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Economic Growth and Economic Development
Topic Thirty-One

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. In countries where inflows and outflows of this sort are significant, GNP may be a more appropriate indicator of a nation's income than GDP. Some countries also use per capita GDP as a measure of well-being in society.

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.
  • 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.

Key Differences between Developed and Developing Countries

Developed Countries are the countries which are developed in terms of economy and industrialization. The developed countries are also known as advanced countries or the first world countries, as they are self-sufficient nations. The countries which are going through the initial levels of industrial development along with low per capita income are known as developing countries. These countries are also referred to as third world 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.