Lec 1

Economic Growth and

Development

Dr. Mohanasundari T.
Assistant Professor (Economics)
HSS, IIT Indore.
Economic growth:

Economic growth can be

defined as an increase in the
capacity of an economy to
produce goods and
services, compared from one
period of time to another.
Economic development:
• Economic Development is policy
intervention with aims of
development of :
➢ Human capital
➢ Literacy ratio
➢ Infrastructure
➢ Health & general welfare of the
citizens
whereas Economic growth is a
phenomenon of market productivity
and rise in GDP
Economic development is:

• Quantitative and Qualitative

changes in the economy
• Promoting the standard of living
and Economic health
• Human Development Index-
method for measuring which takes
into account the literacy rates & life
expectancy.
• Modernization and
industrialization plays important
role for economic development of a
nation.
Meaning
Prof. Kindleberger; "Growth may well imply not only more
output and also more inputs and more efficiency.
Development goes beyond these to imply changes in the
structure of outputs and in the allocation of inputs by sectors.

Growth – increase in height and weight.

Development-change in functional capacity & physical
coordination.
Growth without development is possible. For example, more
and more steel in the Soviet Union and more coffee production
in Brazil.
Development without growth is not possible, because change
in function requires a change in size.
Factors affecting Economic
Development:

• Inflation distorts business decisions as buying capacity of

consumer reduces.
• Tax Levels Income tax and sales tax (eg GST) affect how
much consumer have to spend, hence the demand.
• Interest Rates can impact the growth of an industry. For ex.
High car loan interest rate will discourage vehicle industry.
• Governmental Policies provides a friendly environment
for businesses to move into and operate within a community.
 Development Factors Cont…d

• Currency Strength is important even for companies

that do not import or export goods.
• Government Intervention Many industries are
regulated by the government which ensures safety of
consumers, employees & natural resources
• Overall Economic Health The economic state of the
country and consumer confidence can also spur
development or harm it.
• Social and Cultural Values affect economic
development through attitude toward progress.
• Foreign Direct Investment
Indicators of 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 in 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
The Importance of Economic Growth:

• Economic growth is important because it is a necessary

ingredient for higher outputs → higher incomes
→higher living standards.
• Per capita GDP is the nation’s GDP divided by its
population. Growth of per capita GDP means more
goods and services per person.
• In most cases, higher levels of per capita GDP will mean
that the typical person has a better diet, improved health
and access to medical services, a longer life
expectancy, and greater educational opportunity.
Indicators of economic development:
• GDP PER CAPITA
• LIFE EXPECTANCY
• LITERACY RATES
• MEASURES OF POVERTY
• DEMOGRAPHIC
INDICATORS
• DISEASE INDICATORS
Basis Economic Development Economic Growth
Economic development implies Economic growth
Meaning changes in income, savings and refers to an increase
investment along with in the real output of
progressive changes in socio- goods and services
economic structure of country in the country.
(institutional and technological
changes).

Growth relates to a
gradual increase in
Development relates to growth of
one of the components
human capital indexes, a decrease
of Gross Domestic
in inequality figures, and
Factors: Product:
structural changes that improve
consumption,
the general population's quality of
government spending,
life.
investment, net
exports.
Basis Economic Development Economic Growth

Qualitative.HDI (Human
Development Index),
Quantitative.
gender- related index
Measurement: Increase in real GDP.
(GDI), Human poverty
Shown by PPF.
index (HPI), infant
mortality, literacy rate etc.

