SHORT NOTES

Growth and Development

1
 GROWTH AND DEVELOPMENT

ECONOMIC GROWTH

Economic growth is defined as an increase in the production of goods and

services from one period to another.

In other words, the term economic growth is defined as the process where
the country’s real national and per capita income increases over a period of
time.

This definition of economic growth consists of the following features of

economic growth:

Economic growth implies a process of increase in National Income and

Per-Capital Income
The increase in Per-Capita income is a better measure of economic growth
since it reflects increase in the improvement of living standards of masses.

Economic growth is measured by increase in real National Income and

not just the increase in money income or nominal national income.
In other words, the increase should be in the terms of increase of output of
goods and services, and not due to a mere increase in the market prices of
existing goods.

The increase of real national income should be over a long period

The increase of real national income and per-capita income should be sustained
over a long period of time. The short-run seasonal or temporary increase in
income should not be confused with economic growth.
 Increase in income should be based on increase in productive capacity

Increase in Income can be sustained only when this increase results from some
durable increase in productive capacity of the economy like modernization or
use of new technology in production, strengthening of infrastructure like
transport network, improved electricity generation, etc.

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Economic Growth Rate =
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Capital goods, labour force, technology, and human capital all have
the potential to contribute to economic growth.

Importance of Economic Growth

It creates a potential for wider range for human choices and economic
activities

It helps in poverty alleviation

It is an important instrument to resolve social tensions.

Sources of Economic Growth

Capital Formation: More capital generally means more production and means
more growth.

The larger the stock of capital the greater tends to be the productivity of
labour, therefore the volume of commodities and services that can be turned
out with the same effort.
Capital-Output Ratio: The term ‘capital-output ratio’ refers to the number of
units of capital that are required in order to produce one unit of output.

In other words, capital-output ratio reflects the productivity of capital in the

various sectors of the economy at a point of time.

Occupational Structure: Another factor which determines economic growth

process is the occupational structure of the working population.

The efficient utilization of labour will further boost the overall level of
productivity of the economy.

Technical Progress: This is perhaps the most widely accepted source of

economic growth. This is because technology makes it possible to produce more
from the same quantity of resources.
This boots the potential level of output of the economy

Limitations of Economic Growth

Inequality of Income: The issue of distribution of the fruits of the growth

process becomes first important limitations of process of economic growth.
There is evidence to suggest that, at least in the initial stages of development;
growth tends to worsen the distribution of income.

Pollution (and other –ve externalities): The drive for increased output tends
to put more and more pressure on the environment and the result will often be
increased pollution- air, water and noise.

Loss of non-rewnewable resources: The more we want to produce, the more

resources we need to do that. Loss of non-renewable resources, the more we
want to produce, the more resources we will be required.
 Inclusive Growth

Inclusive growth means economic growth that creates employment

opportunities and helps in reducing poverty

As per OECD (Organization for Economic Co-operation and Development),

inclusive growth is economic growth that is distributed fairly across society
and creates opportunities for all.

It means having access to essential services in health and education by the

poor. It includes providing equality of opportunity, empowering people through
education and skill development.

It also encompasses a growth process that is environment friendly growth,

aims for good governance and helps in creation of a gender sensitive society.

ECONOMIC DEVELOPMENT

Economic Development is defined as a sustained improvement in material well

being of society.

It is a wider concept than economic growth. Apart from growth of national

income, it includes changes – social, cultural, political as well as economic
which contribute to material progress.

It includes changes in resource supplies, capital formation rates, population

size and composition, skills and efficiency, as well as institutional and
organizational structure.
These changes contribute to the larger goals of ensuring more equitable
income distribution, increased employment and poverty alleviation.

It is a long chain of interconnected changes in fundamental supply factors

and demand structure that leads to an increase in a country’s net national
product in the long run.

Major Indices of Economic Development

q Human Development Index (HDI)

Human Development Index (HDI) is a statistical tool used to

measure a country’s overall accomplishment in its social and
economic dimensions, and it is published by the United Nations
Development Programme (UNDP)

The health of people, their level of education, and their style of

life determine a country’s social and economic dimensions.

q Inequality- adjusted Human Development Index (IHDI)

The Inequality- adjusted Human Development Index takes into account not
only the average achievements of a country on health, education and income,
but also how those achievements are distributed among its population.
As per UNDP, The IHDI combines a country’s average achievements in health,
education and income with how these achievements are distributed among
country’s population by “discounting” each dimension’s average value according
to its level of inequality.

