Differences in income

Published by Patrick Mutisya · 14 days ago

IGCSE Economics – Economic Development: Differences in Income

Economic Development – Differences in Income between Countries

Learning Objective

Explain why income levels differ between countries and identify the main factors that influence these differences.

Key Concepts

  • Gross National Income (GNI) per capita

  • Purchasing Power Parity (PPP)

  • Human Development Index (HDI)

  • Physical and human capital

  • Institutional quality

  • Geography and natural resources

Measuring Income

Economists use several indicators to compare the economic performance of countries.

IndicatorDefinitionTypical Use
GNI per capita (current US$)Total income earned by residents of a country, divided by its population.Basic comparison of average income.
GNI per capita (PPP)GNI adjusted for differences in price levels between countries.More accurate comparison of living standards.
HDIComposite index of life expectancy, education and GNI per capita.Broad measure of development.

Why Do Income Levels Differ?

  1. Physical Capital – Stock of machinery, infrastructure and technology. Higher capital stock raises productivity: \$Y = A \cdot f(K, L)\$.

  2. Human Capital – Skills, education and health of the workforce. More educated workers are more productive.

  3. Institutional Quality – Property rights, rule of law, corruption levels. Strong institutions encourage investment.

  4. Geography – Climate, disease burden, access to sea routes. These affect agricultural productivity and trade costs.

  5. Natural Resources – Availability of minerals, oil, fertile land. Can be a source of wealth or a “resource curse”.

  6. Trade Openness – Ability to export and import goods and services. Openness can stimulate growth through technology transfer.

Illustrative Comparison

The table below shows the 2023 GNI per capita (PPP) for three representative countries.

CountryGNI per capita (PPP) 2023 (US$)HDI (2023)Key Characteristics
Luxembourg135,0000.952High financial services sector, strong institutions, skilled labour.
India7,5000.647Large population, rapid growth, but lower capital per worker.
Nigeria5,2000.539Abundant oil resources, but institutional challenges and infrastructure gaps.

Case Study: The “East Asian Miracle”

Countries such as South Korea, Taiwan and Singapore achieved rapid income growth between 1960 and 2000. The main drivers were:

  • High rates of investment in physical and human capital.

  • Export‑oriented industrial policies.

  • Effective government coordination and low corruption.

Discussion Questions

  • How does adjusting GNI for PPP change the ranking of countries compared with current‑price GNI?

  • Can a country with abundant natural resources still have low income? Explain with the “resource curse” theory.

  • Why might two countries with similar levels of physical capital have different income levels?

Suggested diagram: A bar chart comparing GNI per capita (PPP) of selected high‑income, middle‑income and low‑income countries.

Summary

Income differences between countries arise from a combination of capital endowments, human capital, institutions, geography and trade policies. Understanding these factors helps economists design policies that promote sustainable economic development.