of the value of imported goods (e.g., a 25% tariff on the value of imported trucks).