ECO 101: Economic Development Reviewer
(Midterms)
Economic Growth
- refers to increases in a country's production or
income per capita.
- Production is usually measured by gross
national product (GNP) or gross national
income (GNI), used interchangeably, an
economy's total output of goods and services.
- defined as an increase in Gross Domestic Product
(GDP), either in total GDP or in GDP per capita.
- To others a statement like: ‘we have to promote
economic growth’ is understood as a suggestion
to promote neo-liberal policies like the ones
suggested by the IMF and the World Bank.
Development
- is a process of disproportionate growth of
systems.
- In economics, development is a Essay on Entitlement and Deprivation, 1981).
multidimensional process that generates
economic, technological, social and
institutional change to support wealth of
nations and a comprehensive wellbeing of
people in society.
Economic Development
- refers to economic growth accompanied by
changes in output distribution and economic
structure.
- Changes may include:
1. improvement in the material well-
being of the poorer half of the
population
2. a decline in agriculture's share of
GNP and a corresponding increase in
the GNP share of industry and
services
3. an increase in the education and
skills of the labor force;
4. substantial technical advances
originating within the country.
- growth involves a stress on quantitative
measures (height or GNP), whereas
development draws attention to changes in
capacities (such as physical coordination and
learning ability, or the economy's ability to
adapt to shifts in tastes and technology).
- is a process that generates economic, social
and technical progress of nations. The
fundamental elements of development in
society are: the improvement of health, the
growth of wealth, the creation of new
knowledge and technology, etc.
- Economic development is fostered in
appropriate social systems with high
democracy and culture, good economic
governance, efficient higher education
system, and high innovative outputs
- Economic development is a broader concept
than economic growth.
- Development reflects social and economic
progress and requires economic growth.
- Growth is a vital and necessary condition for
development, but it is not a sufficient
condition as it cannot guarantee
development.
Amartya Sen
- Indian economist (Poverty and Famines: An
- he stated that development is about creating
freedom for people and removing obstacles to
greater freedom. Greater freedom enables
people to choose their own destiny. Obstacles
to freedom, and hence to development,
include poverty, lack of economic
opportunities, corruption, poor governance,
lack of education and lack of health.
Market Value
- The value that the measures of national
income and output assign to a good or service
is its market value – the price it fetches when
bought or sold.
- The actual usefulness of a product (its use-
value) is not measured – assuming the use-
value to be any different from its market
value.
Three strategies have been used to obtain the market
values of all the goods and services produced:
1. Product Method (output)
- looks at the economy on an industry-by-
industry basis.
- The total output of the economy is the sum of
the outputs of every industry.
- to avoid counting the item twice we use not
the value output by each industry, but the
value-added; that is, the difference between
 the value of what it puts out and what it takes
in.
- The total value produced by the economy
- is the sum of the values-added by every
industry.
2. Expenditure Method
- is based on the idea that all products are
bought by somebody or some organization.
- we sum up the total amount of money people
and organizations spend in buying things.
- This amount must equal the value of
everything produced.
3. Income Method
- summing the incomes of all producers within
the boundary.
- Since what they are paid is just the market
value of their product, their total income must
be the total value of the product.
- Major subdivisions of income:
1. Wages
2. Proprietor’s incomes
3. Corporate profits
Economic Value - is the value that person places on an
economic good based on the benefit that they derive from
the good. It is often estimated based on the person's
willingness to pay for the good, typically measured in
units of currency. For example, the education, experience,
and abilities of employees all have economic value for
employers and for the economy as a whole.
Human Development Index
- The HDI was introduced in 1990 as part of
the United Nations Development
Programme (UNDP) to provide a means of
measuring economic development in three
broad areas – per capita income, health and
education.
- The HDI tracks changes in the level of
development of countries over time.
- The HDI was created to emphasize that
people and their capabilities should be the
ultimate criteria for assessing the
development of a country, not economic
growth alone.
HDI has two main features:
A scale from 0 (no development) to 1 (complete
development).
An index, which is based on three equally weighted
components:
1. Longevity, measured by life expectancy at birth
2. Knowledge, measured by adult literacy and
number of years children are enrolled at school
3. Standard of living, measured by real GDP per
capita at purchasing power parity
What the figure means:
✓ An index of 0 to 0.49 means low development
✓ An index of 0.5 to 0.69 means medium
development
✓ An index of 0.7 to 0.79 means high
development
✓ Above 0.8 means very high development
The HDI is a very useful means of comparing the level of
development of countries. GDP per capita alone is clearly
too narrow an indicator of economic development and
fails to indicate other aspects of development, such as
enrolment in school and longevity.
Hence, the HDI is a broader and more encompassing
indicator of development than GDP, though GDP still
provides one third of the index.
