ECONOMIC GROWTH AND DEVELOPMENT NOTES
Define Economic Growth
Economic growth is an increase in activity in an economy. It refers only
to the quantity of goods and services produced; it says nothing about
the way in which they are produced.
Define Economic development
Economic development refers to social and technological progress. It
implies a change in the way goods and services are produced, not merely
an increase in production achieved using the old methods of production
on a wider scale.
Economic development typically involves improvements in a variety of
indicators such as literacy rates, life expectancy, and poverty rates.
Measures of Economic Wellbeing/Health
Gross Domestic Product (GDP)
Economic health is often measured as the rate of change of gross
domestic product (GDP). GDP can be defined in three ways, all of which
are conceptually identical. First, it is equal to the total expenditures
for all final goods and services produced within the country in a
stipulated period of time (usually a 365-day year).
Second, it is equal to the sum of the value added at every stage of
production (the intermediate stages) by all the industries within a
country, plus taxes less subsidies on products, in the period.
Third, it is equal to the sum of the income generated by production in
the country in the period i.e., compensation of employees, taxes on
production and imports less subsidies, and gross operating surplus (or
profits). The most common approach to measuring and quantifying
GDP is the expenditure method:
GDP = private consumption + gross investment + government spending +
(exports − imports)
Gross national product (GNP) is sometimes used as an alternative measure
to gross domestic product. GNP adds net foreign investment income,
unlike GDP.
GNP = GDP + net foreign investment income
Put simply, GDP is concerned with the region in which income is
generated. It is the market value of all the output produced in a nation
in one year. GDP focuses on where the output is produced rather than who
produced it. GDP measures all domestic production,
disregarding the producing entities’ nationalities.
In contrast, GNP is a measure of the value of the output produced by the
“nationals” of a region. GNP focuses on who owns the production. For
example, in the Kenya, GNP measures the value of output produced by
Kenyan firms, regardless of where the firms are located.
Limitations of GDP as a Measure of Economic Health
Wealth distribution – GDP does not take disparity in incomes between
the rich and poor into account. However, numerous Nobel-prize winning
economists have disputed the importance of income inequality as a factor
in improving long-term economic growth. In fact, short term increases in
income inequality may even lead to long term decreases in income inequality.
Non-market transactions – GDP excludes activities that are not
provided through the market, such as household production and volunteer
or unpaid services. As a result, GDP is understated. Unpaid work
conducted on Free and Open Source Software (such as Linux) contributes
nothing to GDP, but it was estimated that it would have cost more than a
billion US dollars for a commercial company to develop.
Underground economy – Official GDP estimates may not take into account
the underground economy, in which transactions contributing to
production, such as illegal trade and tax-avoiding activities, are
unreported, causing GDP to be underestimated.
Non-monetary economy – GDP omits economies where no money comes into
play at all, resulting in inaccurate or abnormally low GDP figures. For
example, in countries with major business transactions occurring
informally, portions of local economy are not easily registered. GDP
also ignores subsistence production.
Quality of goods – People may buy cheap, low-durability goods over and
over again, or they may buy high-durability goods less often. It is possible that the monetary
value of the items sold in the first case is higher than that in the
second case, in which case a higher GDP is simply the result of greater
inefficiency and waste.
Quality improvements and inclusion of new products – By not adjusting
for quality improvements and new products, GDP understates true economic
growth. For instance, although computers today are less expensive and
more powerful than computers from the past, GDP treats them as the same
products by only accounting for the monetary value. The introduction of
new products is also difficult to measure accurately and is not
reflected in GDP despite the fact that it may increase the standard of
living. For example, even the richest person from 1900 could not
purchase standard products, such as antibiotics and cell phones that an
average consumer can buy today, since such modern conveniences did not
exist back then.
What is being produced – GDP counts work that produces no net change
or that results from repairing harm. For example, rebuilding after a
natural disaster or war may produce a considerable amount of economic
activity and thus boost GDP. The economic value of health care is
another classic example—it may raise GDP if many people are sick and
they are receiving expensive treatment, but it is not a desirable situation.
Externalities – GDP ignores externalities such as damage to the
environment. By counting goods which increase utility but not deducting
or accounting for the negative effects of higher production, such as
more pollution, GDP is overstating economic welfare.
