ADDITIONAL NOTES

CA5108: ECONOMIC DEVELOPMENT

PROFESSOR: Mr. Gerardo M. Castro
UST-AMV College of Accountancy Second Semester | A.Y. 2022-2023

ECONOMIC GROWTH VS ECONOMIC DEVELOPMENY MEASURING ECONOMIC DEVELOPMENT

• Gross Domestic Product – The total value of production in an
BASIS FOR ECONOMIC ECONOMIC economy
COMPARISON GROWTH DEVELOPMENT • Gross National Product – GDP + Income from abroad to
measure the nation’s income or production
Meaning Economic Growth is Economic • Note: An improvement in the living standards of the population
the positive change Development is a natural consequence of economic growth over a period of
in the real output of involves rise in the time.
the country in a level of production • Real GDP – Measures the volume of output. It is adjusted for
particular span of in an economy inflation and measured at constant prices.
time. along with the • Nominal GDP – Measures the value of national output at
advancement of current prices with no adjustment for the effect of inflation.
technology, • Real GDP is nominal GDP adjusted for inflation. Real GDP is
improvement in used to measure the actual growth of production without
living standards and distorting the effects from inflation.
so on. • Real GDP < Nominal GDP
Scope Increase in the Improvement in life
NOMINAL GDP
indicators like GNP, expectancy rate,
GDP Deflator x Real GDP
inflation, interest infant mortality
rate etc. rate, literacy rate
REAL GDP (INCREASE % IN PRICE)
and poverty rates.
Nominal GDP / GDP Deflator (1+%)
Term Short term process Long term process
REAL GDP (DECREASE % IN PRICE)
Which kind of Quantitative Qualitative and Nominal GDP x GDP Deflator (1-%)
changes are changes quantitative
expected? changes ILLUSTRATIVE EXAMPLES

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.
1. Economic growth may only benefit a small % of the
population. 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 from it.
2. Corruption. A country may see higher GDP, but the benefits
of growth may be syphoned into the bank accounts of
politicians.
3. 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.
4. Congestion. Economic growth can cause an increase in
congestion. This means people will spend longer time in
traffic jams. GDP may increase but they have lower living
standards because they spend more time in traffic jams.
5. Production not consumed. If a state-owned industry
increases output, this is reflected in an increase in GDP.
However, if the output is not used by anyone then it causes
no actual increase in living standards.
GROWTH RATE OF INCOME
6. 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 ILLUSTRATIVE EXAMPLE
standards. 1. Suppose country A in 2017 has a growth rate of capital (nd)
of 10%, and capital share of income is 30%, labor share is 70%
and labor grows at 1%, efficiency factor is 0.023, then the
growth rate of income is:

= 0.3 (0.10) + 0.7 (0.01) + 0.023

1 BY: JLLA & TJMS

 SOLOW MODEL
• Developed by Solow and Swan in 1956
• Incorporates the law of diminishing returns.
• Assumes the endogeneity of capital-output ratio.
• Output of an economy depends crucially on its initial
endowment of capital and labor.

GROWTH THEORIES

KEYNESIAN THEORY/HARROD-DOMAR
• Accumulation of capital SOLOW NEOCCLASSIC MODEL
• Rostow’s Harrod-Domar Growth FORMULAS
• Do not consider the law of diminishing returns
• Not realistic

KEYNESIAN-HARROD-DOMAR MODEL

Where:

Capital Output Ratio (COR) - Productivity of Capital

investment = K/Y
ILLUSTRATIVE EXAMPLES
K- Capital
Y- Income

ILLUSTRATIVE EXAMPLES

2 BY: JLLA & TJMS