Economic Growth and Economic Growth and DevelopmentDevelopment

What is the difference between What is the difference between growth growth and and developmentdevelopment??

Can you have growth without development, Can you have growth without development, and vice versa? How?and vice versa? How?

What are methods used to help develop a What are methods used to help develop a country? Promote economic growth?country? Promote economic growth?

Economic growth

Growth—increases in output & incomes over time, often measured as per capita– Quantitative measurement: Gross Domestic

Product, Gross National Product…

Increasing levels of output (GDP) and incomes resulting from growth can help better satisfy needs of a society (but not guaranteed)– Persistent poverty, failure of long-term

improvements

DevelopmentDifficult to define because it involves normative or value judgmentDevelopment should address these essential conditions:– Food– Clothing– Shelter– Healthcare– Employment– Freedom from fear and indignity

So what is the link between income and these life essentials?– Improving income and growth of income should improve poverty

and unemployment.– Therefore, growth of income should help development.

What’s the difference? What’s the difference?

DevelopmentDevelopment—process where increases in real —process where increases in real GDP GDP per capitaper capita accompanies/leads to improved accompanies/leads to improved standards of living for a whole populationstandards of living for a whole populationA much broader concept than growth, and A much broader concept than growth, and doesn’t really have a qualitative measurement doesn’t really have a qualitative measurement Goals of development:Goals of development:– Decrease widespread povertyDecrease widespread poverty– Raise living standardsRaise living standards– Reduce income inequalityReduce income inequality– Increase employment opportunityIncrease employment opportunity

Growth enables development but they are not Growth enables development but they are not the same.the same.

GROWTH: Two ways for GDP to GROWTH: Two ways for GDP to grow: grow: actualactual and and potentialpotential

Actual GrowthActual Growth Point A:Point A:

Points B & E:Points B & E:

Points D & C:Points D & C:

Point A to Point C:Point A to Point C:

Point F:Point F:

Agriculturalgoods

A

B

C

D

E

FManufacturedgoods

22ndnd Way to measure growth Way to measure growth

Potential GrowthPotential Growth– Point FPoint F– Curve ICurve I– Curve IICurve II

Agricultural goods

F

I II

Manufacturedgoods

PotentialGrowth

Calculating Economic GrowthCalculating Economic Growth

Economic Growth can be defined as an increase real Economic Growth can be defined as an increase real GDP per capita over time.GDP per capita over time.

Remember GDP= C + I + G+ (X-M)Remember GDP= C + I + G+ (X-M)GDPreal = GDPnom base year___x 100

Price index of base year

CountryCountry

NameName

Yr 1 GDP Yr 1 GDP nominalnominal

Year 2 Year 2 GDP GDP nominalnominal

Economic Economic growthgrowth

Real Growth Real Growth (assuming (assuming 7.5% inflation)7.5% inflation)

Increase in Real per Increase in Real per capita output capita output (assuming 2% pop (assuming 2% pop growth)growth)

FictoriaFictoria 100100mm

110110mm

10%10% 2.5%2.5% .5%.5%

Refresher!“Gross” is total amount made as a result of some activity. “Net” is the amount left over after all deductions are made. Net value is not allowed to be made lower.

Per capita (“per person” or “per head”)—takes the total value (output, income, expenditure) and divides it by the total population of a country– GDP/GNI divided by the

total population

Ex: Ireland’s GDP 2001: €114,744; divided by the population, we get per capita GDP €29,889

RULE OF 72 . . .RULE OF 72 . . .Doubling Time Magic . . .Doubling Time Magic . . .

Rule: 1% will double every 72 yearsRule: 1% will double every 72 years– If any variable grows at 1% per year it will If any variable grows at 1% per year it will

double in size in approximately 72 years.double in size in approximately 72 years.

Formula: Formula: 72 divided by growth rate = Doubling time72 divided by growth rate = Doubling time

Example: 2% growth will double in? 9%?Example: 2% growth will double in? 9%?

72/2=36 years72/2=36 years

72/9=8 years72/9=8 years

Economic Growth Economic Growth with with DevelopmentDevelopment

A B

Necessities (merit goods)

Luxury goods& services

Here, growth has gonetoward producing goodsand services usedby the poor. Examples:food, clothing, elementaryschools, radios, bikes

Economic Growth Economic Growth without without Development Development

LuxuryGoods & Services

Necessities (merit goods)

II

Benefits of growth all go to rich.Unequal income distribution creates this situation. Demandis determined by income, there-fore their purchases will determinea large portion of the production

Example: luxury homes, restaurant meals, luxury autos.

QatarQatarWatch film for evidence of economic Watch film for evidence of economic growth and economic developmentgrowth and economic development

60 Minutes clip

Review . . . Review . . .

What is the difference between economic growth What is the difference between economic growth and economic development? Is it possible to and economic development? Is it possible to have one without the other?have one without the other?– Growth:Growth: increase in economies real level of output increase in economies real level of output

over time. Quantitative – ex., GDPover time. Quantitative – ex., GDP– Development:Development: The process to improve the lives of all The process to improve the lives of all

people in a country. This includes increase living people in a country. This includes increase living standards (goods and services), improved dignity, standards (goods and services), improved dignity, respect and self-esteem, freedom etc. Qualitative.respect and self-esteem, freedom etc. Qualitative.

