Economic

Development
Module 1

Prepared by:
Cristeta A. Baysa, DBA
Oct 2020

7
 Module 1: Introduction
Overview:
Development economics studies the transformation of emerging nations into more
prosperous nations. Strategies for transforming a developing economy tend to be
unique because the social and political backgrounds of countries can vary dramatically.

Students of economics and professional economists create theories and methods that

guide practitioners in determining practices and policies that can be used and
implemented at the domestic and international policy level.

Module Objectives:
After successful completion of this module, you should be able to:
 Demonstrate understanding in the basic concepts of development economics.
 Discuss the components to compute the National Income
 Identify the different cycles in business and how it can be addressed through
government policies
 Discuss the different components/ approaches in solving the national income
 Use the concept of multipliers to determine country’s output
Course Materials:
What is Development economics?
Development economics is a branch of economics that focuses on improving
fiscal, economic, and social conditions in developing countries. Development
economics considers factors such as health, education, working conditions,
domestic and international policies, and market condition with a focus on
improving conditions in the world's poorest countries.

The field also examines both macroeconomic and microeconomic factors relating

to the structure of developing economies, and domestic and
international economic growth. Macroeconomics refers to broadly inSfluencing
factors such as interest rates, whereas microeconomics relates to individual
influences.

What is National Income Accounting?

National income accounting is a bookkeeping system that a government uses to

measure the level of the country's economic activity in a given time
period. Accounting records of this nature include data regarding total revenues
earned by domestic corporations, wages paid to foreign and domestic workers,
and the amount spent on sales and income taxes by corporations and individuals
residing in the country.
8
  National income accounting is a government bookkeeping system that
measures a country's economic activity—offering insight into how an
economy is performing.
 Such a system will include total revenues by domestic corporations, wages
paid, and sales and income tax data for companies.
 National income accounting systems allow countries to assess the current
standard of living or the distribution of income within a population, as well
as assess the effects of various economic policies.
 However, the accuracy of analysis relating to national income accounting
is only as accurate as the data collected.

Understanding National Income Accounting

Although national income accounting is not an exact science, it provides useful

insight into how well an economy is functioning, and where monies are being
generated and spent. When combined with information regarding the associated
population, data regarding per capita income and growth can be examined over a
period of time.

Some of the metrics calculated by using national income accounting include

the gross domestic product (GDP), gross national product (GNP), and gross
national income (GNI). The GDP is widely used for economic analysis on the
domestic level and represents the total market value of the goods and services
produced within a specific nation over a selected period of time.

Special Considerations

The information collected through national income accounting can be used for a
variety of purposes, such as assessing the current standard of living or the
distribution of income within a population. Additionally, national income
accounting provides a method for comparing activities within different sectors in
an economy, as well as changes within those sectors over time. A thorough
analysis can assist in determining overall economic stability within a nation.

For example, the U.S. uses information regarding the current GDP in the
formation of various policies. During the financial crisis of 2008, the GDP began
to suffer as increased market volatility and shifting supply and demand affected
consumer spending and employment levels. As a result, President Barack
Obama, after taking office in 2009, instituted an economic stimulus package in
response.

9
As an example, the basic accounting identity for GDP, sometimes known as the
national income identity, is computed using the following formula:

 GDP = consumption + investment + government spending + (exports −

imports)

National Income Accounting vs. Economic Policy

The quantitative information associated with national income accounting can be

used to determine the effect of various economic policies. Considered an
aggregate of the economic activity within a nation, national income accounting
provides economists and statisticians with detailed information that can be used
to track the health of an economy and to forecast future growth and
development.

The data can provide guidance regarding inflation policy and can be especially
useful in the transitioning economies of developing nations, as well as statistics
regarding production levels as related to shifting labor forces.

This data is also used by central banks to set and adjust monetary policy and
affect the risk-free rate of interest that they set. Governments also look at figures
such as GDP growth and unemployment to set fiscal policy in terms of tax rates
and infrastructure spending.

Criticism of National Income Accounting

The accuracy of analysis relating to national income accounting is only as

accurate as the data collected. Failure to provide the data in a timely fashion can
render it useless in regard to policy analysis and creation.

Additionally, certain data points are not examined, such as the impact of the
underground economy and illegal production. This means the activities are not
reflected in the analysis even if their effect on the economy is strong. As a result,
certain national accounts such as GDP or the consumer price index (CPI) of
inflation have been criticized on the grounds that they do not accurately capture
the real economic condition of the economy.

10