Economic growth and development
Economic growth- measures the changes in the physical and quantity of goods and services
that an economy actually produces, or has the potential to produce
o Increase in a country’s national output
o Caused by an increase in the quantity and quality of factors of production which
causes an outward shift in the PPF
Economic development- goes further, encompassing not only the increase in quantity of
output but also the quality and the contribution to human happiness
o Refers to living standards, freedom (from oppression) and life expectancy
o It covers a more moral side to economic growth and is normative
o It’s also concerned with how sustainable the economy is and whether the needs of
future generations can be met
Increased economic growth does NOT always guarantee economic development
However economic development cannot take place without economic growth
How economic growth leads to economic development
Lifts per capita incomes and raises people out of extreme poverty
Increases per capita GDP/GNI which gives households and businesses greater
financial resources to save which will lead to more investment
Creates new jobs providing a flow of incomes for people in work
Higher incomes can also reduce income and wealth inequality
Faster economic growth generates higher profits which can then be reinvested –
promoting increased productivity and capacity
Growth can accelerate changes in patterns of production e.g., a shift away from a
dual economy (less developed agriculture and more developed manufacturing)
towards investment in more advanced manufacturing and services such as business
services and tourism
Economic growth can generate higher tax revenues for the government – providing
more funds to finance public and merit goods and welfare spending
Drawbacks of growth
However – it’s important to realise that there are disadvantages from economic
growth i.e., economic and social costs, e.g.
o Negative externalities, e.g., waste disposal, pollution, congestion
o Greater inequality of income and wealth
Growth is probably a necessary but insufficient condition for sustained human
development – it can underpin gains in health, education and per capita incomes but
many other factors determine the development process.
GDP is a limited measure of development
GDP is limited and often misleading because
1. It excludes other positive factors which add to the quality of life
a. E.g. health, education, community, society and culture
, 2. Includes negative factors that reduce the quality of life
a. Includes value of demerit goods such as tobacco, alcohol, drugs, junk
food etc
i. These all have a negative effect on the quality of life and
economic welfare
b. Includes negative externalities such as pollution, environmental harm,
congestion and car accidents
3. It’s only an average so it excludes the effect of inequalities of income and
poverty
4. This does not include the informal economy which can provide additional
income
The UN HDI (Human Development Index)
An attempt to describe people's welfare and a country's economic development in a
way that goes beyond just looking at national income figures.
Contains three “dimensions” and four indicators
1. Health
Life expectancy at birth
2. Knowledge
Mean years in school
Expected years in school
3. Living standards
GNI per capita (per person)
A value close to 1 shows high economic development but a value close to 0 suggests
low development
Pros and cons of HDI
Pros Cons
It takes into account people's health It doesn't capture all the
(measured by life expectancy), information that's relevant to
education (measured by years of people's welfare or economic
schooling), and standard of living development, but it does place a
(measured by real GNI per capita, greater emphasis on the quality of
adjusted for purchasing power life of a country's people instead of
parity). just considering economic growth.
Countries' HDI figures can be used Two countries can achieve a similar
to rank those countries from most HDI in very different ways, e.g. one
developed to The Human country might have high life
Development least developed. expectancy, but a poorly developed
It provides a much broader education system, while another
comparison between countries than has low life expectancy but a
GDP does successful education system.
Education and health are important Ignores inequalities in the
development factors to consider, it distribution of income
can provide information about the Does not consider how free people
country’s infrastructure and are politically, their human rights,
opportunities gender equality, or peoples cultural
It also shows how successful identity
Economic growth- measures the changes in the physical and quantity of goods and services
that an economy actually produces, or has the potential to produce
o Increase in a country’s national output
o Caused by an increase in the quantity and quality of factors of production which
causes an outward shift in the PPF
Economic development- goes further, encompassing not only the increase in quantity of
output but also the quality and the contribution to human happiness
o Refers to living standards, freedom (from oppression) and life expectancy
o It covers a more moral side to economic growth and is normative
o It’s also concerned with how sustainable the economy is and whether the needs of
future generations can be met
Increased economic growth does NOT always guarantee economic development
However economic development cannot take place without economic growth
How economic growth leads to economic development
Lifts per capita incomes and raises people out of extreme poverty
Increases per capita GDP/GNI which gives households and businesses greater
financial resources to save which will lead to more investment
Creates new jobs providing a flow of incomes for people in work
Higher incomes can also reduce income and wealth inequality
Faster economic growth generates higher profits which can then be reinvested –
promoting increased productivity and capacity
Growth can accelerate changes in patterns of production e.g., a shift away from a
dual economy (less developed agriculture and more developed manufacturing)
towards investment in more advanced manufacturing and services such as business
services and tourism
Economic growth can generate higher tax revenues for the government – providing
more funds to finance public and merit goods and welfare spending
Drawbacks of growth
However – it’s important to realise that there are disadvantages from economic
growth i.e., economic and social costs, e.g.
o Negative externalities, e.g., waste disposal, pollution, congestion
o Greater inequality of income and wealth
Growth is probably a necessary but insufficient condition for sustained human
development – it can underpin gains in health, education and per capita incomes but
many other factors determine the development process.
GDP is a limited measure of development
GDP is limited and often misleading because
1. It excludes other positive factors which add to the quality of life
a. E.g. health, education, community, society and culture
, 2. Includes negative factors that reduce the quality of life
a. Includes value of demerit goods such as tobacco, alcohol, drugs, junk
food etc
i. These all have a negative effect on the quality of life and
economic welfare
b. Includes negative externalities such as pollution, environmental harm,
congestion and car accidents
3. It’s only an average so it excludes the effect of inequalities of income and
poverty
4. This does not include the informal economy which can provide additional
income
The UN HDI (Human Development Index)
An attempt to describe people's welfare and a country's economic development in a
way that goes beyond just looking at national income figures.
Contains three “dimensions” and four indicators
1. Health
Life expectancy at birth
2. Knowledge
Mean years in school
Expected years in school
3. Living standards
GNI per capita (per person)
A value close to 1 shows high economic development but a value close to 0 suggests
low development
Pros and cons of HDI
Pros Cons
It takes into account people's health It doesn't capture all the
(measured by life expectancy), information that's relevant to
education (measured by years of people's welfare or economic
schooling), and standard of living development, but it does place a
(measured by real GNI per capita, greater emphasis on the quality of
adjusted for purchasing power life of a country's people instead of
parity). just considering economic growth.
Countries' HDI figures can be used Two countries can achieve a similar
to rank those countries from most HDI in very different ways, e.g. one
developed to The Human country might have high life
Development least developed. expectancy, but a poorly developed
It provides a much broader education system, while another
comparison between countries than has low life expectancy but a
GDP does successful education system.
Education and health are important Ignores inequalities in the
development factors to consider, it distribution of income
can provide information about the Does not consider how free people
country’s infrastructure and are politically, their human rights,
opportunities gender equality, or peoples cultural
It also shows how successful identity
