AE12: ECONOMIC DEVELOPMENT

MODULE FOR DISTRIBUTION FOR MIDTERM GP (GROUP 1)

THE MEANING 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-exampl
es-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.
5. Define poverty and able to know why some countries are rich and others poor.
6. Differentiate economic development and development economics.
7. Explain what welfare economics is.

Introduction

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

ECONOMIC + DEVELOPMENT

 Economics
 is a branch of Social Science that deals with the study of the allocation of limited
resources for production, distribution, and consumption of goods and services to
satisfy the unlimited needs and wants of people.

 Economics is the study of choice.

Since resources are limited, we are compelled to make decision.

 Development is the process expanding human freedom. It is “the enhancement of

freedoms that allow people to lead lives that they have reason to live”. Hence
“development requires the removal of major sources of unfreedom: poverty as well
as tyranny, poor economic opportunities as well as systematic social deprivation,
neglect of public facilities as well as intolerance or overactivity of repressive states”.
–Prof. Amartya Sen 1998

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WHAT IS ECONOMIC DEVELOPMENT? DEFINITION AND INDICATORS AN
D EXAMPLES

SOME DEFINITIONS:

 Economic Development refers to economic growth accompanied by changes in outp

ut distribution and economic structure. (Nafziger)

 Economic Development is the process by which emerging economies become advan

ced economies. In other words, the process by which countries with low living standa
rds become nations with high living standards. Economic development also refers to t
he process by which the overall health, well-being, and academic level the general po
pulation 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 develop
ment. Improved productivity, higher literacy rates, and better public education, are also c
onsequences.

Put simply; economic development is all about improving living standards. ‘Improved li

ving 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 im
proved.” (The Cambridge Dictionary).
 Economic development is “the process by which a nation improves the economic, po
litical, and social well-being of its people.” (Wikipedia).

INDICATORS AND EXAMPLES OF ECONOMIC DEVELOPMENT

(https://www.jotscroll.com/forums/3/posts/185/economic-development-types-examples-h
tml)
 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

ECONOMIC DEVELOPMENT VS. ECONOMIC GROWTH

Growth and Development

A major goal of poor countries is economic development or economic growth. The two te
rms are not identical. Growth may be necessary but not sufficient for development. Altho
ugh 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 big
ger. 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 value of all the products and services that an e
conomy produces.

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)

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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 th
eir 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 eno
ugh because it cannot guarantee development.
Amartya Kumar Sen, an Indian economist and philosopher, who received the Nobel Mem
orial Prize in Economic Sciences, once said:

“Economic development is about creating freedom for people and removing obstacles t
o greater freedom. Greater freedom enables people to choose their own destiny.”

“Obstacles to freedom, and hence to development, include poverty, lack of economic opp
ortunities, 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 bet
ter education, they also usually get richer, because healthy, educated workers are more pr
oductive (better at making things), and richer workers can afford health and education. Th
e 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.

Factors that Increase Productivity (and Growth)

1. Institutions. Provides incentives for innovation and production.

2. Government. Play an important part in the development of nation’s economy.
3. International Trade. Increasing increase to international trade can provide
markets for the goods produced by less-developed countries. Also increase
productivity by increasing the access to capital resources.

How do we know if economic development is working?

There are hundreds of ways to measure things for the hundreds of differe
nt economic development objectives that communities may have. We can mea
sure many of the above things through:

1. Improvements in average income of families

2. Local unemployment rates
3. Standardized testing and literacy results in children
4. Leisure time and changes in life expectancy, or hospital stays

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 ECONOMIC DEVELOPMENT GOALS
(https://penpoin.com/economic-development)

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 g
rowth 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 e
xpand the distribution of essential life-sustaining goods such as food and drink, shelter, e
ducation, health, and protection.
 Increase per capita income. Income is one way to become more prosperous. Also, bett
er education and the provision of more jobs are other important goals. Development mus
t 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.

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

LOW PER CAPITA REAL 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.

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 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.

 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

------------------------------
Population of the Country

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

HIGH RATE OF UNEMPLYMENT

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.

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).

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.

DEFINING POVERTY

 What is Poverty?

 Poverty is about not having enough money to meet basic needs including food,
clothing and shelter.
 World Bank Organizations: “Poverty is hunger. Poverty is lack of shelter.
Poverty is sick and not being able to see a doctor. Poverty is not having access to
school and not knowing how to read. Poverty is not having a job, is fear for the
future, living one day at a time.
 A universal theme reflected in these seven quotes is that poverty is more than lack of
income – it is inherently multidimensional, as is Economic Development.

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 Escaping Poverty

 People
Lies in rising levels of income.

 Countries
 Increasing the amount of output (per person) that their economy produces.
 In short, economic growth enables countries to escape poverty

WHY ARE SOME COUNTRIES RICH AND OTHERS POOR?

Differences in the economic growth rate of nations often come down to differences in
inputs (factors of production) and differences in total factors productivity (TFP) – the
productivity of labor and capital resources.

Higher productivity promotes faster economic growth, and faster growth allows a nation
to escape poverty.

ECONOMIC DEVELOPMENT VERSUS DEVELOPMENT ECONOMIC

Development economics is a field of economics that examines economic development.D

evelopment economics is an academic discipline. This is the theory, study and research of
economic data pertaining to development.

Economic development is the physical manifestation of progress and change in an econo

my. This is where the discipline would get its data. For example, Gross Domestic Product
(GDP) and GDP per capita are both metrics of economic development.

In summary, development economics is a topic of study, economic development is a phys

ical process. The goal or target of Development Economics is Economic Development.

WELFARE ECONOMICS

Welfare economics is that branch of economics, which primarily deals wit

h taking of poverty, famine and distribution of wealth in an economy. Th
is is also called Development Economics. The central focus of welfare ec
onomics is to assess how well things are going for the members of the so
ciety. If certain things have gone terribly bad in some situation, it is
necessary to explain why things have gone wrong. Prof. Amartya Sen was
awarded the Nobel Prize in Economics in 1998 in recognition of his cont
ributions to welfare economics. Prof. Sen gained recognition for his st
udies of the 1974 famine in Bangladesh. His work has challenged the comm
on view that food shortage is the major cause of famine.

In the words of Prof. Sen, famines can occur even when the food supply
is high but people cannot buy the food because they don’t have money. T
here has never been a famine in a democratic country because leaders of
those nations are spurred into action by politics and free media. In und
emocratic countries, the rulers are unaffected by famine and there is no
one to hold them accountable, even when millions die.

1. Welfare economics takes care of what managerial economics tends to ignore.

In other words, the growth for an economic growth with societal upliftment
is countered productive. In times of crisis, what comes to the rescue of pe
ople is their won literacy, public health facilities, a system of food dist
ribution, stable democracy, social safety, (that is, systems or policies th
at take care of people when things go wrong for one