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Economic Growth and Economic

Development
 October 27, 2020  Posted by: OptimizeIAS Team

 Category: MMN (https://optimizeias.com/category/mmn/)

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Economic growth and Economic development

Context:

Economic growth and Economic Development

Economic growth without development

Is GDP good economic indicator?

GDP

Three ways of GDP measurements

Limitations of GDP

Indicators of Economic development

 HDI

Green GDP

Gross National happiness

Economic growth and Economic development

Economic growth means an increase in real national income / national output. It is

simply a quantitative measure and there is no chance to know about distribution of income
among population.

Economic development means an improvement in the quality of life and living

standards, e.g. measures of literacy, life-expectancy and health care. Economic growth is
necessary to attain economic development but it is not sufficient.  The proceeds of
economic growth could be wasted or retained by small wealthy elite.

Economic Growth vs Economic Development

Parameters Economic Growth Economic Development

Rise in income and
It is raise in value of
quality of life due to
Meaning goods and services
structural changes in
produced in the country.
economy
Scope It is narrow It is wider.
Components of GDP : Qualitative improvement
Consumption, in living standard like life
Indicators
investment , exports , expectancy  ,education
imports ,etc.
Measurement GDP or GNP HDI, PQLI, etc.
Nature It is an outcome. It is a process
Process It is rapid It is slow and time taking
Generally poor and
Regions Advanced nations
developing nations
Inference Quantative  Change Qualitative Change
Economic growth is Economic development
Relation possible without is not possible without
economic development economic growth
Economic Growth Occurs When

 There is a discovery of new mineral/metal deposits.

 There is an increase in the number of people in the workforce or the quality of the
workforce improves. For example, through training and education.
 There is an increase in capital and machinery.
 There is an improvement in technology.

Economic Development Occurs When

 An increase in real income per head – GDP per capita.

 The increase in levels of literacy and education standards.
 Improvement in the quality and availability of housing.
 Improvement in levels of environmental standards.
 Increased life expectancy.

Economic growth without development

It is possible to have economic growth without development. i.e. an increase in GDP,

but most people don’t see any actual improvements in living standards. This could occur
due to:

 Economic growth may only benefit a small section of the population or Non
inclusive growth. For example, if a country produces more oil, it will see an increase in
GDP. However, it is possible, that this oil is only owned by one firm, and therefore, the
average worker doesn’t really benefit.
 A country may see higher GDP, but the benefits of growth may be syphoned into the
bank accounts of politicians
 Environmental problems. Producing toxic chemicals will lead to an increase in real GDP.
However, without proper regulation, it can also lead to environmental and health
problems. This is an example of where growth leads to a decline in living standards for
many.
 Military spending. A country may increase GDP by spending more on military goods.
However, if this is at the expense of health care and education it can lead to lower living
standards.

Is GDP good economic indicator?

Usually economic growth is measured in terms of GDP. GDP is the monetary value of all
the finished goods and services produced within a country’s borders in a specific time
period and include anything produced by the country’s citizens and foreigners within its
borders.

GDP can be expressed in two different ways—nominal GDP and real GDP. Nominal GDP
takes current market prices into account without factoring in inflation or deflation.
Nominal GDP looks at the natural movement of prices and tracks the gradual increase of an
economy’s value over time.

On the contrary, real GDP factors in inflation meaning it accounts for the overall rise in price
levels. Economists generally prefer using real GDP as a way to compare a country’s
economic growth rate. It is calculated using a  price deflator—the difference in prices
between the current and base year, which is the reference year. Real GDP is how
economists can tell whether there is any real growth between one year and the next.

GDP can be viewed in three different ways:

 The  production approach  sums the “value-added” at each stage of production,

where value-added is defined as total sales less the value of intermediate inputs into the
production process. For example, flour would be an intermediate input and bread the
final product; or an architect’s services would be an intermediate input and the building
the final product.
 The expenditure approach adds up the value of purchases made by final users—for
example, the consumption of food, televisions, and medical services by households; the
investments in machinery by companies; and the purchases of goods and services by the
government and foreigners.
 The income approach sums the incomes generated by production—for example, the
compensation employees receive and the operating surplus of companies (roughly sales
less costs).

