CHAPTER -1

ECONOMIC GROWTH AND DEVELOPMENT

(Meaning and Parameters)

I. SHORT ANSWER TYPE– I

(1) Define economic growth.

Ans.Economic growth refers to long term increase in real national income or real national output.
Economic growth is an economy occurs when production of goods and services increases. This is what is
called ‘real growth’. It implies improvement in economic welfare of the people. For economic growth of
a nation, it’s necessary that the rate of increase in its total output must be greater than the rate of
population growth.

(2) Define economic development.

Ans.Economic development is a broader concept. It not only includes the quantitative changes in the
economy, but also includes certain qualitative or social changes. Thus, economic development refers to
that process, as a result of which, along with increase in real per capita income, there is reduction in
economic-divide, poverty, illiteracy and disease. Thus, economic development includes both economic
growth as well as social welfare.

(3) What is real national income ?

Ans. Real national income refers to market value of the final goods and services produced in the
economy during an accounting year, as estimated using the base year prices.

(4) What is per capita income ?

Ans. Per capita income refers to the average income earned by the people of a country. It is calculated
by dividing the national income by the population of the country.

II. SHORT ANSWER TYPE - II.

1. Differentiate between economic growth and economic development. (2015, 2016)

Ans. The principal differences between Economic Growth and Economic Development are highlighted
in terms of the following observations:
(i) Quantitative and Qualitative Changes :Economic growth is only a quantitative concept whereas
economic development is both a qualitative as well as a qualitative concept.
(ii) Spontaneous and Discontinuous Changes :The term development is used for spontaneous and
discontinuous changes. On the other hand, the term growth is used for continuous and steady changes.
(iii) Increase in Productivity :Economic growth may not be associated with increase in productivity.
On the contrary, development is essentially associated with increase in productivity so that greater output
is realised per unit of input.
(iv) Change in Outlook :Growth may occur without any change in outlook of the people towards
institutions, modernisation and quality of life. On the other hand, development is associated with change
in outlook of the people. People start appreciating institutional changes, modernisation and quality of life.
3. Explain per capita income as a parameter of economic development.

Ans.Per capita income is a parameter of economic development. It refers to the average income earned by
the people of a country. It is calculated by dividing the national income by the population of the country.
Per capita income is calculated at ; (i) current year prices, or (ii) the base year prices.
Accordingly, there are two concepts of per capita income :
(a) Monetary Per Capita Income : Monetary per capita income of a country is estimated as under :
National Income at Current Prices
Monetary Per Capita Income=
Total Population

Market Value of Final Goods∧Services

Or, Monetary Per Capita Income=
Total Population

Q×P
Or, Monetary Per Capita Income=
Population
This implies that population remaining constant, monetary per capita income can increase when
either quantity (Q) increases or prices (P) increases. If increase in monetary per capita income occurs just
because of increase in P, it only reflects a fall in purchasing power of the people and therefore, a fall in
their quality of life. Accordingly, monetary per capita income is not a satisfactory indicator or
measurement of economic development.

(b) Real Per Capita Income :Real Per Capita income is estimated by assuming that ‘P’ remains
constant. Therefore, real per capita income at constant prices or at base year prices. Thus, in a situation
where population remains constant, real per capita income will increase only when ‘Q’ increases.
Constant population and increase in the quantum of goods and services will imply greater availability of
goods and services per head of the population of a country. Hence, real per capita income is a better index
(or indicator) of economic development compared to monetary per capita income.
Real Per Capita Income may be estimated as under :
Monetary Per Capita Income
Real Per Capita Income= × 100
Price Index of Current Year

National Income at Current Prices

Real Per Capita Income= ×100
Population

4. Write short notes on Human Development Index.

Ans. Human Development Index is a composite index prepared by the United Nations Development
Programme (UNDP) on a scale of 0 to 1, measured on the basis of the following three indicators :
(i) Longevity : It implies how long a person lives. Alternatively, how long a new-born is expected to
live. Shorter longevity implies lesser welfare.
(ii) Knowledge or Educational Attainment : It implies the status of education of the people. It
includes:
(a) Adult Literacy Rate : Adult literacy rate refers to the percentage of people above 15 years of
age who can read and write.
(b) Gross or Combined Enrolment Ratio ( or mean year of schooling ) : Number of students
enrolled for different levels of education such as primary, secondary and tertiary levels is
 estimated. Gross Enrolment Ratio refers to the ratio between total students enrolled for education
and total population of the country.
Number of Students Enrolled for Education
GER=
Total Population
(iii) Income or Per Capita Real Domestic Product : This reflects purchasing power of the people or
their capacity to buy goods and services. It is measured in terms of per capita real gross domestic product.
Gross Domestic Product at Constant Price
Per Capita Real GDP=
Total Population

III. LONG ANSWER TYPE QUESTIONS.

1. Explain the limitations of real per capita income as an index of economic development.
(2015, 2016, 2017)

Ans. As a measurement of economic development, real per capita income has certain limitations. Some
of these are asunder :
(i) Ignores Distribution of Income : The biggest limitation of per capita income as an index of
economic development is the nature of its arithmetic average. It conveys no direct information regarding
distribution of income. A mere increase in in income will not be an indicator of economic development, if
its distribution is unequal.
(ii) Ignores Non-market Transactions : While estimating per capita income, goods and services which
reach the consumers through non-market transactions are generally not taken into account. However,
these goods and services add to economic welfare and help raise the standard of living of the people.
(iii) Inclusion of Harmful Goods and Services : Production of harmful goods like cigarettes, opium
and liquor is also included while calculating per capita income. Thus, per capita income does increase as
a result of the production of such goods but the health standard of the people is adversely affected.
Consequently, net contribution of such goods may be negative.
(iv) Increase in pollution :Increased in real per capita income may be accompanied by increase in
pollution. The amount spent to safeguard oneself against water pollution, air pollution and sound
pollution is not deducted from per capita income. Consequently, real per capita income (in terms of net
welfare) is overestimated.
(v) Significance of Leisure : The amount of leisure people enjoy has also emerged as an important
determinant of welfare of the people. Per capita income index does not account for it.
(vi) Various Issues Untouched : Per capita income is not an adequate measure of development because
it does not consider various issues related to social, human, institutional and ethical aspects of the
country.