Copyright © 2006 Pearson Addison-Wesley. All rights reserved. Chapter 1 Economics, Institutions, and Development: A Global Perspective

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Economic growth versus economic development versus Development n Economic growth? broader n Economic development? broader n Development? Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 1-4

Economic growth Economic growth takes place when there is a sustained (ongoing for at least 1-2 years) increase in a country’s output (as measured by GDP or GNP) or in the per capita output (GDP or GNP per person) The growth of GDP per capita or GNP per capita is a better indicator of growth than GDP or GNP because if the population grows faster than output, output (GDP or GNP) could grow while output per person (GDP or GNP per capita) falls – in this case it is misleading to say “growth” is occurring Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 1-5

Economic development Economic development occurs when the standard of living of a large majority of the population rises, including both income and other dimensions like health and literacy. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 1-6

Development Development is associated with not only improvements in economic and socio- economic dimension (like improvements in living standards) but also changes in political rights, civic rights etc. Development is the process of improving the quality of all human lives and capabilities by raising people’s levels of living, self-esteem, and freedom. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 1-7

The reason for the distinction between economic growth - economic development The reason for this distinction between eg and ed is because of the way income is distributed: it is possible for a nation’s economic output per person to increase (growth), but a large number of people can have their income decrease at the same time if the increase in output is earned by a small percentage of the population for example, if 80% of the population is in traditional agriculture and 20% are in the modern sector then the average income per person can increase due to large gains by the modern sector minority but the income of the 80% of the population in the traditional sector can simultaneously be falling over time. Thus an increase in GDP per capita is insufficient to say development is occurring 1-8

Absolute poverty Absolute poverty: A situation of being unable to meet the minimum levels of income, food, clothing, healthcare, shelter, and other essentials. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 1-9

Subsistence economy Subsistence economy: An economy in which production is mainly for personal consumption and the standard of living yields little more than basic necessities of life—food, shelter, and clothing. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-10

Economics and Development Studies:The Nature of Development Economics Traditional economics: An approach to economics that emphasizes utility, profit maximization, market efficiency, and determination of equilibrium. Political economy. The attempt to merge economic analysis with practical politics—to view economic activity in its political context. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1-11

Economies as Social Systems: The Need to Go Beyond Simple Economics Social system: The organizational and institutional structure of a society, including its values, attitudes, power structure, and traditions. Values: Principles, standards, or qualities that a society or groups within it considers worthwhile or desirable. Attitudes: The states of mind or feelings of an individual, group, or society regarding issues such as material gain, hard work, saving for the future, and sharing wealth. Institutions: Norms, rules of conduct, and generally accepted ways of doing things. Economic institutions are humanly devised constraints that shape human interactions including both informal and formal “rules of the game” of economic life in the widely used framework of Douglass North. Copyright © 2011Pearson Addison-Wesley. All rights reserved. 1-12

Development economics: The study of how economies are transformed from stagnation to growth and from low-income to high- income status, and overcome problems of absolute poverty. More developed countries (MDCs): The now economically advanced capitalist countries of western Europe, North America, Australia,New Zealand, and Japan. Less developed countries: A synonym for developing countries. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 1-13

Globalization Globalization: The increasing integration of national economies into expanding international markets. Copyright © 2011Pearson Addison-Wesley. All rights reserved. 1-14