Composite Economic Indicators (Cambridge (CIE) A Level Economics): Revision Note

The Human Development Index (HDI)

• The HDI is defined as a composite index published annually by the United Nations Development Programme (UNDP), measuring average achievement across three dimensions of human development

The three dimensions and their indicators

• Each dimension is scored between 0 and 1; the HDI is the geometric mean of the three dimension scores

• Countries are classified as very high, high, medium or low human development based on their HDI score

  • A value of < 0.550 is considered low development

    • E.g. Senegal was at 0.514 in 2021

  • A value of 0.550-0.699 is considered medium development

    • E.g.Bangladesh was at 0.667 in 2021

  • A value of 0.700-0.799 is considered high development

    • E.g Thailand was at 0.777 in 2021

  • A value ≥ 0.800 is considered very high development

    • E.g. Austria was at 0.918 in 2021

Evaluating the HDI

• Advantage over GNI alone

  • Two countries with identical GNI per capita can have very different HDI scores depending on how income is translated into health and education outcomes

  • Cuba and Qatar are classic examples of this divergence

• Limitations

  • Does not capture inequality within countries

    • A high HDI can coexist with extreme income concentration

  • Does not include political freedom, environmental sustainability or gender equality

  • Education and health indicators measure quantity, not quality

Measure of economic welfare (MEW)

• The MEW is defined as an adjusted measure of GDP developed by economists Nordhaus and Tobin in 1972, which attempts to correct GDP to better reflect actual economic welfare

• MEW adjusts GDP in two directions:

• The rationale is that GDP counts all output equally regardless of whether it improves welfare - MEW attempts to strip out the output that does not, and add back the welfare that GDP misses

Limitations

• Extremely difficult to measure in practice — assigning monetary values to leisure time and environmental damage is inherently subjective

• Not produced regularly for most countries, limiting its use for international or time-series comparisons

• Methodological choices about what to add and deduct are contested

Multidimensional poverty index (MPI)

• The MPI is defined as a composite index developed by the Oxford Poverty and Human Development Initiative (OPHI) and the UNDP, measuring acute poverty across three dimensions using ten indicators

The three dimensions and their indicators

• A household is classified as multidimensionally poor if it is deprived in at least one third of the weighted indicators

• The MPI score = headcount ratio (proportion of population that is poor) × intensity (average share of deprivations experienced by poor households)

Evaluating the MPI

• Advantage over income poverty measures

  • The MPI identifies which specific deprivations people experience simultaneously, allowing more targeted policy responses than a simple income threshold

• Limitations:

  • Does not include income as an indicator - due to data constraints rather than conceptual exclusion

  • Data relies on household surveys, which are infrequent in many low-income countries, reducing timeliness

  • Thresholds and weights are partly arbitrary - small changes can alter a country's classification

Comparison of composite indicators