What is Economy?

• Economics is the study of the production and consumption of

goods and the transfer of wealth to produce and obtain those
goods.
• Economics explains how people interact within markets to get
what they want or accomplish certain goals.
• Since economics is a driving force of human interaction,
studying it often reveals why people and governments
behave in particular ways.

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 What is Economic Development?
• Economic development generally refers to the sustained,
concerted actions of policymakers and communities that promote
the standard of living and economic health of a specific area.
• Such actions can involve multiple areas including development of
human capital, critical infrastructure, regional competitiveness,
environmental sustainability, social inclusion, health, safety,
literacy, and other initiatives.
• Economic development differs from economic growth.
• Whereas economic development is a policy intervention endeavor
with aims of economic and social well-being of people, economic
growth is a phenomenon of market productivity and rise in GDP.
• Consequently, as economist Amartya Sen points out: “economic
growth is one aspect of the process of economic development.”

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 Traditional View of economic
development
• It is concerned primarily with the efficient, least- cost
allocation of scarce productive resources and with the
optimal growth of these resources over time so as to produce
an ever expanding range of goods and services.

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 New economic view of development.
• "Economic development is generally defined:
– To include improvements in material welfare, especially for persons
with the lowest incomes,
– The eradication of mass poverty with its correlates of illiteracy,
Diseases and early death,
– Changes in the composition of inputs and outputs that generally
include shifts in the underlying structure of production away from
agricultural growth towards industrial activities,
– The organization of the economy in such a way that productive
employment is general among the working age population rather than
the situation of a privileged minority and the correspondingly greater
participation of broadly based groups in making decisions about the
directions,
– Economic and otherwise, in which they should move to improve their
welfare

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 Growth versus Development

• Economic growth may be one aspect of economic

development but is not the same
• Economic growth:
– A measure of the value of output of goods and services
within a time period
• Economic Development:
– A measure of the welfare of humans in a society

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 Economic Growth
• Using measures of
economic growth can
give distorted pictures
of the level of income in
a country – the income
distribution is not taken
into account.
• A small proportion of
the population can own
a large amount of the
wealth in a country. The
level of human welfare
for the majority could
This might be a common But this could be just around the therefore be very
picture…… corner!
limited.

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 Myths About Economic Growth
• It is indicator of wealth, which reflect the quantity of
resources available to a society .

• Does not tells about people’s quality of life: access to

education and health care, employment opportunities,
availability of clean air and safe drinking water, the threat of
crime, and so on.

• Economic growth, by increasing a nation’s total wealth, also

enhances its potential for reducing Poverty and solving other
social problems.

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Cont.

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Indicators of Economic Development

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Growth

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 Economic Growth
• Using measures of economic performance in terms of the
value of income, expenditure and output
• GDP – Gross Domestic Product
– The value of output produced within a country during
a time period
• GNP – Gross National Product
– The value of output produced within a country plus net
property income from abroad
• GDP/GNP per head/per capita
– Takes account of the size of the population
• Real GDP/GNP
– Accounts for differences in price levels in different
countries
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 Economic Growth

Shopping Mall in Saudi Arabia Dubai Skyline

• High economic growth fuelled through capital spending can

hide a number of underlying economic problems – how is the
income and wealth distributed? Who is doing the spending and
will it ‘trickle down’ to the poor?
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National Income – Problems with using
GDP/GNP

• Reliability of data?
– How accurate is the data that is collected?
• Distribution of income?
– How is the income distributed – does a small
proportion of the population earn a high
percentage of the income or is income more
evenly spread?

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National Income – Problems with using
GDP/GNP
• Quality of life?
– Can changes in economic growth measure changes in
the quality of life?
– Does additional earnings power bring with it additional
stress, increases in working hours, increased health
and family problems?
• Impact of exchange rate?
– Difference in exchange rates can distort the
comparisons – need to express in one currency, but
which one and at what value?

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 National Income – Problems with using
GDP/GNP

• Black/informal economy?
• Some economic activity not
recorded – subsistence farming
and barter activity, for example
• Some economic activity is
carried out illegally – building
work ‘cash in hand’, drug
dealing, etc.
• Work of the non-paid may not
It might not be pleasant, but what he finds among be considered but may
the refuse could be all he has. contribute to welfare – charity
Title: Sierra Leone Liberia. Copyright: Photolibrary Group
work, housework, etc.

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Development

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 Development

• Development incorporates the notion of a

measure/measures of human welfare
• As such it is a normative concept – open to
interpretation and subjectivity
• What should it include?

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 Development

• Levels of poverty
– Absolute poverty
– Relative poverty
• Inequality
• Progress – what
constitutes progress?
Our definitions of progress may be highly subjective. What
has progress brought to native tribes people across the
globe?
Title: Navajos refuse casino riches. Copyright: Stock.Xchng

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 Development

• Other considerations of human welfare:

• Political freedoms?
• Sustenance?
• Self esteem?
• Proportion of activity in different sectors of the
economy:
– Primary
– Secondary
– Tertiary
SUSTAINABLE DEVELOMENT
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 Development

• Development is sustainable if it “meets the

needs of the present without compromising
the ability of future generations to meet their
own needs.”

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 Development

Copyright: Photolibrary Group

• Iraqis have supposedly been given their freedom following

the American led ‘Operation freedom’ but has it improved
welfare? 22
Human Development Index

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 Human Development Index (HDI)

• HDI – A socio-economic measure

• Focus on three dimensions of human welfare:
• Longevity – Life expectancy
• Knowledge – Access to education, literacy rates
• Standard of living – GDP per capita: Purchasing
Power Parity (PPP)

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OTHER MEASURES

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