Indicators of Development
1. Per Capita Income
2. Life Expectancy
3. Education
4. Extent of Poverty
International Dependence Model
- The international dependence theory was
very popular in the 1970s and early 1980s.
- The dependence theorists argued that
underdevelopment exists because of the
dominance of developed countries and
multinational corporations over developing
countries.
- The theory is considered an extension of
Marxist theory (Hein 1992).
- The poor countries are said to be dependent
on the developed countries for market and
capital. However, developing countries
received a very small portion of the benefits
that the dependent relationship brought
about.
- The unequal exchange, in terms of trade
against poor countries, made free trade a
convenient vehicle of “exploitation” for the
developed countries. Developed countries
 can exploit national resources of developing
countries through getting cheap supply of
food and raw materials. Meanwhile, poor
countries are unable to control the
distribution of the value added to the products
traded between themselves and the developed
countries.
- developing countries should therefore end the
dependence by breaking up their
relationships with the developed world, as
well as by closing their doors on the
developed countries
- the failures of the model were clearly
reflected in the developing countries that
followed the autarky policy.
- These countries often experienced stagnant
growth and finally decided to open their
economies once again such as China,
Tanzania and India
- Meanwhile, the experience of the newly
industrialized economies of East Asia,
namely Hong Kong, Singapore, Taiwan and
South Korea, during the 1970s and 1980s
showed that their success had been the result
of emphasizing trade with the advanced
industrial countries.
- The negative impacts of the policy of autarky
rendered the theory out of favour in the 1980s
Agricultural Sector vs Industrial Revolution
In the case of the Agricultural Sector, that new technology
was the agricultural knowledge combined with new tools,
such as the plough.
The Industrial Revolution was primarily driven by
machines powered by external sources of energy other
than humans or animals, such as the steam engine.
During most of the 1960s and early 1970s,
economists generally described the development process
as structural change by which the reallocation of labor
from the agricultural sector to the industrial sector is
considered the key source for economic growth.
Two well-known representatives of this approach:
o Two Sector Model or Theory of Surplus
Labor - labor increasingly moves away from
the agricultural sector to the industrial sector.
However, with unlimited supply of labor
from the traditional sector, these transferred
workers continually received only
subsistence wages. The excess of modern
sector profits over wages and hence
investments in the modern sector continued
to expand and generate further economic
growth on the assumption that all profits
would be reinvested.
- This model considered savings and
investments to be the driving forces of
economic development but in the context of
the less developed countries.
o Structural Change and Patterns of
Development Analysis - The analysis
identified that the steady accumulation of
physical and human capital is among
conditions necessary for economic growth,
apart from savings and investments.
By focusing on the pattern of development rather than
theory, the structural change models may mislead policy-
makers. Since the reallocation of labor from the
agricultural sector to the industrial sector is considered the
engine of economic growth, many developing countries
implemented policies that often promote the industry and
neglect agriculture.
Scholars assert that one of the main effects of
development on environment is pollution, which started
with the Industrial Revolution
Agricultural Sector
- Abundance of labor
- Subsistence wage
- Low productivity
Industrial Sector
- Higher wages
- High productivity
Sustainable Development
- Environmental economists are concerned that
the long-term neglect of the environmental
assets is likely to jeopardize the durability of
economic growth (Thampapillai, 2002)
- The relationship between development and
environment has given birth to the
sustainable development concept.
- The central idea of sustainable development
is that global ecosystems and humanity itself
can be threatened by neglecting the
environment.
- “involves maximizing the net benefits of
economic development, subject to
maintaining the services and quality of
natural resources over time” (Pearce and
Turner, 1990)
 - balancing the objectives of economic growth
and attending to environmental
considerations.
- Sustainable development is defined by the
Brundtland Commission, formally the World
Commission on Environment and
Development, as “progress that meets the
needs of the present without compromising
the ability of future generations to meet their
own needs”
- sustainable development aims to improve the
quality of life in a com prehensive manner,
including economic prosperity, social equity
and environmental protection.
- Economic, social, environmental and cultural
aspects must be integrated in a harmonious
manner to enhance the intergenerational
well-being (World Bank 2003).
Human society should focus on patterns of sustainable
development, rather than economic growth, for improving
long-run environmental and social factors, and health of
people. However, development is also affected by
economic, social, psychological, anthropological, and
perhaps biological factors that can generate uncertain and
unknown long-term effects in environment and society
Robert Solow - an American economist whose work on
the theory of economic growth culminated in the
exogenous growth model named after him. Solow
neoclassical growth model stresses the importance of
three factors of output growth: increases in labor quantity
and quality (through population growth and education),
increases in capital (through savings and investments) and
improvements in technology. By opening up national
markets, developing countries can draw additional
domestic and foreign investments, thus increasing the rate
of capital accumulation and returns on investments.
