MODULE (MIDTERM)

MODULE NO. 1
TITLE: THE MEANING AND MEASUREMENT OF ECONOMIC
DEVELOPMENT

TEXT:
 Economic Development, Fourth Edition. Nafziger, Wayne, E., New York: Cambridge
University Press, 2006

REFERENCES:
 https://marketbusinessnews.com/financial/glossary/economic -development/
 (https://www.jotscroll.com/forums/3/posts/185/economic-development-types-examples-html)
 (https://penpoin.com/economic-development)

LESSON OBJECTIVES:

At the end of this lesson, the students will be able to:

1. Define what is economic development, its indicators and examples.

2. Differentiate economic development and economic growth.
3. Enumerate and explain the goals of economic development.
4. Enumerate and explain the common characteristics and features of developing economies.

Introduction
This lesson discusses the meaning, calculation, and basic indicators of economic growth and
development; the classification of rich and poor countries; the price index problem; the distortion
in comparing income per head between rich and poor countries; adjustments to income figures
for purchasing power; alternative measures and concepts of the level of economic development
besides income per head; the problems of alternative measures; and the costs and benefits of
economic development.

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WHAT IS ECONOMIC DEVELOPMENT? DEFINITION AND INDICATORS AND
EXAMPLES

SOME DEFINITIONS:
 Economic Development refers to economic growth accompanied by changes in output
distribution and economic structure. (Nafziger)
 Economic Development is the process by which emerging economies become advanced
economies. In other words, the process by which countries with low living standards become
nations with high living standards. Economic development also refers to the process by
which the overall health, well-being, and academic level the general population improves.
(marketbusinessnews.com).
During the development, there is a population shift from agriculture to industry, and then to
services.
A longer average life expectancy, for example, is one of the results of economic development.
Improved productivity, higher literacy rates, and better public education, are also consequences.
Put simply; economic development is all about improving living standards. ‘Improved living
standards’ refers to higher levels of education and literacy, workers’ income, health, and
lifespans.
 Economic Development is “the process in which an economy grows or changes and
becomes more advanced, especially when both economic and social conditions are
improved.” (The Cambridge Dictionary).
 Economic development is “the process by which a nation improves the economic, political,
and social well-being of its people.” (Wikipedia).
Development economics is a field of economics that examines economic development.

INDICATORS AND EXAMPLES OF ECONOMIC DEVELOPMENT

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 Steady accumulation of physical and human capital

 Change in consumer demands
 Increased urbanization
 Constant power supply
 Improved transport and communication networks
 Shift from agriculture to industrial production
 Demographic transition
 Decline in family size

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ECONOMIC DEVELOPMENT VS. ECONOMIC GROWTH
Growth and Development
A major goal of poor countries is economic development or economic growth. The two terms are
not identical. Growth may be necessary but not sufficient for development. Although the terms
economic development and economic growth cover similar concepts, they are not the same.
Economic Growth
Economic Growth is all about expanding GDP, i.e., making the size of the economy
bigger. GDP stands for Gross Domestic Product. GDP is the sum of all economic activity in a
nation over a specific period. It is the net market value of all the final products and services that
an economy produces stated in US dollars.
Economic development, on the other hand, is the growth of the standard of living of a nation’s
people from a low-income (poor) economy to a high-income (rich) economy. When the
local quality of life is improved, there is more economic development.
Economic development looks at how the citizens of a country are affected. Apart from their
living standards, it also looks at the freedom they have to enjoy those living standards.
Economic development takes into account the following information:
 Average life expectancy, i.e., how long people people’s lifespans are.
 Education standards.
 Literacy rates, i.e., what percentage of the population can read.
 Environmental standards.
 Availability of housing, plus the quality of housing.
 Access to healthcare. This takes into account the number of doctors per thousand people,
access to affordable medicine, etc.
 Income per capita.
Growth is not enough
Economic growth is a crucial condition for development. However, just growth is not enough
because it cannot guarantee development.
Amartya Kumar Sen, an Indian economist and philosopher, who received the Nobel Memorial
Prize in Economic Sciences, once said:
“Economic development is about creating freedom for people and removing obstacles to
greater freedom. Greater freedom enables people to choose their own destiny.”

