Economic Growth &

Development
 Economic growth
measures of economic performance in terms of the value of
income, expenditure, and output

GDP – Gross Domestic Product

The value of goods and services produced within a country
during a time period
GNI – Gross National Income
The value of goods and services produced within a country
plus net income from abroad
GDP/GNI per head/per capita
GNI divided by the total population
 Economic Development:

 A measure of the welfare of humans in a society

“Development is a multi dimensional process

involving changes in social structures, popular
attitudes, and national institutions, as well as the
acceleration of economic growth, the reduction of
inequality, and the eradication of poverty.” (Todaro
and Smith)
 Economic Development Economic Growth
Economic development implies Economic growth
an upward movement of the refers to an increase
entire social system in terms of over time in a
income, savings and investment country`s real output
Implications along with progressive changes in of goods and services
socioeconomic structure of (GNP) or real output
country (institutional and per capita income.
technological changes).

Development relates to growth of Growth relates to a

human capital indexes, a decrease gradual increase in one
in inequality figures, and of the components of
Factors structural changes that improve Gross Domestic
the general population's quality of Product: consumption,
life. government spending,
investment, net exports
 Economic Development Economic Growth
Qualitative.HDI (Human Quantitative. Increases in
Development Index), gender- real GDP.
Measure related index (GDI), Human
ment poverty index (HPI), infant
mortality, literacy rate etc.
Brings qualitative and quantitative Brings quantitative changes in
Effect changes in the economy the economy
Economic development is more Economic growth is a more
relevant to measure progress and relevant metric for progress in
quality of life in developing developed countries. But it's
Relevance nations. widely used in all countries
because growth is a necessary
condition for development

Concerned with structural changes Growth is concerned with

Scope
in the economy increase in the economy's output
 Social And Economic Indicators Of Level Of
Economic Development.
• There seems to be two aspects to development,
economic (financial) and social (human).

• Economic development refers to how well the

economy is doing and how much money people
have at their disposal.

• Social development refers to more human

indicators of well being such as life expectancy,
infant mortality rate, literacy rate, availability of
communications.
HIGH STANDARD OF LIVING LOW STANDARD OF LIVING

• long life expectancy • short life expectancy

• equal rights • discrimination against woman

• high average wages • very low wages

• strong economies • faltering economies

• great health care • little health care

• and high literacy rates • and very low literacy rates.

 Human Development Index(HDI)
• The HDI is a composite measure of health, education and
income that was introduced in the first Human Development
Report in 1990 by UNDP as an alternative to purely economic
assessments of national progress, such as GDP growth
• HDI (Human Development Index) is a measure of
development of a nation;

• The HDI consists of three equally weighted components:

• (1) “A long and healthy life” (Health)
• (2) “Knowledge” (Education)
• (3) “A decent standard of living” (Wealth)
 Each component of the HDI is measured in the following
way:
• Health
Measured by life expectancy at birth.
• Education
Measured as a combination of adult literacy (with two-
thirds weight) and gross enrollment (with one-third
weight).
• Wealth
Measured by GDP per capita.

• HDI= 1/3(Income index)+1/3(Life expectancy index)

+1/3(education index)
 Calculating the HDI
A long and Being A decent
Dimensions: Knowledgeable standard
healthy life
of living

Literacy & GDP

Indicators: Life Enrolment per capita
Expectancy
Education GDP
Index Index
Dimension Life
index Expectancy
Index

The HDI
 Calculating the HDI: an example
Life Education index
expectancy Income
index
Literacy
(2/3)
Enrolment
(1/3) index HDI
85 years 1 100% 100% 1 40,000 1 1

78.1 0.68

49 0.433
780 0.34
41.4 0.27

25 years 0 0% 0% 0 100 0 0
(log scale)

0.27 + 0.68 + 0.34

= 0.433
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Measures of income inequality

Gini coefficient - most prominently used as a measure of

inequality of income distribution or inequality of wealth
distribution. It is defined as a ratio with values between 0
and 1.

Gini = 1 perfect inequality

Gini = 0 perfect equality

Bangladesh has Gini coefficient of 0.31

 Economic Theories
1. Economic development theories and models seek to explain and predict
how:
(a) Economies develop (or not) over time
(b) Barriers to growth can be identified and overcome
(c ) Government can induce (start), sustain and accelerate growth with
appropriate development polices
2. Theories are generalizations. While LDC's share similarities, every country’s
unique economic, social, cultural, and historical experience means the
implications of a given theory vary widely from country to country.
3. There is no one agreed ‘model of development’. Each theory, like Rostow,
gives an insight into one or two dimensions of the complex process of
development. e.g. Rostow helps us to think about the stages of
development LDC's might take and the Harrod-Domar model explains the
importance of adequate savings in that process.

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 ROSTOW, Walt W.(UT Austin: 1969-2003)
This is a linear theory of development. Economies can be divided into primary secondary
and tertiary sectors. The history of developed countries suggests a common pattern of
structural change: The Stages of Economic Growth: An Anti-Communist Manifesto (1960)
Stage 1: Traditional Society
Characterized by subsistence economic activity i.e. output is consumed by producers
rather than traded, but is consumed by those who produce it; trade by barter where goods
are exchanged they are 'swapped'; Agriculture is the most important industry and
production is labor intensive, using only limited quantities of capital.
Stage 2 :Transitional Stage
The precondition for takeoff. Surpluses for trading emerge supported by an emerging
transport infrastructure. Savings and investment grow. Entrepreneurs emerge ( how they
emerge is not spelt out)
Stage 3 :Take Off
Industrialization increases, with workers switching from the land to manufacturing.
Growth is concentrated in a few regions of the country and in one or two industries. New
political and social institutions are evolving to support industrialization.
Stage 4 :Drive to Maturity: Growth is now diverse supported by technological innovation.
Stage 5: High Mass Consumption

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 Implications of Rostow's theory
Development requires substantial investment in capital equipment (K) ; to
foster growth in developing nations, the right conditions for such investment
would have to be created i.e. the economy needs to have reached Stage 2.
For Rostow:
1. Savings and capital formation (accumulation) are central to the process of
growth, hence development
2. The key to development is to mobilize savings to generate the investment to
set in train self generating economic growth.
3. Development can stall at Stage 3 for lack of savings. Suppose the deficiency
in savings is on the order of 15-20% of GDP. If S = 5% then foreign
aid/loans of about 10-15% plugs this ‘savings gap’. Resultant investment
means a move to Stage 4-Drive to Maturity and self generating economic
growth, i.e. virtuous cycles (e.g. Botswana)and not vicious cycles (e.g.
Argentina).
4. Once Stage 5(High Mass Consumption ) is achieved, this society continues
to have high consumption and maintains such by incentives to savings plus
additional key ingredients (good governance, property rights, human capital
and functioning institutions)
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