Capitalism vs Socialism
Adam Smith and Karl Marx are the two most famous
thinkers for their two opposite views on the nation’s
system of economic arrangements: one called capitalism
and the other called socialism.
Adam Smith (Capitalism)
- (original work published in 1776) “The
Wealth of Nations”
- He argued that under competition, private
investors while pursuing their own interests
guided by the “invisible hand” would
maximize national output and thus promote
public interests.
- The “invisible hand” doctrine has become the
foundation for the working of the market
economy or capitalism (Skousen 2007).
Karl Marx (Socialism)
- “Capital” (Marx 1933) (original work
published in 1867) argued that the feasible
system should be based on social or public
ownership of property.
- He emphasized that the wealth of the
capitalists comes from the exploitation of the
surplus value created by the workers.
- He believed that a revolution would be
inevitable to break down the increasing
concentration of the capitalists, and to
establish socialism (Roemer 1988; Skousen
2007).
- A nation’s economy should be planned and
managed by the state to serve the interests of
the masses.
Harrod-Domar Model
- emphasized that the prime mover of the
economy is investments.
- Therefore, every country needs capital to
generate investments. It states the important
role of investments that is most closely
correlated with the economic growth rate.
- The principal strategies of development from
the stage approach were commonly used by
developing countries in the early post-war
years. With a target growth rate, the required
saving rate can then be known. If domestic
savings were not sufficient, foreign savings
would be mobilized.
Poverty - Traditional definitions of poverty have focused
on income and wealth, or the lack of money or material
possessions. The definition of poverty as lack of income,
inherited from classical economists like Adam Smith and
David Ricardo, was completely dominant until the 1960s,
when the focus of development policy was more or less
exclusively on expanding monetary income. In recent
decades, however, it has become increasingly popular to
extend the definition of poverty to other, non-material
aspects of human well-being.
Poverty definition has at least three important purposes
and uses:
First, it should be useful in policy debates and
formulations, e.g., to define the scope of poverty
reduction strategies (PRS).
Second, it should help in targeting and measuring the
impact of specific poverty alleviation programmers and
policies.
Third, it should be useful as an analytical concept to
understand and analyze poverty, and also measure
changes. It
Inequality Measurement - Use in economic analyses of
growth, inequality and poverty, the term refers to end
results on welfare, and not in material and intangible
assets that may contribute to the 2 explanations of these
end results.
Gini Coefficient
The most common measure of income inequality is the
Gini coefficient or index (G), named after the Italian
statistician Corrado Gini (1912).
The Gini coefficient has a value between 0 and 1, with 0
being perfect equality (all have the same income) and 1
being perfect inequality (all income earned by one
person). In most countries, it ranges between 0.3 and 0.7.
The Gini coefficient can thus be intuitively interpreted as
the share of the total income (GDP) that has to be
redistributed to hypothetically obtain perfect income
equality.
Kuznets Ratio - This gives the ratio between the average
income of the richest and the average income of the
poorest – typically undertaken by focusing on the
averages of the top and bottom quintiles, i.e., the richest
20 % and the poorest 20 %. This has a clear intuitive
meaning: how many times richer are the rich compared
with the poor?
From a scientific viewpoint, Kuznets ratio are less
satisfactory as compared to the Gini coefficient, because
income changes in the middle range are ignored (e.g. a
transfer of income within the 60 % in the middle would
not affect the Kuznets ratio, but would change the Gini
index).
Human Capital
- Capital embodied in human beings in the
form of education and health which make
them more productive is called human
capital.
- Physical capital human resources or human
capital plays a significant role in determining
economic development. More education
makes the human beings more productive
through enhancing their skills, abilities,
knowledge and better health enables them not
only to participate in the production process
but increase their capabilities to produce
more.
- The human capital is embodied in human
beings. Human capital comprises the
education, knowledge, the skills, better health
and the capacities of all people in the society
to undertake production.
- intangible asset or quality not listed on a
company's balance sheet.
- It can be classified as the economic value of
a worker's experience and skills. This
includes assets like education, training,
intelligence, skills, health, and other things
employers value such as loyalty and
punctuality.
- The concept of human capital recognizes that
not all labor is equal.
- Human capital is important because it is
perceived to increase productivity and thus
profitability.
- Directors, employees, and leaders who make
up an organization's human capital are critical
to its success.
- Human capital is typically managed by an
organization's human resources (HR)
department. This department oversees
workforce acquisition, management, and
optimization. Its other directives include
workforce planning and strategy,
recruitment, employee training and
development, and reporting and analytics.