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“Obstacles to freedom, and hence to development, include poverty, lack of economic
opportunities, corruption, poor governance, lack of education and lack of health.”
Measuring Economic Development

One way to measure economic development is human development. Human development is very
important, and includes the health of the people and their education. This usually goes together
with economic growth. As people in a country become healthier and get better education, they
also usually get richer, because healthy, educated workers are more productive (better at making
things), and richer workers can afford health and education. The Human Development
Index looks at how long people live, how well people read, how many people go to school, and
how much money people make.

Economists also look at the rate of growth, which is how fast a country gets richer.

ECONOMIC DEVELOPMENT GOALS

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Development is more than just talking about increasing income or increasing the economy’s number
of goods and services. It is not only about growing the economy but also how that growth benefits
citizens.

Development takes into account inclusive welfare, better standards of living for all citizens. It’s also
about building capacity and resilience in a fast-changing and unpredictable world.

Some of the goals of economic development:

 Increase the availability of goods and services. It talks about production and how to expand
the distribution of essential life-sustaining goods such as food and drink, shelter, education,
health, and protection.
 Increase per capita income. Income is one way to become more prosperous. Also, better
education and the provision of more jobs are other important goals. Development must also
place more significant attention on cultural and human values. So, prosperity here does not only
take the material dimension but also immaterial.
 Promote the freedom to make responsible economic and social choices. Individuals and
nations must be free from slavery, ignorance, and misery.

Economic development is typically associated with improvements in a variety of areas or

indicators (such as literacy rates, life expectancy and poverty rates), that may be causes of
economic development rather than consequences of specific economic development programs.

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For examples, health and education improvements have been closely related to economic growth,
but the causality with economic development may not be obvious.

COMMON CHARACTERISTICS/FEATURES OF DEVELOPING ECONOMIES

1. Low per capita real income

2. High population growth rate
3. High rates of unemployment
4. Dependence on primary sector
5. Dependence on exports of primary commodities

1. LOW PER CAPITA INCOME

It means the average person doesn’t earn enough money to invest.

Gross Domestic Products (GDP)

Measure the value of finished goods and services produced within a country. It is composed of
private consumption or consumer spending, government spending, capital spending by business
and net exports.

 GDP per capita is gross domestic product divided by midyear population. GDP is the sum of
gross value added by all resident producers in the economy plus any product taxes and minus
any subsidizes not included in the value of the products.

Consumption
The value of the consumption of goods and services acquired and consumed by the country’s
household. (This account for the largest part of the GDP).

Government Spending
All consumptions, investments, and payments made by the government for current use.

Capital Spending by business

Spending on purchases of fixed assets and unsold stock by private business.

Net Exports
Represents the country’s Balance of Trade (BoT) computed as Exports minus Imports (E-M)

Two Categories of GDP

1. Real GDP – economic output after inflation is factored.
2. Nominal GDP – output does not take inflation into account.

Recession. GDP growth rate is negative for two consecutive quarters or more.

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GROSS NATIONAL PRODUCT (GNP)
Measures the value of goods and services produced by a country’s citizen domestically and
abroad. (This was abandoned by the US in 1991 as most countries are using GDP).

Computation of Per Capita Income:

Per Capita Income = National Income or GNP

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Population of the Country

2. HIGH POPULATION GROWTH RATE/SIZE

1. Lack of family planning options
2. Lack of sex education
3. Believe that more children could result in a higher labor force for the family to earn
income

3. HIGH RATES OF UNEMPLOYMENT

1. Unemployment. Labor force that is seeking employment but cannot find it. (Age 16 and
over)
2. Underemployment. Employed at less than full-time/underpaid/jobs inadequate with
respect to training.

4. DEPENDENCE ON PRIMARY SECTOR

Almost 75 percent of the population of low-income countries is rurally-based.

(As more income level rise, the structure of demand changes, which leads to a rise in the
manufacturing sector and then the service sector).

5. DEPENDENCE ON EXPORTS OF PRIMARY COMMODITIES

Significant portion of output originates from primary sectors, a large portion of exports is also
from the primary sector.