Narrower concept
Concept: Normative concept than economic
development
Basis Economic Economic Growth
Developme
nt

Brings qualitative and Brings quantitative

Effect: quantitative changes in changes in the economy
the economy

Economic growth is a
Economic development more relevant metric for
is more relevant to progress in developed
measure progress and countries. But it's widely
quality of life in used in all countries
Relevance:
developing nations. because growth is a
necessary condition for
development.
Basis Economic
Development
the problems of underdeveloped
Resource Use countries are concerned with the
development of unused resources
Economic Growth
related to growth, most
of their resources being
already known and
developed to a
considerable extent

➢Wider concept than economic A country may increase

growth. GDP through spending
➢“It is taken to mean growth + more on military goods.
change.” However, if this is at the
Productivity ➢Economic development embraces expense of health care and
both growth and decline. An education it can lead to
economy can grow but it may not lower living standards.
develop because poverty,
unemployment and inequalities.
Basis Economic Economic Growth
Development
Does not take into account
Development alleviates
the size of the informal
Informal people from low standards of
economy. The informal
Economy living into proper
economy is also known as
employment with suitable
the black economy which is
shelter. Considers the Black
unrecorded economic
economy
activity.

Development concerned Economic Growth does not

with sustainability - take into account the
Natural meeting the needs of the depletion of natural
Resource present without
resources which might lead
compromising future
needs. to pollution, congestion &
disease.
Three Core Values of Development-
(Goulet, 1971)
➢Sustenance: The Ability to Meet Basic Needs
Major objective of development is to raise people out of
poverty and provide basic needs.

➢Self-Esteem: To Be a Person
The feeling of worthiness, Self-respect and Independence that
a society enjoys. Dominance & Dependence are inferior economic
status.

➢Freedom from Servitude: To Be Able to Choose

If a person is not free, he cannot choose. With out education &
skill they are living in margin. Material Development expands the
range of human choice.
 ECONOMIC DEVELOPMENT IN INDIA

• After fundamental
reforms since 1991
and their renewal in
the 2000s, India has
progressed towards a
free market economy
Indian Economy, 2012-13:
Basic
Concepts
Nominal: The value of an item measured in Nominal Vs Real:
monetary terms. These are values at the level
of prices that exist during the time period
being measured. It simply refers to the
current price without taking inflation or
other factors into consideration as opposed
to real values.

Real value refers to the nominal value

when adjusted for inflation. The real value is
its value in terms of some other good,
service, or bundle of goods. Relative
price is another term for the real price of a
good or service.

Relative prices of individual goods and

services can decrease even if nominal prices
are all increasing, because of inflation.
Current Vs Constant
Current Prices measures GDP/ inflation/asset prices using the actual
prices we notice in the economy. Current prices make no
adjustment for inflation.

Constant prices adjust for the effects of inflation. Using constant

prices enables us to measure the actual change in output (and not just
an increase due to the effects of inflation.
Gross Vs Net:

It is related to the concept of disposable income –

income after tax and deductions.
Purchasing Power Parity (PPP)
PPP is defined as how much currency of one country will be needed to buy the
same quantity of goods and services in different countries.

•Purchasing power parity (PPP) is a popular metric used by macroeconomic

analysts that compares different countries' currencies through a "basket of
goods" approach.

•Purchasing power parity (PPP) allows for economists to compare economic

productivity and standards of living between countries.

•Some countries adjust their gross domestic product (GDP) figures to reflect
PPP.

•If an Apple Mac costs £1,000 in the UK and $1000 in the US.
•If a UK citizen was able to travel to US, he would only need £500 to convert
into a $1,000. This suggests that it is much cheaper to buy the Mac in America.
Norway’s GDP per
capita is $98,000, but
when adjusted for PPP
it falls to $62,000. This
reflects the fact that
wages are very high,
but then living costs are
also high. PPP gives a
better indication of
what you can actually
buy in different
countries.

India’s GDP per capita

is $1,489, but because
living costs are very
low. The PPP is
considerably higher.
Economic growth in India :
National Income Measures

Green Economy
This is the economy which deals with the environmental risks and ecological
scarcity and also an economy that aims for sustainable development without
degrading the environment.

Green GDP
•It is the calculation of net natural consumption (i.e., resource depletion,
environmental degradation, protective and restorative environmental
initiatives).
Economic Growth in Major world regions
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Economic Growth and Development

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