– Growth is possible without development, but only Growth is possible without development, but only certain groups benefitcertain groups benefit

Calculate the real GDP growth rate and doubling time

Country Nominal GDP

2007

Economic Growth

Inflation rate

Real GDP growth

Adjusted for pop. growth

GDP Doubling Time

USA13.84 T 9% 3% 6%

Pop=1%

5% 14.4 yrs

Mexico

893 M 8% 4% Pop.=2%

China 3.25T 16% 5% Pop.=1%

What do these statistics tell us?What don’t they tell us?

World Bank Classifications: 2013GNI/GDP, per capita

Low Income Countries: Y<$1,025

Middle Income Countries:– Lower Middle Income $1026 - $4035– Upper Middle Income $4036 - $12,477

High Income Countries: Y> $12,478

Low and Middle Income countries are what we generally refer to as “developing”

Important notes about classifications

Classifying countries by most measurements does not accurately represent their level of development– Varies depending on what characteristic is used– Using GNI per capita hides lack of uniformity

within countries (it’s an average)

Relationship between level of Y and structure of production

Poor Countries: primary sectorExample: agriculture

Middle Income Countries: secondary sectorExample: industry

High Income countries: tertiary sectorExample: high-level industry; service

Characteristics of LDCs

Low GDP per capita growth

High poverty

Relatively large agricultural sectors

High birth rates

Large urban informal sectors (black markets)

Remember, these are generalizations, and it can be problematic to generalize

Sources of Econ. Growth in LDCs:(less developed countries)

Increase quantity of physical capital (infrastructure)

Increase quantity of human capital (education)

Increase use of technology appropriate to the conditions of the LDC

Institutional Changes

Production Possibility FrontiersProduction Possibility Frontiers

Weak Agricultural SectorWeak Agricultural Sector Land and agriculture are Land and agriculture are key to studying key to studying developmentdevelopmentSupply of land is fixed Supply of land is fixed and with growing and with growing populations this leads to populations this leads to law of diminishing law of diminishing returns. returns. Here manufacturing is Here manufacturing is growing, but food output growing, but food output is growing at smaller and is growing at smaller and smaller increments as smaller increments as population growspopulation grows

Food

Man

ufac

ture

s

A

B

C

D

Production Possibility FrontierProduction Possibility Frontier

Improved land qualityImproved land quality Main development Main development goal is to improve goal is to improve productivity of land.productivity of land.– IrrigationIrrigation– DrainageDrainage– Use of fertilizersUse of fertilizers– Pest controlPest control

So here improving the So here improving the quality of land allows quality of land allows the food supply to the food supply to increase.increase.

food

man

ufac

ture

s

A

BC

D

Consequence of Growth # 1:Consequence of Growth # 1: Externalities Externalities

LDCs Pollution and Environmental DegradationLDCs Pollution and Environmental Degradation– Increased population=pressure on landIncreased population=pressure on land– Soil erosion (more likely to farm marginal land)Soil erosion (more likely to farm marginal land)– Deforestation (for fuel)Deforestation (for fuel)– Desertification (mostly from overgrazing)Desertification (mostly from overgrazing)– Over-fishingOver-fishing

Industrialized countries and COIndustrialized countries and CO22 emissions: emissions:– Positive correlation between COPositive correlation between CO22 and national income and national income– 80% of all fuel is burnt by 20% of the richest people80% of all fuel is burnt by 20% of the richest people– In 1997 China had 500 bikes for every car . . . In 1997 China had 500 bikes for every car . . .

Consequence of Growth #2:Consequence of Growth #2:Income Distribution and Saving RatesIncome Distribution and Saving Rates

Income distribution is a key concern for Income distribution is a key concern for development economics; goal: development development economics; goal: development plan to promote evenly distributed incomeplan to promote evenly distributed income

Some assume that development will follow Some assume that development will follow growthgrowth– To encourage growth encourage technology and To encourage growth encourage technology and

investment, BUTinvestment, BUT– Increased investment means increased saving is Increased investment means increased saving is

necessary. For saving to increase income more likely necessary. For saving to increase income more likely to be to be unevenlyunevenly distributed. distributed.

Rich = higher propensity to save Rich = higher propensity to save Poor = high propensity to consumePoor = high propensity to consume

Income Distribution-Income Distribution-Lorenz Curve and Gini CoefficientLorenz Curve and Gini CoefficientLorenz CurveLorenz Curve Lorenz curve—way to Lorenz curve—way to

measure income distribution measure income distribution and degree of inequalityand degree of inequality– More unequal the income More unequal the income

distribution, more bowed the distribution, more bowed the curvecurve

The Gini coefficient converts The Gini coefficient converts the Lorenz curve into a single the Lorenz curve into a single statisticstatisticEquation:Equation:

Shaded area AShaded area Aarea BCDarea BCD

Smaller coefficient is better Smaller coefficient is better 0=least inequality, 1=most0=least inequality, 1=most

Line of Equality

LorenzCurve

Percentage of incomeRecipients (population)

Per

cent

age

of in

com

e

A

B C

D

Income Inequality in America

Income Distribution-Income Distribution-Purchasing Power Parity, PPPPurchasing Power Parity, PPP

A more realistic measurement of living A more realistic measurement of living standard than GDPstandard than GDPAccounts for local buying power of a Accounts for local buying power of a currency to determine GDPcurrency to determine GDPCalculated by the IMF and used by the Calculated by the IMF and used by the World Bank in attempt to mitigate the World Bank in attempt to mitigate the impact of exchange rates.impact of exchange rates.A GDP adjusted for PPP is generally A GDP adjusted for PPP is generally higher than just GDPhigher than just GDP