Measuring Development: GDP, GNI, and the HDI

Gross domestic product (GDP) is the total value of goods and services produced within a country in a year, gross national income (GNI) is the total income earned by a country’s residents and businesses including income from abroad, and the Human Development Index (HDI) is a composite measure of health, education and living standards on a scale from 0 to 1. In brief: GNI = GDP + net income received from abroad. Dividing by the population gives GDP or GNI per capita, and the HDI combines life expectancy, years of schooling and GNI per capita into one number: 0.800 and above is “very high” development and below 0.550 is “low”.

Measures of development help to compare countries, target aid and track progress, but each measure shows only part of the picture. This guide explains GDP, GNI and the HDI, how the HDI is calculated, what these indicators leave out, compares the measures in a table, works through a full HDI calculation, outlines the history and corrects common mistakes.

What are GDP and GNI?

GDP measures the value of all final goods and services produced inside the borders of a country in a year, whoever owns the producers. A foreign-owned factory in the country counts in its GDP. GNI measures the income of the country’s own residents and firms, wherever it is earned: it adds the income that residents receive from abroad (wages, profits, interest) and subtracts the income that goes to foreigners. In countries with large remittances, large foreign investment or big debts, GDP and GNI can differ noticeably.

Both are usually divided by the population to get a per capita value, which is better for comparing countries of different size. Because prices differ between countries, economists often adjust for purchasing power. Purchasing power parity (PPP) converts incomes into “international dollars” that buy the same basket of goods everywhere, so that income in a low-price country is not understated. The World Bank groups countries into low-, lower-middle-, upper-middle- and high-income categories using GNI per capita thresholds that are updated each year.

What is the Human Development Index?

The United Nations Development Programme (UNDP) introduced the HDI in 1990. It has three dimensions, each turned into an index between 0 and 1.

• Health: life expectancy at birth, with a minimum value of 20 years and a maximum of 85.
• Education: the average of mean years of schooling for adults (maximum 15) and expected years of schooling for children (maximum 18).
• Standard of living: GNI per capita in PPP dollars, using a logarithm, with a minimum of 100 and a maximum of 75,000. The logarithm reflects that extra income matters less at high levels.

Each dimension index = (actual value − minimum) ÷ (maximum − minimum). The HDI is the geometric mean of the three indices, which means that weakness in one dimension cannot be fully offset by strength in another. UNDP groups countries as very high (0.800 or more), high (0.700–0.799), medium (0.550–0.699) and low (below 0.550) human development. The minimum and maximum values and country scores are revised from time to time, so they should be checked in the latest report.

What do these measures leave out?

GDP and GNI averages hide inequality: a country can have a high average income while most people are poor. They ignore unpaid work (such as housework and care), the informal economy, environmental damage and the depletion of resources, and they count activities such as clean-up after disasters as growth. The HDI includes health and education but not inequality, gender gaps, political freedom, safety or sustainability, which are covered by other measures such as the inequality-adjusted HDI, the Gender Development Index and the Gini coefficient. Alternative approaches include the Multidimensional Poverty Index and measures of happiness or well-being.

The measures compared

Worked example: calculating the HDI

The data are hypothetical, and the minimum and maximum values are those given above.

1. Data: life expectancy 72.5 years, mean years of schooling 8.0, expected years of schooling 14.0 and GNI per capita 12,000 (PPP dollars).
2. Health index: (72.5 − 20) ÷ (85 − 20) = 52.5 ÷ 65 = 0.808.
3. Education index: the mean-years index is 8.0 ÷ 15 = 0.533, and the expected-years index is 14.0 ÷ 18 = 0.778. Their average is (0.533 + 0.778) ÷ 2 = 0.656.
4. Income index: (ln 12,000 − ln 100) ÷ (ln 75,000 − ln 100) = ln 120 ÷ ln 750 = 4.787 ÷ 6.620 = 0.723.
5. HDI: the geometric mean is (0.808 × 0.656 × 0.723)^1/3 = (0.383)^1/3 = 0.726, which places the country in the “high” group.
6. Comparison: a country with life expectancy of 80, mean schooling 12, expected schooling 17 and GNI per capita of 45,000 has indices of 0.923, 0.872 and 0.923, so its HDI is about 0.906, which is “very high”.
7. GNI from GDP: if the GDP is 200 billion, residents earn 12 billion abroad and foreigners take 7 billion out, GNI = 200 + 12 − 7 = 205 billion. With 20 million people, GNI per capita is 205,000 ÷ 20 = 10,250.

How did development measurement evolve?

National income accounting developed in the 1930s and 1940s, building on the work of Simon Kuznets, and GDP became the main measure of economic performance after the Second World War. In the 1960s and 1970s, economists criticized the focus on income alone, and the “basic needs” approach gained support. The economists Mahbub ul Haq and Amartya Sen developed the HDI, presented in UNDP’s first Human Development Report in 1990, based on Sen’s idea of development as expanding people’s capabilities and freedoms. Since then, many other indicators have been introduced, and the Sustainable Development Goals of 2015 use a long list of targets and indicators.

Which mistakes are common?

Mistake 1: Using GDP as a measure of well-being

GDP shows the size of the economy, not how it is shared, or the health and happiness of the people.

Mistake 2: Confusing GDP and GNI

GDP counts production within the borders. GNI counts income of the residents, including income from abroad.

Mistake 3: Averaging the three HDI indices

The HDI uses the geometric mean, not the simple average, so a very low score in one dimension reduces the result more.

Mistake 4: Thinking that a high HDI means equality

The HDI is an average. Inequality, gender gaps and environmental costs need other indicators.