Readers Question: What is the difference between growth and development? Explain the factors affecting macroeconomic growth in an underdeveloped country? Can a country experience economic growth without development?
- Economic growth means an increase in real national income / national output.
- Economic development means an improvement in the quality of life and living standards, e.g. measures of literacy, life-expectancy and health care.
- Ceteris paribus, we would expect economic growth to enable more economic development. Higher real GDP enables more to be spent on health care and education.
- However, the link is not guaranteed. The proceeds of economic growth could be wasted or retained by a small wealthy elite.
Economic growth in the UK
Economic growth measures an increase in Real GDP (real output). GDP is a measure of the national income / national output and national expenditure. It basically measures the total volume of goods and services produced in an economy.
Development looks at a wider range of statistics than just GDP per capita. Development is concerned with how people are actually affected. It looks at their actual living standards and the freedom they have to enjoy a good standard of living.
Measures of economic development will look at:
- Real income per head – GDP per capita
- Levels of literacy and education standards
- Levels of healthcare e.g. number of doctors per 1000 population
- Quality and availability of housing
- Levels of environmental standards
- Life expectancy.
Measures of economic development
Measuring economic development is not as precise as measuring GDP because it depends on what factors are included in the measure.
There are several different measures of economic development, such as the Human development index (HDI)
Human development index (HDI)
The HDI combines:
- Life Expectancy Index. Average life expectancy compared to a global expected life expectancy.
- Education Index
- mean years of schooling
- expected years of schooling
- Income Index (GNI at PPP)
more on Human development index (HDI)
Factors affecting economic growth in developing countries
- Levels of infrastructure – e.g. transport and communication
- Levels of corruption, e.g what percentage of tax rates are actually collected and spent on public services.
- Educational standards and labour productivity. Basic levels of literacy and education can determine the productivity of the workforce.
- Levels of inward investment. For example, China has invested in many African countries to help export raw materials, that its economy needs.
- Labour mobility. Is labour able to move from relatively unproductive agriculture to more productive manufacturing?
- The flow of foreign aid and investment. Targeted aid, can help improve infrastructure and living standards.
- Level of savings and investment. Higher savings can fund more investment, helping economic growth.
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.
- 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.
- Corruption. 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.
- Congestion. Economic growth can cause an increase in congestion. This means people will spend longer in traffic jams. GDP may increase but they have lower living standards because they spend more time in traffic jams.
- 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.
- 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.
- GDP and development
- Harrod-Domar Growth model
- Does GDP measure economic development?
- Causes of economic growth