Sustainability of growth – GDP does not measure the sustainability of
growth. A country may achieve a temporarily high GDP by over-exploiting
natural resources or by misallocating investment.
For example, the large deposits of phosphates gave the people of Nauru
one of the highest per capita incomes on earth, but since 1989 their
standard of living has declined sharply as the supply has run out.
Oil-rich states can sustain high GDPs without industrializing, but this
high level would no longer be sustainable if the oil runs out. Economies
experiencing an economic bubble,
such as a housing bubble or stock bubble, or a low private-saving rate
tend to appear to grow faster owing to higher consumption, mortgaging
their futures for present growth. Economic growth at the expense of
environmental degradation can end up costing dearly to clean up; GDP
does not account for this.
Alternative Measures of Economic Wellbeing
Genuine Progress Indicator (GPI)
GPI is a concept in welfare economics that has been suggested to replace
gross domestic product (GDP) as a metric of economic growth. GPI is an
attempt to measure whether a country’s growth, increased production of
goods, and expanding services have actually resulted in the improvement
of the welfare (or well-being) of the people in the country. GPI
advocates claim that it can more reliably measure economic progress, as
it distinguishes between worthwhile growth and uneconomic growth. The
GDP vs the GPI is analogous to the difference between the gross profit
of a company and the net profit; the Net Profit is the Gross Profit
minus the costs incurred. Accordingly, the GPI will be zero if the
financial costs financial gains in production of goods and services, all
other factors being constant. Advocates of GPI assert that in some
situations, expanded production facilities damage the health, culture,
and welfare of people. Growth that was in excess of sustainable norms
had to be considered to be uneconomic
The Human Development Index (HDI)
HDI is a summary measure of human development that is published by the
United Nations Development Programme (UNDP). HDI measures the average
achievements in a country in three basic dimensions of human development:
- A long and healthy life, as measured by life expectancy at birth.
- Knowledge, as measured by the adult literacy rate (with two-thirds
weight) and the combined primary, secondary and tertiary gross
Enrollment ratio (with onethird weight). - A decent standard of living, as measured by GDP per capita in
purchasing power parity (PPP) terms in US dollars.
Before the HDI itself is calculated, an index is created for each of
these dimensions. To calculate these indices—the life expectancy,
education and GDP indices—minimum and maximum values (goalposts) are
chosen for each underlying indicator. For example, in
the maximum and minimum values for life expectancy were 85 and 25 years,
Adult literacy rate (%) 100 and 0, Combined gross enrolment ratio (%)
100 and 0, GDP per capita (US$) 40,000 and100 respectively. Performance
in each dimension is expressed as a value between 0 and 1. The HDI is
then calculated as a simple average of the dimension indices:
HDI = 1/3 (life expectancy index) + 1/3 (education index) + 1/3 (GDP index)
The Indicator Problem
When the term indicator is used in the following, it refers to data and
‘simple’ statistical composites (e.g. gross domestic product and life
expectancy) which are recognized as analytic decision-making tools.
Highly composite index-type indicators (e.g. human development index)
are explicitly excluded here. The main problems can be stated as follows:
Proliferation of indicators– The sheer volume of development
indicators and the lack of information on how similar indicators are
related makes it difficult for analysts and decision
makers to use them.
Inconsistencies among indicators– Despite references to seemingly
identical indicators, there exists differences in the definition, in the
use of data sources, in the compilation method, in the periodicity etc.,
which lead to different numerical values.
Validity of indicators– Sources, definitions and compilation/
estimation methods are not always made explicit. The lack of adequate
referencing and of technical notes deprives the user of making an
informed quality assessment.
Separation of indicator development from basic data collection at
country level Insufficient attention is given to improving the quality
and comprehensiveness of basic data from which indicators are derived.
Overburdening of national statistical systems- Competing demands and
poor overlap1 of internationally formulated indicator sets increase the
reporting burden of national statistical agencies. Ad hoc requests by
international agencies lead to ad hoc data collection, crowding out
limited financial and human resources and, thus, interfering with
regular national statistical programmes. Inefficient use of statistical
resources- At present agencies does not share information coming from
the country level optimally. There are potential efficiency gains by
organizing better the flow of information.