- The most common ways human capital can
depreciate are
- through unemployment, injury, mental
decline, or the inability to keep up with
innovation.
o Labor
o Manpower
o Worker
✓ Skilled
✓ Educated
✓ Trained

Dependency Burden - Dependency Burden is
the proportion of the population aged from 0 to 15 and
over 65, which is seen as no economic productivity, and
so it is not included in the labor force.
Relationship of Poverty to Per Capita Income
- Economic growth is generally defined as an
increase in Gross Domestic Product (GDP),
either in total GDP or in GDP per capita.
With high annual population growth rates of
2-3 % a country may easily be in a situation
with growth in total GDP but not in per capita
GDP, and we shall therefore refer to
economic growth as an increase in GDP per
capita.
- economic growth is a powerful force for
poverty reduction.
- The GDP is nothing but the value of total
production or total income for a country.
Thus, economic growth is the same as an
increase in average income. The growth
definition is the first potential source of
disagreement in the growth-poverty debate.
To an economist it is a technical concept, as
defined above. To others a statement like:
‘we have to promote economic growth’ is
understood as a suggestion to promote neo-
liberal policies like the ones suggested by the
IMF and the World Bank. Thus, the term is
often interpreted beyond its technical
meaning. This chapter will use the term
economic growth in its pure technical
meaning – as an increase in average income.
- The most popular indicator has been the
Human Development Index (HDI) published
in UNDP’s annual Human Development
Report. HDI includes per capita income but
with decreasing welfare ‘returns’ over
growing income levels – thus, an extra dollar
in a poor country has a greater HDI effect
than in a rich one.
- The most widely used income poverty line
internationally is the ‘one dollar a day’
measure, or more precisely 370 US dollars
per year at their 1985 value (World Bank
1990).2 In addition, national governments
have their own poverty lines, based on what
is considered a minimum income to meet
basic needs in the country. The need for an
international standard has led to widespread
adoption of this measure, although one
certainly could question the empirical basis
for this. Other poverty lines have also been
used, including extreme poverty (0.6 dollar)
and moderate poverty (2 dollars a day).
Adam Smith - Adam Smith’s (1976) (original work
published in 1776) “The Wealth of Nations” focuses on
the market. Adam Smith saw that division of labor could
create more productive processes. The mechanism for
enhancing the nation’s wealth therefore is through
specialization and exchange. Adam Smith argued that
under competition, private investors while pursuing their
own interests guided by the “invisible hand” would
maximize national output and thus promote public
interests.
Adam Smith referred to the concept in his book "An
Inquiry into the Nature and Causes of the Wealth of
Nations," in which he explored the wealth, knowledge,
training, talents, and experiences for a nation. Adams
suggests that improving human capital through training
and education leads to a more profitable enterprise, which
adds to the collective wealth of society. According to
Smith, that makes it a win for everyone.
Your contribution to the development
- Educate and be aware about the SDG
- Participate in community service
- Volunteer to environmental and
sustainability advocacies
- Use innovation and social media to
promote awareness
- Patronize local and eco-friendly
products.
- As a student focus on learning to
contribute more in the future.
Communism, Socialism, Capitalism
Capitalism
- P & S are provided by the indiv
- Employ workers
- Keep the profit from excess prod that
workers create
- Divide the wealthiest & poorest citizens
- Free market and freedom of competition
 Human Capital as investment
- people come with a diverse set of skills
and knowledge.
Socialism - education as a crucial factor in economic
- The gov. owns and operate the prod development.
- Citizens earn a wage but receive only - Human capital involves skills and
knowledge
what they need - basis of production;
- Aim is equality between all - human beings are the active agents who
- Eliminate social classes accumulate capital,
- exploit natural resources,
- Indiv are not allowed to produce more
- build social,
than anyone - economic and political organisations, and
- Leads to low prod and creates mass carry forward national development.
- To effectively develop a economy, a
poverty
country must also develop skills and
Communism knowledge of its people.
- Result of successful communism - Human capital is perceived to increase
productivity and thus profitability. The
- Working class own everything
more investment a company makes in its
- What the collective produces as a whole employees, the chances of its productivity
is shared out according to need. and success become higher.
- The skill they have can be an advantage
- Investment in education or acquiring
How can we reduce poverty and inequality new skills is called investment in human
- Increase employment capital.
- Have policy
- Improve education opportunity
✓ Reduce cost of education
✓ Promote anti-discriminatory
practices
- Have an inclusive rural development
✓ Increase and improve agricultural
productivity
✓ Have a market connectivity
between rural and urban areas.
✓ Enhance policies, standards and
institutions on rural areas.
- Addressing inequality of opportunity
through studies, and advocates.