Objectives in Economics – Growth and Development – By Dr. Gnana Sankaralingam
Economic growth is the increase in size of GDP or making the size of economy bigger. Economic development is more complex to define and measure as it involves making value judgements about what would be a more developed country. It is the process in which people in a country become wealthier, healthier, educated and have good access to housing and communications. Economic development looks at a much wider range of statistics than simply GDP or GDP per capita. Although growth and development are terms covering similar concepts, they are not the same. Growth is a crucial condition for development but growth alone would not guarantee development. Growth and development are used to gauge how living standard and general welfare of the people change over a time in a country.
Economic growth can be measured by the change in national output (total of goods and services produced) over a period of time. Output is measured either by adding up quantity of goods and services (volume) or by calculating value of goods and services, which is termed GDP. It can also be derived by adding up the total amount of national expenditure or the total amount of national income. Indicators used by governments to monitor how the economy is doing are rate of economic growth, level of unemployment, rate of inflation and state of balance of payments. Economic growth is usually measured as a percentage, taking the first year as base and setting the index number at 100. Changes are denoted in numbers as above or below 100, eg. 3% increase in GDP over one year as 103 and 2% fall in GDP over one year as 98. Changes in GDP could also be expressed in a value such as Dollars.
Rate of economic growth is the speed at which national output grows over a period of time. Speed of growth is not always constant over the years. Long periods of high economic growth rate are called booms. If economic growth is negative for two consecutive quarters (3 months), it is called recession and long recession is referred to as slump. If there is sustained economic downturn lasting for several years, it is depression. Some GDP growth may be due to inflation (rising prices). Nominal GDP is the figure that has not been adjusted for inflation, which may give the impression that GDP is higher than it should be. Economists remove the effect of inflation to calculate the real GDP. If nominal GDP showed 4% increase during a period when inflation was 3%, then real GDP increase is only around 1%.
GDP and GNI per capita give an indication of standards of living in a country. GDP gives the total output of a country by the residents whether citizens or foreigners while GNI gives the total output of its citizens whether residing in the country or living abroad and remitting the income. When comparing GDP and GNI per capita between countries that use different currencies, the exchange rate may not reflect the true worth of the two currencies. To overcome it, comparisons are made using the principle of purchasing power parity (PPP). Purchasing power is the real value of the amount of money, in terms of what you could buy with it. In making a more accurate and easier comparison, GDP and GNI figures are adjusted to take into account the purchasing power. GDP and GDP per capita are used to assess the economic performance and standards of living. If GDP is high, it suggest that the economic performance is strong and if GDP per capita is high, it suggests that standard of living is high. However GDP and GDP per capita might not take into account several things such as hidden economy (the activity of some economy do not appear in official figures), public spending by the government in the way of free health care and unemployment benefit, inequalties in the distribution of incomes between rich and poor and different consumer spendings.
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Economic development refers to transforming simple low income economies into modern industrial economies. It involves creating and using physical, human, social and financial assets to bring improved and broadly shared economic well being and quality of life for communities or regions. It looks at how the people are affected, taking into account per capita income, health and educational facilities, housing and communication. Measurement of growth or unemployment are used to work out standard of living, but often those figures do not tell the full story. Best way to assess the standard of living of a country is to measure economic development focussing on level of human and social welfare called quality of life, which is important when comparing economies of two very different countries. To get fuller picture of quality of life other indicators are necessary than just economic growth.
Structure of an economy of a country is based around three sectors: primary (agriculture, fishing, mining), secondary (construction, manufacturing) and tertiary (banking, tourism, professions). Less developed countries have larger primary sector. As the economy becomes developed and wealthier, production and consumption increase results in growth of secondary sector. Continuation of development would eventually end up in the economy being dominated by tertiary sector. Most important measure of economic development is national income figures such as GDP/GNI per capita. Others are human development index which places greater emphasis on quality of life rather than economic growth, and poverty index which measures the percentage of the population which are multidimensionally poor. Inequality and poverty linked to crime and health issues could slow down development and development can help to reduce them. Relative poverty is less than 50% of average national income and absolute poverty is where one cannot afford very basics like food or shelter and the minimum needed for this basics is called poverty line ($2 used by world bank).
Limiting factors for growth and development are poor infrastructure such as roads, railways, schools, hospitals, sewerage, electricity, telephones etc, which are facilities needed for an economy to function; disease and illiteracy due to poor health and education systems, as sick people will not be able to work causing low productivity and illiteracy could make professional training difficult; reduced domestic savings and investments due to lower incomes causing issues due to lack of capital for new ventures; primary product dependency on commodities directly taken from the earth (minerals like copper, iron etc) and (plants like rice, wheat, fruits etc) which do not generate much profits due to low value addition and are subjected to fluctuation in prices; corruption which causes diversion of resources from their most productive use making state and private businesses less efficient and civil disturbances which cause damage to infrastructure, capital flight and a rise in absolute poverty.
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