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Economic growth and development

Study Material > Economics

Economic growth

  • Economic growth is a long-term expansion of the productive potential of the economy.
  • It can be measured in nominal or real terms, the latter of which is adjusted for inflation. Traditionally aggregate economic growth is measured as the percentage increase in Gross National Product (GNP) or Gross Domestic Product (GDP) or per capita Net Domestic Product (NDP). Per capita, NDP is the most appropriate measure of economic growth.
  • Economic growth can be achieved in different ways. Economy can either:
    1. Grow extensively by using more resources (such as physical, human or natural capital)
    2. Grow intensively by using the same amount of resources more efficiently
    3. Grow by discovery of new or better economic resources
    4. Grow by creating superior technology and skilling the workers to work with those superior technologies
    5. Savings, investment and specialization are the most consistent and easily controlled methods.

Economic development

  • Earlier economic development and economic growth are often used as synonyms of each other. Now a days economists differ this word by measuring change or growth in quantitative or qualitative terms.
  • A economic growth is a change in quantitative term while economic development is a change in qualitative term.
  • Economic development and growth both goes hand in hand.
  • Some of the qualitative changes are improvement in the health and education, reduction in inequality, positive changes in attitude, improvements in the environment, and so on.
  • Objectives of economic development is to increase the availability and efficient distribution of essential life-sustaining goods. Provides more choices to both individuals and Nations.
  • To improve literacy rates, life expectancy, creating more job opportunities and greater attention to culture.

Measuring economic development

  • There is no commonly accepted yardstick of economic development. Some of the most commonly used measures of economic development are:
    1. Gross National Income (GNI)
    2. Physical Quality of Life Index(PQLI)
    3. Human Development Index (HDI)
    4. Inequality Adjusted Human Development Index (IHDI)
    5. Gender Inequality Index (GII)

Gross National Income

  • It was previously known as Gross National Product. World Bank uses the concept of per capita Gross National Income (GNI) as a measure for comparing and classifying countries based on their stage of economic development.
  • According to this classification, India is a low middle-income country.
  • Since the official exchange rate is used in the international comparison of GNI, therefore they do not give a correct picture for two reasons:
  • Purchasing power capacity of a Country ignored.
  • Official exchange rate does not reflect the value of non traded goods.
  • In order to overcome this problem, following the work of IB Kravis and others, “International Comparison of Real Product and Purchasing Power,” The UN International comparison program gave the purchasing power parity (PPP) method.

The physical quality of life index(PQLI)

  • The physical quality of life index was the first attempt to measure the quality of life or well being of a country. It was developed by Morris David Morris, as one of a number of measures created due to dissatisfaction with the use of GNP as an indicator of development.
  • PQLI is the average of three statistics: basic literacy rate, infant mortality and life expectancy. All equally weighted on a 1 to 100 scale. Where 1 represents worst and 100 represents the best.

Human Development Index (HDI)

  • HDI is introduced by the United Nations development programme in its first human development report (1990). First HDI was written by a team of experts led by the late Pakistani economist Mahbub Ul Haq, who argued that health and education should be given as much weight as income in measuring a country's development, and that the ultimate goal of development is the expansion of people’s choices and freedoms.
  • The HDI is a measure for assessing progress in three basic dimensions of human development:
    1. A long and healthy life.
    2. Access to knowledge.
    3. Access to a decent standard of living.

 

  • The 2010 Human Development Report(HDR) continued the measurement innovation started by first HDR by introducing new indices that address crucial development factors not directly reflected in HDI:
    1. The inequality adjusted Human Development Index.
    2. The Gender Inequality Index.
    3. The Multidimensional Poverty Index.

The Inequality Adjusted Human Development Index (IHDI)

  • The IHDI combines a country's average achievements in health, education and income with how those achievements are distributed among Country’s population by “discounting” each dimension’s average value according to its level of inequality. Under perfect equality the IHDI is equal to the HDI, but falls below the HDI when inequality rises.
  • The difference between the IHDI and HDI is the human development cost of inequality, also termed the loss to human development due to inequality.

The Gender Inequality Index (GII)

  • The GII is an inequality index. It measures gender inequalities in three important aspects of Human Development –
    1. Reproductive health, measured by maternal mortality ratio and adolescent birth rates.
    2. Empowerment, measured by proportion of parliamentary seats occupied by females and proportion of adult females and males aged 25 years and older with at least some secondary education.
    3. Economic status, expressed as labour market participation and measured by labour force participation rate of female and male population aged 15 years and older.
  • The GII is built on the same framework as the IHDI to better expose differences in the distribution of achievements between women and men. It measures the human development costs of gender inequality. Thus the higher the GII value the more disparities between females and males and the more loss to human development.

Multidimensional Poverty Index

  • The multidimensional poverty index was developed in 2010 by Oxford poverty and Human Development Initiative and UNDP. Different factors are used to determine poverty beyond income-based lists.
  • The MPI is an index of acute multidimensional poverty. It shows the number of the people, who are multidimensionally poor (suffering deprivation in 33% of weighted indicators) and the number of deprivation with which poor households typically contend. It reflects deprivation in very rudimentary services and core human functioning for people across 104 countries.
  • The Index uses same three dimensions as the Human Development Index such as health, education and standard of living.

