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Economic Growth and Development


Economic growth and economic development are two popular concepts in Economics. In general, they imply an improvement achieved over a period of time. There is no difference between the two to a layman and he often uses it as synonyms. Economists however, draw a distinction between the two. While economic growth implies a rise in national income, economic development refers to a rise in national income along with an improvement in economic welfare. These concepts are explained at the aggregate level and not at the individual or institutional level. Similarly growth or development is related to the entire economy not to that of a particular sector or a specific economic activity. In brief, both are macro concepts.

Economic Growth Economic growth refers to the increase in the output of goods and services produced by an economy over a period of time. It refers to long term increase in national output or income. National income increases when output of goods and services increases when prices of the same remain constant or when prices increase and output remaining the same. Economic growth refers to the increase in national income when output rises while prices remain constant. This is termed as real growth. When real growth takes place, the per capita availability of goods and services will increase provided population remains constant.

Further, economic growth refers to increase in the flow of goods and services over a period of time. It implies that occasional increase in agricultural output or industrial output due to good monsoon or due to new technology cannot be considered as growth. The increase in output or income should sustain for a long period of time. Definition

Professor Meier Economic growth has been defined as the process whereby the per capita real income of a country increases over a long period of time. Pro. Salvatore Economic growth can be defined as The process whereby a countrys real per capita gross national product or income increases over a sustained period of time through continuing increase in per capita productivity.

Economic growth is generally measured in terms of Gross Domestic Product at Factor Cost at constant prices (GDP fc). G = [(A/P) -1] x 100 G = Growth, A = Latest GDP, P = Base years GDP

Example : Suppose the GDP at factor cost in 2000-01at 93-94 prices was Rs 20,000 lakh crores and 1999-2000 it was Rs 18,000 lakh crores. Find the growth rate

G = [(A/P) -1] x 100 = 20,000 - 1 18,000 = (1.11 -1) x 100 = 0.11 x 100 = 11%

Economic Development
Economic development is a wider term compared to economic growth. It refers to a process which consists of economic growth and economic welfare. Economic development has been defined as economic growth and a number of other changes leading to overall development of the economy. Some of the changes are rise in productivity of labour and capital, development of money market and capital market, reduction in poverty and unemployment, equitable distribution of income and above all changes in the attitude of the people moving from traditional values to modern values.

Thus economic development is a very comprehensive term. Economic growth may take place in an economy, but if it is not accompanied by qualitative changes, then it cannot be termed as economic development.

Definition Prof Peterson Economic development is a process whereby the real per capita income and economic welfare increases over a long period of time. Prof. M. P. Todaro Economic development is a multidimensional process involving major changes in social structures, popular attitudes and national institutions as well as the acceleration of economic growth, the reduction of inequality and the eradication of absolute poverty. The definitions imply the following 1. Development indicates a rise in real per capita income, The real per capita income is calculated as - (Real Nation Income / Population).

2. Development is a long-term process. It brings about significant changes in demand for goods and services, supply of factors of production etc. 3. Development should result in an increase in real per capita income and reduction in poverty and inequality. In other words there should be increase in the economic welfare of the people. 4. Development process should lead to significant structural technological and institutional changes in the economy. Structural change implies a fundamental change in the economy. For example, the secondary and the tertiary sectors replacing the agricultural sector as the dominant one is a structural change.

When economic development takes place in an economy, many changes take place. The notable are as uncer 1. Improvement in the standard of living of the people 2. Eradication of absolute poverty 3. Increase in the productivity of factors of production 4. Social parameters like literacy rate, life expectancy etc. show a positive trend. 5. Population growth gets stabilised 6. Greater equality in the distribution of income and wealth is witnessed 7. Infrastructural development is given importance to sustain growth and development 8. Environmental protection and sustainable development are given much importance

Indicators of Development 1. Per capital Income 2. Per capita Consumption 3. Physical Quality of Life Index 4. Human Development Index 5. Quality of Life Index

Per Capita Income Per capita income is the average income of the people of a country. It is obtained with the help of the following formula

Per Capita Income = National Income / Population


When per capita income is calculated according to current prices, it is called money or monetary per capita income. When it is calculated according to the prices of a base year it is termed as real per capital income. It is estimated as
Real Per Capita Income = National Income at Constant Prices Population

2. Per Capita Consumption Per capita Consumption indicate average consumption of goods and services by the people. It is obtained by dividing the total consumption expenditure by the population of a country. If per capita consumption is high, than it indicates, a high standard of living and vice-versa. It implies that quantity and quality of goods consumed by the people should increase when development takes place, otherwise, development has no meaning. This may not be true a) If a part of the increased national income is used for savings and capital formation than consumption, b) If restrictions are imposed by the government on the production and consumption of consumer goods c) When resources have to be diverted to other purposes like war or major projects, resource allocation for consumption goods will decline.

3. Physical Quality of Life Index This index was developed by the famous economist David Morris in the 1970s. He considered three criteria to formulate this index. They are 1. Life expectancy 2. Infant mortality rate 3. Literacy rate

4. Human Development Index Human Development Index (HDI) is an average of three parameters namely life expectancy, educational attainment and standard of living

5. Quality of Life Index There are six parameters to development Quality of Life Index. They are Per Capita Income in PPP$ Infant Mortality Rate Life Expectancy at Birth Adult Literacy Rate Civil Rights of the People Political Rights of the People

Differences between Economic Growth and Economic Development


Economic Growth Economic Development

1. It is defined as the long-term increase in real per capital income


2. It is a narrow concept as it is concerned only with the rise in real per capita income.

1. It is defined as the long-term rise in the real per capita income plus economic welfare.
2. It is a broader concept as it focuses on economic welfare along with the increase in real per capita income.

3. It is a quantitative concept. It is 3. It is both qualitative and measured in terms of increase in quantitative as it is concerned per capital income. with improvement in economic growth and economic welfare. 4. It is a concept associated with the developed countries. 4. It is generally related to the developing countries

Differences between Economic Growth and Economic Development .


Economic Growth
5. It is not concerned with the distribution of income.

Economic Development
5. Equality in the distribution of income and wealth is one of the price concerns of economic development.

6. Other factors like changes in the 6. These changes are a part and productivity of factors of parcel of economic development. production, changes in the attitudes of the people are not included. 7. Structural technological or institutional changes need not occur when growth takes place. Growth is independent of structural changes. 7. These changes are indispensable for the process of development. Development and structural change go together.

Sustainable Development
Economic development is a process wherein economic growth is accompanied by structural changes. While growth implies a rise in national income structural changes refer to changes in the sectoral contribution. When an economy progresses, the contribution made by the primary sector to GDP will decline, while that of the secondary and tertiary sectors will increase. Along with structural changes, development is supposed to increase the welfare of the people reducing inequality, poverty and unemployment.