Economic Growth And Development

What is the difference between Economic Growth and Development? We will start by defining Economic growth and development. It is possible to have economic growth without economic development.

Economic growth in an economy is by an outward shift in its Production Possibility Curve (PPC). Another way to define growth is the increase in a country’s total output or Gross Domestic Product (GDP). It is the increase in a country’s output.

A country’s economic development is usually indicated by an increase in citizens’ quality of life. ‘Quality of life’ is often measured using the Human Development Index, which is an economic model that considers intrinsic personal factors not considered in economic growth, such as literacy rates, life expectancy and poverty rates.

Economic Growth And Development

Growth Occurs When

There is a discovery of new mineral/metal deposits.

There is an increase in the number of people in the work force or the quality of the work force improves. Example: training and education.

There is an increase in capital and machinery.

There is an improvement in technology.

Development Occurs When

Measures of economic development will look at:

Increase in real income per head – GDP per capita.
Increase in levels of literacy and education standards.
Increase in the quality and availability of housing.
Improvement in levels of environmental standards.
 Increased life expectancy.

Difference between Economic Growth and Development

Growth – Growth is an increase in the country’s output.

Economic Growth PPC

Development – Development is an improvement in factors such as health, education, literacy rates and a decline in poverty levels.

Economic Development

Change in Development

We can also have a situation where there is growth and development, i.e. increase in luxury goods and education.

Development alleviates people from low standards of living into proper employment with suitable shelter. Economic Growth does not take into account the depletion of natural resources which might lead to pollution, congestion & disease. Development however is concerned with sustainability which means meeting the needs of the present without compromising future needs.

The Relationship between Inequality and Economic Growth

Poverty has come down most when inequality has fallen and there is high economic growth. Initial low levels of inequality are associated with more negative elasticities of poverty reduction with respect to growth. Higher initial inequality results in less effect on poverty with increase in economic growth.

Savings rate

The marginal savings rate changes with decreasing or increasing income. The marginal savings rate is the fractional decrease in saving that results from a decrease in income.

Credit market constraints

The poor can’t get loans.

Political economy

Governments pursue poor policies (redistribution policies) trying to reduce inequality which actually results in high inflation, high deficit and lower growth. However, there doesn’t seem to any relationship between inequality and economic growth empirically. But, higher economic growth leads to lower levels of poverty (not the same as inequality)

Growth Effect – Positive growth of people’s income and no change in income leads to a decrease in the poverty level.

Redistribution Effect – If there is a rise in inequality and mean income remains constant, then poverty will rise.

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