Economic Growth and Development What is the difference between growth and development? Can you have growth without development, and vice versa? How? What are methods used to help develop a country? Promote economic growth?

Economic growth Growth—increases in output & incomes over time, often measured as per capita – –Quantitative measurement: Gross Domestic Product, Gross National Product… Increasing levels of output (GDP) and incomes resulting from growth can help better satisfy needs of a society (but not guaranteed) – –Persistent poverty, failure of long-term improvements

Development Difficult to define because it involves normative or value judgment Development should address these essential conditions: – –Food – –Clothing – –Shelter – –Healthcare – –Employment – –Freedom from fear and indignity So what is the link between income and these life essentials? – –Improving income and growth of income should improve poverty and unemployment. – –Therefore, growth of income should help development.

What’s the difference? Development—process where increases in real GDP per capita accompanies/leads to improved standards of living for a whole population A much broader concept than growth, and doesn’t really have a qualitative measurement Goals of development: –Decrease widespread poverty –Raise living standards –Reduce income inequality –Increase employment opportunity Growth enables development but they are not the same.

GROWTH: Two ways for GDP to grow: actual and potential Actual Growth Point A: Points B & E: Points D & C: Point A to Point C: Point F: Agricultural goods A B C D E F Manufactured goods

2 nd Way to measure growth Potential Growth –Point F –Curve I –Curve II Agricultural goods F III Manufactured goods Potential Growth

Calculating Economic Growth Economic Growth can be defined as an increase real GDP per capita over time. Remember GDP= C + I + G+ (X-M) GDP real = GDP nom base year___x 100 Price index of base year CountryName Yr 1 GDP nominal Year 2 GDP nominal Economic growth Real Growth (assuming 7.5% inflation) Increase in Real per capita output (assuming 2% pop growth) Fictoria 100 m 110 m 10%2.5%.5%

Refresher! “Gross” is total amount made as a result of some activity. “Net” is the amount left over after all deductions are made. Net value is not allowed to be made lower. Per capita (“per person” or “per head”)—takes the total value (output, income, expenditure) and divides it by the total population of a country –GDP/GNI divided by the total population Ex: Ireland’s GDP 2001: €114,744; divided by the population, we get per capita GDP €29,889

RULE OF Doubling Time Magic... Rule: 1% will double every 72 years –If any variable grows at 1% per year it will double in size in approximately 72 years. Formula: 72 divided by growth rate = Doubling time Example: 2% growth will double in? 9%? 72/2=36 years 72/9=8 years

Economic Growth with Development A B Necessities (merit goods) Luxury goods & services Here, growth has gone toward producing goods and services used by the poor. Examples: food, clothing, elementary schools, radios, bikes

Economic Growth without Development Luxury Goods & Services Necessities (merit goods) II Benefits of growth all go to rich. Unequal income distribution creates this situation. Demand is determined by income, there- fore their purchases will determine a large portion of the production Example: luxury homes, restaurant meals, luxury autos.

Qatar Watch film for evidence of economic growth and economic development 60 Minutes clip 60 Minutes clip

Review... What is the difference between economic growth and economic development? Is it possible to have one without the other? –Growth: increase in economies real level of output over time. Quantitative – ex., GDP –Development: The process to improve the lives of all people in a country. This includes increase living standards (goods and services), improved dignity, respect and self-esteem, freedom etc. Qualitative. –Growth is possible without development, but only certain groups benefit

Calculate the real GDP growth rate and doubling time CountryNominal GDP 2007 Economic Growth Inflation rate Real GDP growth Adjusted for pop. growth GDP Doubling Time USA T9%3%6% Pop=1% 5% 14.4 yrs Mexic o 893 M8%4% Pop.=2% China3.25T16%5% Pop.=1% What do these statistics tell us? What don’t they tell us?

World Bank Classifications: 2013 GNI/GDP, per capita Low Income Countries: Y<$1,025 Middle Income Countries: – –Lower Middle Income $ $4035 – –Upper Middle Income $ $12,477 High Income Countries: Y> $12,478 Low and Middle Income countries are what we generally refer to as “developing”

Important notes about classifications Classifying countries by most measurements does not accurately represent their level of development – –Varies depending on what characteristic is used – –Using GNI per capita hides lack of uniformity within countries (it’s an average)

Relationship between level of Y and structure of production Poor Countries: primary sector Example: agriculture Middle Income Countries: secondary sector Example: industry High Income countries: tertiary sector Example: high-level industry; service

Characteristics of LDCs Low GDP per capita growth High poverty Relatively large agricultural sectors High birth rates Large urban informal sectors (black markets) Remember, these are generalizations, and it can be problematic to generalize

Sources of Econ. Growth in LDCs: (less developed countries) Increase quantity of physical capital (infrastructure) Increase quantity of human capital (education) Increase use of technology appropriate to the conditions of the LDC Institutional Changes

Production Possibility Frontiers Production Possibility Frontiers Weak Agricultural Sector Land and agriculture are key to studying development Supply of land is fixed and with growing populations this leads to law of diminishing returns. Here manufacturing is growing, but food output is growing at smaller and smaller increments as population grows Food Manufactures A B C D

Production Possibility Frontier Improved land quality Main development goal is to improve productivity of land. –Irrigation –Drainage –Use of fertilizers –Pest control So here improving the quality of land allows the food supply to increase. food manufactures A B C D

Consequence of Growth # 1: Externalities LDCs Pollution and Environmental Degradation –Increased population=pressure on land –Soil erosion (more likely to farm marginal land) –Deforestation (for fuel) –Desertification (mostly from overgrazing) –Over-fishing Industrialized countries and CO 2 emissions: –Positive correlation between CO 2 and national income –80% of all fuel is burnt by 20% of the richest people –In 1997 China had 500 bikes for every car...

Consequence of Growth #2: Income Distribution and Saving Rates Income distribution is a key concern for development economics; goal: development plan to promote evenly distributed income Some assume that development will follow growth –To encourage growth encourage technology and investment, BUT –Increased investment means increased saving is necessary. For saving to increase income more likely to be unevenly distributed. Rich = higher propensity to save Poor = high propensity to consume

Income Distribution- Lorenz Curve and Gini Coefficient Income Distribution- Lorenz Curve and Gini Coefficient Lorenz Curve Lorenz curve—way to measure income distribution and degree of inequality –More unequal the income distribution, more bowed the curve The Gini coefficient converts the Lorenz curve into a single statistic Equation: Shaded area A area BCD Smaller coefficient is better 0=least inequality, 1=most Line of Equality Lorenz Curve Percentage of income Recipients (population) Percentage of income A BC D

Income Inequality in America Income Inequality in America

Income Distribution- Purchasing Power Parity, PPP A more realistic measurement of living standard than GDP Accounts for local buying power of a currency to determine GDP Calculated by the IMF and used by the World Bank in attempt to mitigate the impact of exchange rates. A GDP adjusted for PPP is generally higher than just GDP