Two countries with different distributions of achievements can have the same
average HDI value.

Under perfect equality the IHDI is equal to the HDI but falls below
the HDI when inequality rises.
For India

q Gender Inequality Index (GII)

The Gender Inequality Index (GII) is an inequality index. It shows the loss in
potential human development due to disparity between female and male
achievements in three dimensions-
1) Reproductive Health
2) Empowerment
3) Labour Market Participation

In a few words, GII reflects how women are disadvantaged in these

dimensions.
 According to the Human Development Report 2020, the GII value of
India was 0.488 and India ranked 123rd out of 162 nations.

There is no country with perfect gender equality – hence all countries suffer
some loss in achievements in key aspects of human development when gender
equality is taken into account.

The GII ranges between 0 and 1 and higher GII values indicates higher level
of inequalities.

q Gender Development Index (GDI)

The Gender Development Index measures differences between male and

female achievements in three basic dimensions of human development:

Equitable command over

Health economic resources Education
 Health

It is measured by female and male life expectancy at

birth

Equitable Command over economic resources

It is measured by female and male estimated earned

income.

Education

It is measured by female and male expected years of

schooling for children and female and male mean years of
schooling for adults ages 25 and older; and

Multi-Dimensional Poverty Index (MPI)

The Multi-Dimensional Poverty Index (MPI) identities multiple deprivations at

the household and individual level in health, education and standard of living.
The MPI offers a valuable complement to income-based poverty measures.
Gross National Happiness Index

Gross National Happiness

(GNH) is a measure of
economic and moral progress
that the king Bhutan – Jigme
Singye Wangchuck introduced
in the 1970s as an alternative
to Gross Domestic Product.

Rather than focusing strictly on quantitative economic measures, gross national

happiness takes into account an evolving mix of quality-of-life factors.

Following parameters are used in Gross National Happiness Index:

1. Higher real per capita income
2. Good governance
3. Environmental Protection
4. Cultural Promotion

Human Poverty Index (HPI)

The Human Poverty Index (HPI) is an

indication of the standard of living in a
country, developed by the United Nations
(UN) to complement the Human Development
Index (HDI) and was first reported as part
of the Human Development Report 2007.

The HPI concentrates on the deprivation in

the three essential elements of human life
already reflected in the HDI:

Decent
Longevity Standard
of living

Knowledge
 Deprivations in longevity are measured by the probability at birth of
not surviving to age 40

Deprivations in knowledge are measured by the percentage of adults

who are illiterate

Deprivations in a decent standard of living are measured by two

variables:
a) The percentage of people not having sustainable access to an
improved water source
b) The percentage of children below the age of five who are
underweight

Genuine Progress Indicator

The Genuine Progress Indicator (GPI) is designed to measure sustainable

economic welfare rather than economic activity alone.

To accomplish this, the GPI uses three simple underlying principles for its
methodology:

• Account for income inequality

• Include non-market benefits that are not included in Gross
Domestic Product, and
• Identification and Deductions to account for income inequality
and cost of crime, environmental degradation, loss of leisure,
etc.

World Happiness Report

The World Happiness Report, which has been published

since 2012, is based on two ideas:
Happiness or life evaluation as evaluated by opinion
surveys
Identifying key aspects that determine well-being and life
evaluation countries.
The report typically evaluates 150 countries based on various factors,
including-

I. Including real GDP per capita

II. Healthy life expectancy
III. Social Support
IV. Freedom to make life choices
V. Generosity
VI. Perceptions of corruption

The report ranked 146 countries in this year.

Every year, each variable calculates a populated-weighted average score on a

scale of 0 to 10, which is then tracked over time and compared to other
countries.

OECD Better Life Index

This index compares well-being across countries, based on 11 topics which

Organizations for Economic Co-operation and Development (OECD) has
identified as essential, in the areas of material living conditions and quality
of life.