Limitations of GDP

 Goods and Services Omitted From GDP: It measures the value of goods and services that
are bought in markets, so it excludes:
 Household Production: Household production is productive activities at the home
that do not involve market transactions. As more services, such as childcare, meals
and laundry are provided in the marketplace, the measured growth rate overstates
development of all economic activity.
 Underground Production: Underground production is the part of the economy that is
hidden from the view of the government either because people want to avoid taxes
and regulations or because the goods and services being produced are illegal. If the
 underground economy is a reasonably stable proportion of all economic activity, the
growth rate will be accurate.
 Leisure Time: Leisure time is an economic good that does not get measured in the
official GDP figures. Increases in leisure time lower the economic growth rate, but we
value our leisure time and we are better off with it. Increased output is not worth very
much if we have little or no time to enjoy it.
 Health and Life Expectancy: While obviously important factors determining the
standard of people’s living, they are omitted from real GDP. Health and life expectancy
have improved as infant deaths and death in childbirth have almost been eliminated. Life
expectancy has increased from 70 years at the end of WWII to nearly 80 years today.
These gains have been checked somewhat by AIDS and drug abuse, which take away
from our standard of living.
 Political Freedom and Social Justice: Political freedom and social justice are not
measured by real GDP. A country might enjoy a very large GDP but have limited political
freedom and social justice and, hence, have a lower standard of living.
 There is no scope for the positive or negative effects created in the process of
production and development.
 Environmental degradation is a significant externality that the measure of GDP has
failed to reflect.
 GDP also fails to capture the distribution of income across society

Alternative measurements

GDP is not a measure of “wealth” at all. It is a measure of income. It is a backward-

looking “flow” measure that tells the value of goods and services produced in a given
period in the past. It tells nothing about whether a country produces the same amount
again next year. Economic development and well-being of population can be measured
using various yardsticks.

HDI

 The United Nations Development Programme (UNDP) introduced the HDI in its
first Human Development Report (HDR) prepared under the stewardship of Mahbub-ul-
Haq in 1990.
 HDR, 1990 has defined human development as the process of widening people’s
choices as well as raising the level of well-being achieved.
 HDI measures the average achievements in a country in three basic dimensions of
the human development: a long and healthy life, access to knowledge and a decent
standard of living.
 The HDI simplifies and captures only part of what human development entails. It does
not reflect on inequalities, poverty, human security, empowerment, etc.

Green GDP

 The Green Gross Domestic Product is an economic growth index that quantifies and
calculates the environmental consequences of that growth.
 Green GDP monetizes the effects of the loss of biodiversity and the costs of climate
change.
 This is just another way to try to quantify and measure the monetary impact of the
environmental damage caused by a country’s economic growth.
 The idea is that, while the economy might look like it’s growing now, the damages
caused by that growth will inevitably drag it downward in the future.
 The preciseness of the Green GDP’s measurement methods is debatable; after all,
since the future costs are not actually known, those calculations are based on speculation
– well-informed speculation, but still.
 What it really gives us is another way of looking at economic growth, putting it in
perspective alongside its potential future economic consequences.

History of environmental accounting in India

 A Framework for the Development of Environmental Statistics (FDES) was

developed by the Central Statistics Office (CSO) of India in the early 1990s. The
 Compendium of Environment Statistics is being released since 1997.
 As per the recommendations of Technical Working Group on Natural Resource
Accounting (NRA) in the later 1990s, a pilot project on NRA in the State of Goa was
initiated during 1999-2000.
 Later a Technical Advisory Committee was constituted in the year 2010 under the
Chairmanship of Kirit Parikh to bring out a Synthesis Report combining the findings of
all these studies. The report recommended the preparation of a National Accounting
Matrix that would include environmental accounts.
 The High powered expert group under Partha Dasgupta was constituted
subsequently in 2011 with the mandate of developing a framework for green national
accounts of India and for preparing a roadmap to implement the framework.
 Following the guidance of International Organisation of Supreme Audit Institutions
(INTOSAI) on the framework for of environmental auditing, Comptroller and Auditor
General of India(CAG) also conducts environmental audit in India. This process was
formalised with the introduction of specialized guidelines for conduct of environmental
audits. This laid down broad guidelines to enable India’s auditors to examine whether the
auditee institutions gave due regard to the efforts of promulgating sustainability
development and environmental concerns, where warranted.

Gross National Happiness

 Gross National Happiness is a term coined by His Majesty the Fourth King of Bhutan,
Jigme Singye Wangchuck in the 1970s.
 The concept implies that sustainable development should take a holistic approach
towards notions of progress and give equal importance to non-economic aspects of
wellbeing.
 The Gross National Happiness Index is a single number index developed from 33
indicators categorized under nine domains.
 The concept of GNH has often been explained by its four pillars: good governance,
sustainable socio-economic development, cultural preservation, and
environmental conservation