4.3.1 - Measures of development

Growth and Development

Economic growth usually means an increase in real GDP or real GDP per head. That is useful, but it is still only an output measure. Economic development is broader because it focuses on whether living standards and quality of life are improving.

That broader view includes factors such as health, education, infrastructure, political freedom, environmental quality, and the distribution of income. A country may therefore experience economic growth without achieving strong economic development if the extra output does not translate into better lives for most people.

A developed country typically has high GDP per head, stronger education and healthcare systems, reliable infrastructure, higher productivity and investment, and a large service sector. It also tends to have more effective institutions and lower corruption. A developing country typically has lower GDP per head, lower levels of physical and human capital, higher unemployment or underemployment, higher mortality rates or faster population growth, and weaker institutions. Economies such as the UK, Germany, France, and Japan are usually classed as developed, while economies such as Ethiopia are more often used as examples of developing countries. These are broad patterns rather than absolute rules, but they help explain why measuring development is harder than measuring output.

What HDI Measures

Because development has several dimensions, economists often use composite indicators. The best-known example is the Human Development Index, published by the United Nations Development Programme.

The HDI combines three dimensions of human well-being:

Using GNI per capita at purchasing power parity matters because the same money income buys different amounts in different countries. A PPP adjustment tries to compare what people can actually afford, not just the money value of income converted at market exchange rates.

Each indicator is first turned into an index between 0 and 1 using minimum and maximum values, called goalposts. The UNDP uses 20 and 85 years for life expectancy, 0 to 15 years for mean years of schooling, 0 to 18 years for expected years of schooling, and $100 to$75,000 for GNI per capita. The education index is then the arithmetic mean of the two schooling indices. For income, the UN uses the logarithm of GNI per capita because an extra dollar matters more to someone on a low income than to someone who is already very rich. The three dimension indices are then combined using a geometric mean, so a very weak score in one dimension pulls the overall HDI down more than it would under a simple average. The three dimensions are intended to carry equal weight in the final measure.

As a rough guide, HDI values of 0.800 and above are classed as very high human development, 0.700 to 0.799 as high, 0.550 to 0.699 as medium, and below 0.550 as low. Countries such as Norway tend to rank very highly because they perform strongly across all three dimensions, not just on income. In the 2025 Human Development Report (2023 data), Iceland ranked first with 0.972, and Norway and Switzerland were joint second with 0.970, even though Norway's GNI per head was far higher than Iceland's.

Why HDI Is Useful and Limited

The main strength of the HDI is that it is broader than GDP per head. It recognises that development is about people's capabilities and living standards, not just national output. Because the required data is available for most countries, the HDI is also practical to calculate and useful for comparisons between countries and over time.

It is also widely recognised. That matters in economics because a measure becomes more useful when governments, international organisations, and examiners all understand what it is showing. Norway's consistently high HDI is a good example of a country with strong scores in health, education, and income pulling in the same direction. By contrast, Equatorial Guinea has often been used to show why income alone can mislead: oil revenue can lift average income sharply, but weaker education and health outcomes can still hold back broader development. In the 2025 Human Development Report (2023 data), Equatorial Guinea and Sri Lanka had almost the same GNI per capita at PPP (about $12,800 and$12,600), yet Sri Lanka's HDI was 0.776 and Equatorial Guinea's only 0.674, largely because life expectancy was 77.5 years in Sri Lanka against 63.7 years in Equatorial Guinea.

The limitations are just as important. First, the HDI only uses three dimensions. Political freedom, personal security, environmental sustainability, gender equality, and human rights all matter for development, but they are not directly included. Second, the HDI focuses on averages. A country may have a relatively high HDI even if some groups or regions have much worse health, schooling, or income than the national average suggests.

There are other weaknesses too. Years of schooling says little about the quality of education or what students actually learn. Life expectancy says little about disability, mental health, or wider quality of life. The data used can be incomplete or outdated in some countries, and the equal weighting of the three dimensions is ultimately a judgment rather than an objective law. Comparisons over time also need care: the UNDP revises its data and methods, so HDI values from different reports should not be compared directly; trends should come from one consistent series. The HDI is therefore useful, but it is still a simplification of a complex reality.