Gross National happiness

  • The phraseGross National Happiness” was first coined by the fourth king of Bhutan, King Jigme Singye Wangchuck, in 1972 when he declared, “Gross National Happiness is more important than Gross Domestic Product”.
  • Gross National Happiness (GNH) is a global indicator of progress, which measures both sustainable economic and social development, while protecting the environment and culture.
  • Hence GNH is a development Philosophy as well as an index which is used to measure the collective happiness in a Nation.
  • GNH is based on four pillars and nine dimensions. The four pillars describe the promotion of sustainable development, the preservation and promotion of cultural values, the conservation of the natural environment, and the establishment of good governance. The nine dimensions are as follows:-
  • 1. Education 2. Psychological well being 3. Health 4. Time-use 5. Cultural diversity and resilience 6. Good Governance 7. Community Vitality 8. Ecological diversity and resilience 9. living standard.

Genuine Progress Indicator

  • GPI is a method developed in the mid nineties for measuring economic progress. It is often considered as a replacement to the more well known Gross Domestic Product (GDP) economic indicator.
  • The GPI metric was developed out of the theories of green economics (which sees the economic market as a piece within a ecosystem).
  • A GPI attempts to measure whether or not a country’s increased production of goods and expanding services have actually resulted in the improvement of welfare of the people of the country.
  • Genuine progress indicator, refers to the concept of a quantitative measurement of well-being and happiness.

Green GDP

  • Green GDP is an index of economic growth with the environmental consequences of that growth factored into a country's conventional GDP. Green GDP monetises the loss of biodiversity and accounts for costs caused by climate change.

Human Sustainable Development Index (HSDI)

  • Human sustainable development index was founded in 2009 to improve the components and the quality of the Human Development Index, established in 1990 by the UNDP. HSDI attempts to measure the overall quality of life by factoring in a fourth parameter ‘per capita carbon emission’ to the existing HDI.

Global Hunger Index

  • The Global Hunger Index(GHI) is a multidimensional statistical tool used to describe the state of countries hunger situation. The GHI measures progress and failures in the Global fight against hunger.
  • The GHI is updated once a year. The Index was adopted and further developed by the International Food Policy Research Institute and was first published in 2006. The index ranks countries on the 100 point scale, with zero being the best score (no hunger) and 100 being the worst.
  • The GHI combines 4 component indicators:-
    1. The proportion of the undernourished as a percentage of the population.
    2. The proportion of children under the age of 5 suffering from wasting.
    3. The proportion of children under the age of 5 suffering from stunting.
    4. The mortality rate of children under the age of 5.

Indian economy as an underdeveloped economy

  • Following characteristics of the Indian economy exhibit the developing nature of the economy.
    1. Low per capita income: Low per capita real income is the main feature of an underdeveloped economy. The per capita income of the people of India is very low in comparison with that of the USA, the UK, Canada, Australia and Japan.
    2. Low standard of living: The low per capita income is reflected in the low standards of living of the people. The average calorie intake per person per day was far below when compared with advanced country.
    3. Inequitable distribution of wealth and income: Like most underdeveloped countries the distribution of income and wealth in India is inequitable. The gap between the haves and the have-nots over the year has a actually widened and there has been concentration of wealth and economic power in the hands of a few to the detriment of the common people. Income inequalities result from the concentration of wealth and capital. 
    4. Predominance of agriculture: In an underdeveloped country two-thirds of the people live in rural areas and their main occupation is agriculture. A developed economy is generally a highly industrialized country where agriculture occupies a comparatively less important place. Similar condition exists in India. A large part of Indian population depends on agriculture. Historically, it is proved that as a country develops economically, the percentage of its population depending on agriculture goes on diminishing.
    5. High rate of population growth: Like all other underdeveloped countries, the population of India has been increasing at an alarmingly high rate. India has the second largest population in the world next to China. Of the total world population, 18% lives in India, where as it has just 2.4% of world area. Thus, in India, per capita availability of land is very less.
    6. Technical backwardness: The state of Technology in the underdeveloped countries is backward. On account of the absence of technological development, India has continued to use old, outdated and primitive methods of production which were discarded by the developed countries long ago.
    7. Deficiency of capital hinders the process of scrapping the old techniques and equipment and its replacement with modern techniques, etc. Illiteracy and absence of skilled labour are the other major hurdles in the spread of techniques in the backward economy.

 

                Difference between Economic Growth and Economic Development

Economic Growth Economic Development
It is a measure of quantitative increase in real GDP. It is a measure of qualitative change of life.
It is concerned with increase in the real output of goods and services in the country like increase in Income, in savings, in investment etc. It implies progressive changes in socio-economic structure of the country like literacy rate, life expectancy etc.
It is a single dimension concept. It is a multidimensional concept.
Ignores reduction of inequality (Income distribution). Hence number of poor people increases in spite of increasing National income. Reduction of inequality (Economic distribution) is one of the key component of this concept.
Brings quantitative changes in the economy. Brings qualitative as well as quantitative changes in the economy.
Narrower concept than economic development. Broader and normative concept.
It is the essential element of progress of developed countries. It is the essential element of the progress of underdeveloped countries.
It is a short term process. It's a long term process.

 


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