Economic Development

Economics – the branch of knowledge concerned with the production, consumption, and transfer of wealth.
It is also a social science that seeks to analyze and describe the production, distribution, and consumption
of wealth.

Two Main Branches of Economics

 Microeconomics
 Macroeconomics

Microeconomics is the social science that studies the implications of incentives and decisions, specifically
about how those affect the utilization and distribution of resources.

Macroeconomics focuses on the performance of economies - changes in economic output, inflation, interest
and foreign exchange rates, and balance of payments. Poverty reduction, social equity, and sustainable
growth are only possible with the sound monetary and fiscal policies.

Economic Development is the process whereby simple, low-income national economies are transformed into
modern industrial economies. Although the term is sometimes used as a synonym for economic growth,
generally it is employed to describe a change in a country’s economy involving qualitative as well as
quantitative improvements.

Economic development means advancement of the standard of living, eg, education, healthcare, innovation,
environment, to name a few Growth directly boosts development.

Economic growth boosts the national output, the total money value of all goods and services
produced by one country.

Brain Drain - the emigration of most highly educated workers to rich countries.

Indicators of Economic Growth and Development

 Saving and Investment
 Diminishing Returns and Catch-Up Effect
 Education
 Health and Nutrition
 Property Rights and Political Stability
 Free Trade
 Research and Development
 Population Growth

Productivity means the amount of goods and services produced from each unit of labor. It is obvious to see
that the key factor in defining the standard of living are the advances in productivity.

Physical Capital is the assets that are utilized to produce goods and services.
Human Capital is the knowledge, skills, and abilities (KSA) humans develop.
Technology is the innovation and advances to make life easier and more efficient production.
Natural Resources refers to the bounty of the land and water used in production.

O-Ring Theory of Development

O-Ring theory of economic development was proposed by economist Michael Kremer in 1993, which explains
that production is composed of a set of tasks, and each task must be carried out proficiently for each one
of the tasks to have value. The name "O-Ring" was derived from the devastating destruction of the
Challenger space shuttle in 1986, resulting from a faulty little gasket or O-Ring.
The theory tells us that a weak link in the production process may cause a surmountable quality failure of
the final output. The quality of input is given more value than its quantity. With the use of the theory,
we can analyze the complexity of the production processes and determine the effect of the quality of
the tasks on total production. In addition, we can look at the factors determining the causes of failures,
such as the lack of training of the workers, unavailability of technology, or even corruption in institutions.

Solow Model

One of the most popular models that is used to understand long-term growth is the use of the
Solow Model. The model was developed by Robert Solow an American economist and a Nobel Prize winner
in Economic Sciences¹¹ and in 1956, wherein gross domestic product per worker, capital per worker,
depreciation rate, savings, and investment rates are factored in analyzing growth. (NEED MORE
EXPLANATION)

Poverty and Inequality

Poverty is a complex, multifaceted world that requires clear analysis in all of its many dimensions. Among
the dimensions referred to in this theory are the Geographical, biological, and social factors that must be
takes into consideration to fully understand poverty, not just by determining the poverty line that separates
those who are above and below it. -Amartya Sen (Economist and Nobel Prize Winner)

Absolute Poverty – levels of incomes and expenditures that fall below a level popularly known as the
“poverty line”, nominal value of which is adjusted to hold a fixed value of its purchasing power.

Relative Poverty/Inequality – is the comparison of incomes and expenditures of the poor with reference to
the rich or of some other groups.

Reasons of Poverty
1. The government is not able to supply the basic needs of its citizen (Education, Health Service and
Food Security)
2. Natural Disaster
3. Uneducated People

Poverty Rate – the most common measure of poverty. This is relative to poverty line. The proportion of the
population that is below the poverty line is called Poverty Rate.

Poverty Line – is set by the government as the threshold to which the absolute value of income and expenses
is compared to considered a family to be in poverty.

Subsistence Incidence – the part below the poverty line suffering from extreme hunger.

Extreme poverty is characterized by those disadvantaged in basic living conditions, such as food,
clean water, sanitation, housing, good health, and even to information.

Poverty incidence (PI) is the percentage of families or individuals with per capita income or
expenditure less than the per capita poverty threshold to the total number of families or individuals

Two Types of Inequality

 Wealth Inequality – is the uneven distribution of accumulated assets after deducting the liabilities
 Income Inequality – is income distributed in an uneven manner

THE LORENZ CURVE

The Lorenz Curve was developed by American economist Max O. Lorenz in 1905 in his undergraduate
essay and doctoral paper in "Economic Theory of Railroad Rates." It is a curve showing the relationship
between the population in percentile ranking and the national income.