Study Notes

Economic Growth
and
Economic Development
Economic Growth & Economic Development

Introduction

 In the early 1930s, it was impossible for macroeconomics to exist in the form we know it
today. This is because, many aggregate concepts had not yet been formulated, or they
were lacking rigour.
 In the mid-1930s, two Keynesians - Simon Kuznets and Richard Stone began to develop
this terminology. Consequently, they came up with “National Income Accounting”.
 The national income accounting is a set of rules and definitions for measuring economic,
activity in an aggregate economy.
 The Kuznets' national accounts brought tremendous breakthrough in economic analysis
for policy makers and economists alike. For the first time, governments had a framework
for collecting and organizing macroeconomic data that allowed them to monitor the
performance of their economy.
 Likewise, Kuznets' national accounting system enabled economists to put various
macroeconomic theories to the test against actual data. It is important to point out here
that the national income accounting system is based on the logic of the circular flow
model.

Economic Growth

 Economic growth is a sustained increase in national income.

 It shows the performance of the economy.
 Although there may be year-to-year fluctuations or short-term variations in the growth of
national income, there has to be a continuous growth in national income in the long run
for it to qualify as economic growth.
 Taking the differences in population into consideration, the increase in Per-Capita
income (i.e. national income divided by total population) is the better measure of
Economic Growth since:
o It reflects increase in the improvement of living standards of masses
o it indicates level of economic development in comparison to other countries

Economic Development

 Economic development is a much broader concept than economic growth.

 Economic development includes not only economic growth but also various other
economic changes that improve the Quality of life or standard of living of people in a
country.
 A country would have achieved economic development if, along with economic growth, a
country experiences various economic changes such as
o reduction in poverty and unemployment,
o reduction in income and wealth inequality,
o increase in literacy rate,
o improvement in health and hygiene,

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Economic Growth & Economic Development

o decrease in population growth,

o improvement in environmental standards etc.,
 As such, economic development would reflect an improvement in the quality of life.
 It may happen that with economic growth, the rich get richer while the poor get poorer if
the fruits of growth are snatched by the richer sections of the society. In that case, even
though the country has experienced economic growth, it has done poorly in terms of
economic development
 Investment in human capital like education and health are key ingredients for economic
development.

Differences between Economic Growth and Economic Development

Basis Economic Growth Economic Development

Meaning Involves rise in real output of Involves rise in production level
the country in a particular time along with technology
span. enhancement, improvement in
standard of living and so on.
Coverage Narrow Broad
Term scope Short term Long term
Kind of change Quantitative change Both quantitative and qualitative
change
Type of change Gradual and steady Discontinuous and spontaneous
Measures GDP, HDI (Human Development Index),
Per capita income, Literacy rate,
GNP etc. infant mortality rate,
Life expectancy rate,
Poverty rate
Type of process Automatic Manual
Applicable to Developed Countries Developing Countries