Keyword

Organizations for Economic Co-operation and Development (OECD): is an

intergovernmental economic organization that works to build better
policies for better lives.
• It was founded in 1961 to stimulate economic progress and world trade.
The Physical Quality of Life Index

It measures the quality of life or well-being of a country. The value is the

average of three statistics all equally weighted on a 0 to 100 scale. These
are-
1. Basic literacy Rate
2. Infant Mortality
3. Life Expectancy
It was developed for the overseas development council in the mid-1970s by
Morris David Morris.
Physical Quality of Life Index might be regarded as an improvement but shares
the general problems of measuring quality of life in a quantitative way. It has
also been criticized because there is considerable overlap between infant
mortality and life expectancy.

q Comparison Chart: Economic Growth v/s Economic Development

Economic Growth Economic Development

It is an increase in the level of output Economic development van be referred

of goods and services that is as the quantitative and qualitative
sustained over a long period of time. changes in the economy.
Economic growth is measured in terms Economic developmental focuses on
of rise in GDP or market productivity. the spectrum of spheres ranging from
health, education, employment, safety,
etc.
It takes into account quantitative It takes into account both quantitative
changes only. and qualitative aspects of
improvement.
The scope of economic growth is The scope of economic development is
narrow. broad.
To measure the economic growth, To measure the economic development
GDP, GNP, etc. are considered. – HDI, Gender Inequality Index,
Gender Development Index, etc.
q Underdeveloped Countries

Common features of underdeveloped countries:

Low per capita income: The level of per capita income is very low in
underdeveloped countries.

Poor level of living: The vast majority of people in underdeveloped

nations lie under the conditions of poverty, malnutrition, disease,
illiteracy, etc. Even basic necessities of life such as minimum food
clothing and shelter are not easily accessible to the poor masses.

High rate of Growth of Population: Population growth in underdeveloped

countries neutralizes economic growth. High population implies greater
consumption expenditure and lower investments in productive activities
and slows down the economic development.

Highly Unequal Income Distribution: The income inequality between the

rich and poor within the underdeveloped countries is also very high.
Prevalence of Mass Poverty: Low level of per capita income combined
with high degree of inequalities in its distribution leads to widespread
poverty in underdeveloped countries.

Low levels of Productivity: The Productivity level (i.e., output produced

per person) tends to be very low in an underdeveloped country which is
mainly due to:
i. Inefficient workforce which itself is a consequence of poverty, ill
health and lack of education
ii. Low work culture
iii. Low use of capital in the form of machinery and equipment

Low Rate of Capital Formation: The saving rate in an underdeveloped

country is quite low and rate of capital formation is also very low.

Technological Backwardness: In most of the sectors iin an

underdeveloped economy, the techniques of production employed are
generally obsolete mainly due to low saving rate.

High level of unemployment: Unemployment levels are very high in the

underdeveloped countries mainly due to lack of capital and low level of
development in various economic sectors, these countries are not able to
absorb the rising labour supply.

Low Social Indicators of Development: The under-developed countries

have very low social indicators such as low literacy rate, high infant
mortality rate, low expectancy of life, etc. as compared to the developed
countries.

Agrarian Economy: More than 40% of population is often dependent on

agriculture in underdeveloped countries. The share of income in
agriculture is however, less than the share of employment in
agriculture, which means productivity of labour is low in terms of
returns provided by every person to the economy in monetary terms.
q Classification of countries based on per capita income

Based on per capita income, World Bank has classified

into four categories:

Category Per capita Income ($)

Low Income <1005

Low Middle Income 1006-3995

Upper Middle Income 3956-12235

High Income >12235

Developed Country

An industrialized country (or post-industrial country), more developed country

of More Economically Developed Country (MEDC) is a sovereign state that has
a developed economy and advanced technological infrastructure relative to
other less industrialized nations. (For instance, the USA)

Developing Country

A relatively less industrialized nation which is based on primary activities but

is thriving for new industrial development such as services (India) or mass
production (China)
 Least Developed Country

Least Developed Country (LDCs) are low-income countries confronting severe

structural to sustainable impediments to sustainable development. They are
highly vulnerable to economic and developmental shocks and have low levels of
human assets. Example, Sudan.