Unit II: ECONOMIC GROWTH AND

DEVELOPMENT
Economic Growth
An increase in the capacity of an economy to
produce goods and services, measured from one
period of time to another.
Economic development
Economic development is related to increase in
output coupled with improvement in social and
political welfare of people within a country.
Economic growth gets reflected by changes in

National Income

Per Capita Income

Income Data for FY 2018-19
(Source: www.mospi.nic.in)

Real GDP or GDP at Constant (2011-12) Prices for the year 2018-19 is
now estimated at Rs.140.78 lakh crore showing a growth rate of 6.8%
over First Revised Estimates of GDP for the year 2017-18 of Rs.131.80
lakh crore.
The Per Capita Income in real terms (at 2011-12 Prices) during 2018-19
is estimated to have attained a level of Rs.92565 as compared to
Rs.87,623 for the year 2017-18. The growth rate in Per Capita Income
is estimated at 5.6% during 2018-19.
Income data for Q1 (2019-20)
(Source: www.mospi.nic.in)

GDP at Constant (2011-12) Prices in Q1 of 2019-20 is estimated at

Rs.35.85 lakh crore, as against Rs.34.14 lakh crore in Q1 of 2018-19,
showing a growth rate of 5.0%
 Classify the countries
For the current 2020 fiscal year, low-income economies are defined as those with a GNI per capita,
of $1025 or less in 2018; lower middle-income economies are those with a GNI per capita between
$1026 and $3,995; upper middle-income economies are those with a GNI per capita between
$3,996 and $12,375; high-income economies are those with a GNI per capita of $12,375 or more.
Country GDP for 2018 (in USD) Population
Argentina 550.33 billion 444.945 million
Sri Lanka 88901 million 0.02167 billion
Luxembourg 69488 million 604245
Mexico 1157.97 billion 124.7 million
Ethiopia 0.084356 billion 108.493 million
China 13.184 trillion 1.392 billion
Australia 1329.35 billion 25.01 million
Rule of 70
Dividing 70 by a country’s growth rate gives the
number of years required for an economy’s income
level to double
When will these countries be able to double
their national incomes?
Country GDP growth rate (% annual)
Afghanistan 1.0
Russia 2.3
Poland 5.1
Ghana 8.5
Bangladesh 7.9
US 2.9
Source: https://www.worldbank.org/en/publication/global-economic-prospects
What are the sources of economic growth?

Investment in physical and human capital

Technological advances
Institutional and policy changes
Theories of economic growth
The geography hypothesis
◦ Economic growth depends mainly on geographical endowments

The institutions hypothesis

◦ Economic growth as result of institutional conditions
Example (validates geography hypothesis)
Connection between climatic conditions and economic development
is posited by Jeffery Sachs. He points out that in the early stages of
industrialization coal was the major source of energy. As it was very
difficult at that time to ship coal over larger distances, countries
which had deposits of coal within their borders had an advantage
over countries which lacked them. As a matter of fact, coal deposits
are mostly located in temperate climate zones.
Example (validates institutions hypothesis)
Until the end of World War II, Korea was under Japanese occupation. In 1948,
Korea separated into North (communist) and South Korea (private property and
capitalist institutions).
Before this separation both Koreas were largely homogenous in disease
environment, geography, culture, and development. Thus, any differences in
incomes afterwards can be attributed to different choices of institutions.
By 2000, income in South Korea was $16,100, while in North Korea it was $1,000
Measuring NY In India/National Accounts Statistics
History - National Income Committee set up in 1949; chairmanship of P.C. Mahalanobis
First official estimates of national income with base year 1948 - 49, published in 1956
Department of Statistics and Department of Programme Implementation → MOSPI;
October 1999
National Statistical Office
CSO, Computer Centre, NSSO
Program Implementation Wing
Twenty Point Program,
Infrastructure Monitoring and Project Monitoring,
MP Local Area Development Scheme
Publication Periodicity
Annual GDP estimates
First advance estimates (January of the FY)
Second advance estimates (February of the FY)
Provisional estimates (May, next FY)
First revised estimates (January next FY)

Quarterly estimates of GDP

Released with a lag of 2 months
Measurement of national income
Production or Value Added approach

Income approach

Expenditure approach
Variants of national income
GDPFC, GDPMP

GNPFC, GNPMP

NDPFC, NDPMP

NNPFC, NNPMP
Real vs Nominal income
Theories of income and employment
Classical Theory

Keynesian Theory
Output/Income
Actual Output : The output and therefore the income
which is generated in the economy at the prevailing
level of employment

Potential Output: The level of output which the

economy would produce if all the factors were fully
employed
Classical Theory
Assumptions:
Laissez Faire economy
Perfect competition in factor and product markets
Wages and Prices are flexible
Closed Economy
Money - merely a medium of exchange
Propositions:
An economy is always in equilibrium
It always enjoys full employment
Money plays insignificant role
In short run …
Actual output may deviate from potential output

Short Run fluctuations define the business cycles that are

experienced by various economies
According to classical theorists

Change from one phase of business cycle to another is

automatic i.e. it does not require external help

Thus, the economy will eventually produce output close to its

potential
Keynesian Theory
Assumptions:
Prices and wages are given
Involuntary unemployment prevails
Proposition:
Supply responds to demand
Equilibrium:
Actual output = Aggregate demand
Aggregate demand

In a two sector economy

AD = C + I
Consumption demand
Consumption Function: C = f (Y)
C = a + bY

Since Y = C + S, S = Y – C

MPC + MPS = 1
Investment demand
Investment demand means firms’ desired additions to their
physical capital and inventories

Investment demand depends upon the current guesses about

future demand for their output

As the investment does not depend on current level of

income, I = I
Short run equilibrium
Given the assumptions, the output market is in SR equilbrium
when AD or planned aggregate spending equal the output that
is actually produced.

AD = Y
If AD < Y, there is unplanned addition to stocks
If AD > Y, there is unplanned reduction in stocks
Numerical examples
 C = 500 + 0.6Y and I = 360
Write the savings function and find equilibrium level of national
income
 Autonomous consumption is 100 and the marginal propensity to
save is 20% while the autonomous investment is 500. Find the
equilibrium level of national income
 C = 8 + 0.7Y, I = 22
Find the equilibrium level of national income
If investment falls by 9, what is the new Y?
Graphical presentation of
short run equilibrium
Multiplier
It reflects how much the output changes when there is a
change in AD

Alternatively, it is the ratio of change in equilibrium output to

change in autonomous spending

Multiplier, k = 1 / (1 – b)
If the people are pessimistic about
tomorrow…
They would not want to consume
Discouraging saving is tough, so consumption demand (i.e. C) gets
adversely affected and therefore lowers Y
Firms may not invest as demand is not forthcoming, this also adversely
affects Y

The economy may settle at an underemployment equilibrium

Keynesian Proposition

In an underemployed economy, the government can

play a significant role in case demand is not forthcoming
from the Households or the Firms
Revisit
What is economic growth? How is it measured?
What is economic development/human development? How is it
measured?
What are the causes/sources of economic growth?
What are the theories endorsing these sources of economic growth?
How is national income measured?
What has been the trend of economic growth in India since 1947?
Contd.
What is the Classical theory of income determination?
What is a business cycle?/What causes business cycles?
What is the Keynesian theory of income determination?
What are the key differences between the Classical and the Keynesian
approach to income determination ?
Suggest a specific measure to improve India’s score from current level of 30.3