Economic Growth and Development

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. Example: training and education.
• There is an increase in capital and machinery.
• There is an improvement in technology.

Development Occurs When

Measures of economic development will look at:

• 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.

Difference between Economic Growth and Economic Development

We can also have a situation where there is growth and development, i.e. increase in luxury goods and education.

Development alleviates people from low standards of living into proper employment with suitable shelter. Economic Growth does not take into account the depletion of natural resources which might lead to pollution, congestion & disease. Development, however, is concerned with sustainability which means meeting the needs of the present without compromising future needs.

1. Economic Growth

Growth is an increase in the country’s output.

1. Development

Development is an improvement in factors such as health, education, literacy rates and a decline in poverty levels.

Change in Development

The Relationship between Inequality and Economic Growth

Poverty has come down most when inequality has fallen, and there is high economic growth. Initial low levels of inequality are associated with more negative elasticities of poverty reduction concerning growth. Higher initial inequality results in less effect on poverty with an increase in economic growth.

1. Savings rate

The marginal savings rate changes with decreasing or increasing income. The marginal savings rate is the fractional decrease in saving that results from a decrease in income.

2. Credit market constraints

The poor can’t get loans.

3. Political economy

Governments pursue poor policies (redistribution policies) trying to reduce inequality which results in high inflation, high deficit, and lower growth. However, there doesn’t seem to any relationship between inequality and economic growth empirically. But, higher economic growth leads to lower levels of poverty (not the same as inequality)

Growth Effect

The positive growth of people’s income and no change in income leads to a decrease in the poverty level.

Redistribution Effect

If there is a rise in inequality and mean income remains constant, then poverty will rise.