Economic Growth and Development
Topic Thirty-One

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Economic Growth versus Economic Development

There is a difference between economic growth and economic development. Economic growth is simply the growth in the nation’s income or in its per capita gross domestic product (GDP) and it is only one aspect of economic development.  There can be a situation where a country can experience growth with no development Therefore, economic development is a wider concept and requires economic growth, reduction in poverty, reduction in unemployment, more houses for the poor, more schools, improvement in the infrastructure in the country such as roads, easy access to basic amenities of life such as education, health, water, electricity, food and social products and services, a reduction in inequality, better communication systems and reduced negative externalities.

Traditional Measures of Economic Growth

Besides GDP, economists also use other measures of economic growth such as gross national product (GNP) or gross national income (GNI) which are derived from the GDP calculation. GDP is the total income earned in the country in any given year while the total income earned by a country's citizens is its GNP or GNI.  GNP is derived by adjusting GDP to include repatriated income that was earned abroad, and exclude expatriated income that was earned domestically by foreigners.

Problems with Traditional Measures of Economic Growth and Development

Even though GDP and GNP are useful measures of economic growth, some economists believe that these measures also have some shortcomings.  The following are some problems that may be present in a country in the face of persistent economic growth using GDP as a measure of growth and levels of living standards:

  • Inequality - economic growth may only benefit a small percentage of the population. For example, if a country produces more goods and services, it will see an increase in GDP. However, growth in GDP per capita could result from growth in the incomes of richer groups in society with the incomes of poorer groups remaining unchanged.
  • Environmental problems - producing toxic chemicals will lead to an increase in real GDP. However, without proper regulation it can also lead to environmental and health problems. This is an example of where growth leads to a decline in living standards of the population.
  • Military spending – a country may increase GDP through spending more on military goods. However, if this is at the expense of health care and education it can lead to lower living standards.

Human Development Index

In response to the observance of some of the challenges inherent in the use of national income measures as an indicator for economic growth and development and well-being, there was the establishment of the Human Development Index (HDI) which is a composite index that rates countries according to their overall performance in relation to three criteria

  1. Life expectancy
  2. Education
  3. Per capita GDP

The HDI was created to emphasize that people and their capabilities should be the ultimate criteria for assessing the development of a country; not just economic growth.  There have been times when two countries have the same level of per capita gross national income but different levels of poverty.  The HDI is the geometric mean of normalized indices for each of the three dimensions.

Key Differences between Developed and Developing Countries

The following are the major differences between developed countries and developing countries

  1. Developed countries have a high per capita GDP and income whereas developing countries have low per capita and incomes,
  2. In developed countries the literacy rate is high while the literacy rate is low in developing countries,
  3. Developed countries have adequate infrastructure and a better environment in terms of health and safety, which is not so in some developing countries.
  4. Developed countries generate revenue from the industrial sector which tend to contribute more to national income while developing countries generate revenue mainly from the primary or service sector which contribute less to national income,
  5. In developed countries, the birth rate and death rate are low, whereas in developing countries both these rates are high.

Economic Indicators or Challenges of Developing Countries

The key economic indicators that can be used to characterise developing countries are as follows:

Low GDP per capita – developing countries usually have low per capita GDP.  These countries  lack investments due to lack of savings and also have less developed financial and capital markets. 

High unemployment- developing countries are usually characterised by high levels and rates of unemployment due to the low levels of economic activities in these countries

Nature of products – developing countries also rely more on products of the primary sector such as agriculture and related products.  These products do not command great value and so these countries’ export earnings are usually much less than developed country.  

Nature of production process – many developing countries rely more on manual and obsolete methods of production which do in fact affect their productivity. 

Balance of payments deficits - because most developing countries have fewer exports relative to imports, there will be the tendency for such countries to have deficits in their balance of payments.

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