How does the Human Development Index (HDI) measure income levels?

The Human Development Index (HDI) is a composite measure that assesses the overall development of a country by considering various dimensions of human well-being, including income levels. The HDI takes into account income as one of its components, alongside education and life expectancy.

To measure income levels, the HDI uses the logarithm of gross national income (GNI) per capita at purchasing power parity (PPP) in US dollars. GNI represents the total income generated by a country's residents, including income from domestic production and income received from abroad. The use of PPP accounts for differences in the cost of living between countries, allowing for a more accurate comparison of income levels.

The logarithmic transformation of GNI per capita is employed to address the issue of diminishing marginal utility of income. This means that as income increases, the additional well-being gained from each additional unit of income diminishes. By taking the logarithm of income, the HDI captures this diminishing marginal utility and ensures that the income component of the index reflects a more equitable distribution of resources.

The income component of the HDI is calculated by subtracting the minimum income threshold (known as the logarithm of the income floor) from the logarithm of GNI per capita, and then dividing the result by the difference between the logarithm of the income ceiling and the logarithm of the income floor. The income floor represents the minimum income required to achieve a basic standard of living, while the income ceiling represents a high-income threshold.

By incorporating income levels into the HDI, the index provides a comprehensive measure of human development that goes beyond economic growth. It recognizes that income alone does not guarantee well-being and that other factors, such as education and health, are crucial for human development. The HDI allows for comparisons between countries and over time, enabling policymakers to identify areas for improvement and track progress in enhancing human well-being.