Economic growth & factors affecting

economic growth
 Growth versus Development
• Economic growth may be one aspect of economic
development but is not the same
• Economic growth:
– A measure of the value of output of goods and services
within a time period
• Economic Development:
– A measure of the welfare of humans in a society
 Economic Growth
• Using measures of economic performance in terms of the value of
income, expenditure and output
• GDP – Gross Domestic Product
– The value of output produced within a country during a time period
• GNP – Gross National Product
– The value of output produced within a country plus net property income
from abroad
• GDP/GNP per head/per capita
– Takes account of the size of the population
• Real GDP/GNP
– Accounts for differences in price levels in different countries
 The Importance of Economic Growth:

• Economic growth is important because it is a necessary ingredient for

both higher incomes and higher living standards.

• GDP is a measure of both output and income. Growth of output is

necessary for growth of income.

• Per capita GDP is the nation’s GDP divided by its population. Growth of
per capita GDP means more goods and services per person.

• In most cases, higher levels of per capita GDP will mean that the typical
person has a better diet, improved health and access to medical
services, a longer life expectancy, and greater educational opportunity.
 Economic Development

• Till 1960s, it was synonym of economic

growth
• It is taken to mean growth + progressive changes in
crucial variables
• There are qualitative dimensions which missing..
 Economic Growth
• It is a narrower concept than economic development.
• It is an increase in a country's real level of national
output which can be caused by an increase in the
quality of resources (by education etc.),
• Increase in the quantity of resources & improvements
in technology or in another way an increase in the
value of goods and services produced by every sector
of the economy.
• Economic Growth can be measured by an increase in a
country's GDP(gross domestic product).
 How Do We Define
Economic Growth?
• Economic growth can be shown graphically by
shifting the production possibilities curve
outward.
• Economic growth reflects the fact that more of
all goods can be produced within the
economy.

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Economic Growth

Distance of shift
represents an
increase
in productive capacity

9-9
 FACTORS AFFECTING ECONOMIC
GROWTH
Economic growth is a function of multiple socio-
economic variables .These could be considered as
factors affecting economic growth.

Factors affecting economic growth can broadly be

classified into two categories, namely-
 Economic factors – natural resources, human capital, investment in
capital goods & entrepreneurship .

Non- economic factors- social factors, political factors &

demographic factors.
ECONOMIC FACTORS
Natural resources are an important source of national wealth around the world. Yet,
experience shows that natural riches are neither necessary nor sufficient for
economic prosperity and progress. The worlds richest countries include Hong
Kong, Japan, Singapore and Switzerland which do not owe their national wealth
to nature and many others, such as the United States and the United Kingdom,
where natural resources nowadays play only a minor role in the generation of
national income.
• Among developing countries, natural resources are relatively more prevalent. But
there are also clear examples of countries that are genuinely rich in terms of
natural resources but still have not been able to sustain economic growth. It thus
appears that the generosity of nature may sometimes although by no means
always turn out to be a mixed blessing.
If a country doesn’t have much resources, the best way is to put those limited
resources to optimal use.
If natural resource development is properly managed, the associated revenue can
be used to speed up growth, reduce inequality, and lift people out of poverty.
 HUMAN CAPITAL
Human capital is a collection of resources—all the knowledge, talents,
skills, abilities, experience, intelligence, training, judgment, and
wisdom possessed individually and collectively by individuals in a
population. These resources are the total capacity of the people that
represents a form of wealth which can be directed to accomplish the
goals of the nation or state or a portion thereof.
 SOCIAL FACTORS
Social institutions exert a determining influence on economic progress &
can either help or hinder the progress of a nation.

In underdeveloped economies, social institutions & structure do not

provide proper necessary atmosphere & proper conditions for
scientific growth. The important social institutions in India are- cast
system , joint family system, religious beliefs & customs.

Whereas in developing & developed countries, social institutions &

structure pave a way for successful economic growth . People believe
more in their hard work rather than in their fate. This improves their
performance contributing to economy’s progress.
 POLITICAL FACTORS
There are often political factors involved in why some countries remain poor,
and one of those is bad government. Governments need to do lots of
things to encourage development – they need to build and maintain
infrastructure, and raise and spend finance wisely, on the right projects.
They also need to set up their laws and business practices in a way that
encourages investment and initiative, that protect businesses and
individuals legally, and that honour property rights, contracts and
copyrights.
 Demographic factors
•
• Nations with a high proportion of children are likely to devote a
high proportion of resources to their care, which tends to depress
the pace of economic growth.

• By contrast, if most of a nation's population falls within the working

ages, the added productivity of this group can produce a high level
of economic growth, assuming that policies to take advantage of
this are in place. In fact, the combined effect of this large working-
age population and health, family, labour, financial, and human
capital policies can create virtuous cycles of wealth creation.

