HDI CALCULATION

Since 1990, several changes were made in the calculation methodology and in the
selected data. I will only explain the latest version. But first, you need to keep in mind
that HDI evolves between 0 and 1 only and that there are two steps in its calculation
process.
1)

Creating the dimension indices

(NB: Indices such as indexes is a plural of the word index)

2)

Aggregating the sub-indices to produce the HDI

Why only between 0 and 1? What does it mean?

Using indices for each dimensions helps to compare their results. To transform
indicators into indices between 0 and 1, you need to set up goalposts (minimum and
maximum values). Then you compare the difference between the actual value and
the minimum one and the difference between the maximum possible value and the
minimum one. Look:

The minimum values are conceived of as subsistence values and the maximums are
the highest observed values in the time series (1980-2011). Then, if the health index
is 1 for a specific country, it means that the actual value for this country is equal to
the maximum possible value.
Ok, but how do you measure the health index?
Health is measured by the life expectancy at birth of a given individual, the minimum
value being 20 years and the maximum 83.4. It is called LEI (Life Expectancy
Index).
For example, in Vietnam in 2011, the life expectancy was 75.2. So:

And the two other dimensions?

Education index (EI) is calculated by the geometric average of two indices: mean
years of schooling and expected years of schooling. Its minimum is 0 and maximum
is 0,978.

Mean years of schooling is calculated as the average number of years of

education received by people who are 25 and above, during their whole life, based
on the level of education attained by these people converted into years of schooling
based on theoretical durations of each level of education attended. (see details
by Barro and Lee 2010) The time period for this country based calculation is 19502010.
Expected years of schooling is a calculation of the number of years a child of
school entrance age is expected to spend at school, or university, including years
spent on repetition (typo school life expectancy in the UNESCO glossary).
To continue with the Vietnamese example, the mean years of schooling index being
0,478 and the expected years of schooling index 0,576:

Humm stop! Whats a geometric average?

You know what average means right? Synonyms of the adjective would be
common, normal, moderate. As a statistic tool, it gives the central tendency of a
specific set of numbers.
A geometric average is usually preferred to an arithmetic average in comparing
different items which have different numeric range because the geometric average
prevents any range of items to dominate the weighting. In the case of the EI,
expected years of schooling might be slightly higher in general as mean years of
schooling as it foresees future tendencies and a growing importance is given to
education worldwide. So if we used an arithmetic average, the expected years of
schooling would be dominant in the central tendency calculated. One of its greatest
interest is to value a balance pattern. If a country has a high level of education of its
adult population but does not have any school for younger generations, then it will
have a lower education index than a country with an average level in each two
dimensions.

Geometric average is calculated with the formula below (dont be afraid, this is just a
more symbolic way to explain what we expressed above):

Ok and what about income? You add everyones gross salary in the country?
Income index (II) is calculated with the Gross National Income per capita, in $, in
Purchasing Power Parity. That makes a lot of new words right?
YesNo!
The Gross National Income per capita is the gross national income divided by the
number of nationals. As explained by OECD (Organization for Economic
Cooperation and Development), it is equal to GDP (explained above) less net taxes
on production and imports, less primary incomes payable to non-resident units
(employees and property) plus the corresponding items receivable from the rest of
the world. In short, you take the production of your country, you get rid of taxes on
production and imports made by economic agents, you get rid of the money they
owe agents based outside of your country and include the money these agents owe
them.
But as you might know, when you travel, you can see that different countries tend to
use different currency with different values. Thats why in order to compare the
different income level; every currency is converted into dollar in order to allow
comparisons.
Also, you might have noticed that with 100 USD from your bank account, you can
buy one full diner with wine for two persons in Switzerland and the same diner for
10 persons in Egypt! This is why Purchasing Power Parity (PPP) was created. It
establishes an exchange rate between countries that makes comparable the
purchase of the same goods and services in two different countries.
Thus, the GNI in $ at PPP makes the countries income comparable.
AAh! Thank you thats a lot clearer now! So you calculate the indices of GNI in PPP
$ and it gives you the income index of one country! Thats it? Almost; the HDI
assumes the richer you become the smaller role money plays as a proxy for wellbeing. So it uses the logarithm of income, to reflect the diminishing importance of
income with increasing GNI. Indeed, theres a big difference between earning
500and1, 000 per month, especially at the end of the month. But not much between
5,000 and 10, 000

Logarithm reflects best the diminishing importance of income because, if you apply
this function to a specific variable, the grower the variable becomes, the slower is the
result going to increase. Thus, the higher the income is, the less weight it will have in
the HDI calculation. Look at the curve:

For Vietnam in 2011, the income index calculation is:

#####@@@!!!!%%%%####???((( When I think this is only the first step of the HDI
calculation
Dont worry, it is almost done and if you got everything that we already went through,
the second step is easy. You just take the geometric average of LEI, EI and II.

Thats it?
Yes. Just keep in mind that the interpretation of the result should be closely linked to
the way the data are collected for each of the above mentioned dimensions and that
it can be difficult to get accurate figures (read UNDP technical notes). The HDI
calculations are made by the Human Development Report Office (HDRO).

CONCLUSION
Lets sum up what we learnt here. As there are many dimensions to look at when you
try to coordinate development policies worldwide, it is easier to use one figure
relevant enough to encompass different theories and dimensions you want to
consider. HDIs introduction in economics relies on the previously highlighted limits of
GDP to reflect the level of development and on the growing attention paid to peoples
well-being. The Human Development Index identifies three main dimensions
(education, health and income) reflecting the freedom of people to reach their wellbeing desire and encourages balanced policies towards these three dimensions
through the geometric average. HDI is used a lot to create ranking among countries
and to categorize them for worldwide development programmes.
Guess whos?

You can look at rankings on the UNDP website and play with the UNDP world map
here:

However, this article does not explain the gender based approach neither HDI limits
nor criticisms that could be further developed. Same thing for GDP, economic
indicators, mathematical formalisation of the economics or the capabilities approach.
Inspiration for contributions or new articles!