• And if a large proportion of a nation's population consists of the

elderly, the effects can be similar to those of a very young
population.
 Concept of economic growth
It means increase in the market value of the goods &
services produced by an economy over time.

It implies sustained expansion in effective labour force,

capital , volume of internal & external trade and level
of consumption in an economy.

It has been one of the principal objectives of planning in

India.
Economic growth is measurable & objective. Real per
capita income is the most reliable indicator of economic
growth.
 Economic Growth in India
Since Independence, India has made significant
progress in several areas of economic &
human development. Food production has
grown to provide adequate level of food
security. Infrastructure development has
proceeded with good speed . A vast pool of
trained human resources has been developed.
A vast network of development institutions
has been nurtured.
1)FOOD & NUTRITION
During the past 50 years ,food grain production has increased nearly fourfold from
50.8 million tonnes to about 203 million tonnes .Yet more than half of the
population of children remain undernourished.

2)EDUCATION
Literacy has increased about more than threefold-from 18.33% in 1951 to
65.83% in 2001. Yet more than one-third of the total population is still
illiterate .For females, the proportion of illiteracy is 55%.
3) WATER
More than 80% of the population have access to safe drinking water . But
quality problems & contamination threatens the growth.
 4) HEALTH
During the years 1950-2001, life expectancy almost doubled
from 32 to 62 years .Infant mortality has been halved from 146
to 74 per thousand births in the same period . Death rate came
down to 9%. Even so , each year about 2.2. million infants die in
the country.

5) INCOME-POVERTY
In 1950-51, the proportion of rural population living below the
income poverty line was 65%. It came down to 26% by 1999-
2000. Income poverty also fell in urban areas, and currently it is
24%. In rural areas, it is 27%.
 Economic development
• It is a normative concept i.e. it applies in the
context of people's sense of morality (right
and wrong, good and bad).
• The definition of economic development given
by Michael Todaro is an increase in living
standards, improvement in self-esteem needs
and freedom from oppression as well as a
greater choice.
Economic Development
• The Traditional Approach:
– This approach defines development strictly in Economic
terms
i. Sustained growth rate of GDP of 5 to 7% or more
ii. Structural transformation
• The New View Of Economic Development:
Having realized that about 40% of the world’s population
have not at all benefited from the economic growth during
1950 & ‘60s the economists called for the rejection of narrow
definition of economic development.
Economic Development
During 1970 they redefined the
concept of economic development in terms of the
reduction or elimination of poverty , inequality &
unemployment in the context of growing economy.
• The new view of development includes
– Material in welfare
– Eradication of mass poverty
– Literacy rates
– Eradication of Disease & early deaths rates
– Unemployment and Inequality
• Economic factors
– capital
– Labor
– Natural resources
– technology
– established markets (labour, financial, goods)
• Non-economic factors (institutional, social,
values)
– attitudes toward life and work
– public and private structures
– cultural traditions
– systems of land tenure, property rights
– integrity of government agencies

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 Economic development:

• Economic Development is
policy intervention with aims
of development of :
 Human capital
 Literacy ratio
 Infrastructure
 Health & general welfare of the
citizens
whereas Economic growth is a
phenomenon of market
productivity and rise in GDP
Human Development Index
 Human Development Index (HDI)
• HDI – A socio-economic measure
• Focus on three dimensions of human welfare:
• Longevity – Life expectancy
• Knowledge – Access to education, literacy rates
• Standard of living – GDP per capita: Purchasing
Power Parity (PPP)
Basis Economic Development Economic Growth
Economic development implies changes Economic growth refers
in income, savings and investment along to an increase in the real
with progressive changes in socio- output of goods and
economic structure of country services in the country.
(institutional and technological changes).

Growth relates to a gradual

Development relates to growth of human increase in one of the
capital indexes, a decrease in inequality components of Gross
Factors: figures, and structural changes that Domestic Product:
improve the general population's quality of consumption, government
life. spending, investment, net
exports.
Basis Economic Development Economic Growth

Qualitative.HDI (Human
Development Index), gender-
Quantitative. Increase in
Measurement: related index (GDI), Human
real GDP. Shown by PPF.
poverty index (HPI), infant
mortality, literacy rate etc.

Narrower concept than

Concept: Normative concept
economic development
 Basis Economic Development Economic Growth

Brings qualitative and

Brings quantitative changes
Effect: quantitative changes in the
in the economy
economy

Economic growth is a more

relevant metric for progress
Economic development is
in developed countries. But
more relevant to measure
Relevance: it's widely used in all
progress and quality of life in
countries because growth is a
developing nations.
necessary condition for
development.