Economic Growth and Economic Development

Dr. Seema Sharma

ACTIVITIES

ECONOMIC

NON ECONOMICS

ECONOMIC ACTIVITY:

Includes both the flows i.e. real flow and monetary flow. Real flow is in the forms of goods and services by the factors of production towards the purchaser of these goods services. In return there is a money flow in the forms of payments for the purchase of these G & S.

NON- ECONOMIC ACTIVIT Y

Real flow does not exist. Only monetary flow exist e.g. old age Pension, Unemployment allowances, Pocket money. Such activities does not contribute towards the current flow of goods and services.

THE CIRCULAR FLOW MODEL OF ECONOMIC ACTIVITY The circular flow model depicts how markets

use the medium of money to determine what

goods and services are produced and who gets to buy them. The model depicts both the output market and the input market.

The Circular-Flow Diagram of Economic Activity

Revenue

Goods & Services sold

Market for Goods and Services

Spending Goods & Services bought

Firms

Households

Inputs for production

Wages, rent, and interest

Market for Factors of Production

Labor, land, and capital

Income

Income Earned or Only Received

Income is EARNED if it represents the money value of the contributions towards the current flow of goods and services, e.g. wages to labour, salary to teacher. Income may be RECEIVED but not earned. In rich an activity there is no contribution to current flow of goods and services. This is known as TRNSFER OF PAYMENTS e.g. pension, unemployment allowances, pocket money etc.

PIGOVIAN PARADOX

Says, sometimes, volume of services remains same but National income falls why?

Major cause behind this is that an activity is excluded from national income only because the money flow is no where now and real flow is there

Economic Growth and Development

Eco.Growth = Uni-dimensional Concept, measured in

terms of increase in national income (in % terms)

Economic

Development - Multidimensional concept, measured in terms of qualitative factors such as standard of living, education, health etc.

Economic Growth is only a pre-condition for development

Measurement of Economic Growth

1. Gross Domestic Product/Gross National Product

2. Per Capita Income

Growth of Per Capita national income takes into account the ability of a nation to expand its output at a rate faster than the growth of its population.

GDP AND GNP

GDP is the basic measure of economic growth. GDP is the value of all final goods and services produced within the countrys geographical territory, irrespective of the ownership of resources. GNP consists of income produced by the countrys owned resources, irrespective of the place of production. For ex: Indian Software Professionals (working in US) salary in US is part of US GDP while Citibanks income in India is Indias GDP.

ECONOMIC GROWTH

GNP Net Factor Income from abroad = GDP

When US based Indian Software Professional remits his salary to India, that gets added to Indias GNP.

GNP at market prices Indirect Taxes + Subsidies = GNP at factor cost

National Income

National Income is defined as the sum total of factor incomes accruing to the normal residents of a country for their productive activities during a year National Product is another term synonymous to National Income. This is the sum total of the market value final goods and services produced in a country in one year

CONTD

National Income at Current Prices

Money value of all final goods & services measured at current prices produced by the normal residents of a country during one year.

NI = PG P = Prices G = Goods & Services NI = National Income at Current Prices

SOME A/C RELATIONSHIP

Relation at Market Prices GNP = GNI = GNE

GDP = GNP Net Income from Abroad NNP = GNP - Depreciation NDP = NNP Net Income from Abroad

CONTD

Relation at Factor Cost GNPFC = GNPMP - Net Indirect Taxes

Net Indirect Taxes = Indirect Taxes Subsidies

NNPFC = GNPMP Net Indirect Taxes Depreciation or GNPFC - Depreciation or NNPMP Net Indirect Taxes

CONTD
NDPFC = NDPMP - Net Indirect Taxes or = NNPMP - Net Income from Abroad - Net Indirect Taxes or = GDPMP Depreciation Net Indirect Taxes

National & Domestic Concept

The term National donates the total income which accrues to the inhabitants or normal residents of a country due to their participation in world production during the current year It covers all types of factor incomes accruing to the normal citizen of the country irrespective of whether the factors of production supplied by them are located at home or abroad

CONTD
Domestic refers to a measure of value of the total output or income originating within the specified geographical boundaries of a country known as domestic territory Hence we can say that the National takes for its frame of reference the normal residents of a country rather than the geographical boundaries, where as Domestic terms takes a given geographical area rather than the national origin of the factors of production supplied National Product = Domestic Product + Net Income from Abroad

Market prices & factors cost

The valuation of the national product at market prices indicates the total amount actually paid by the final buyers The valuation of national product at factor cost is a measure of the total amount earned by factors of production for their contribution to the final output In an economy, it there are indirect taxes and subsidies, the market value of all final goods will exceed the total income accruing to the factors of production by the amount equal to the excess of the indirect taxes over subsides

Contd

This is important to be noted that MP includes the payments to the factors of production as well as indirect taxes. The indirect taxes go to the Govt. not to the factors of production. While subsidies go to the factors of production Factor Cost = Market Price Indirect Taxes + Subsidies GNPFC = GNPMP - Net Indirect Taxes

Gross and net

Statisticians use the word Gross to emphasize that no allowance for capital consumption has been made or that depreciation has yet to be deducted Whereas Net is used to indicate that depreciation is deducted.

Actually over a given period of time, the fixed capital used for production loses a part of its value from wear and tear; hence it is the customary to make special allowance for the using up of capital. Such allowance (depreciation) indicates the extent to which capital goods have been consumed in the process of production

GNP = Net National Product + Depreciation

CONTD

GDPFC
A RO B
-D

FY -N

M RO F

GNPFC
-D

NDPFC
A RO AB Y NF + M RO F D

+ NET INDIRECT TAXES

- NET INDIRECT TAXES

NNPFC

GNPMP

NDPMP
+N F FY M RO

- NET INDIRECT TAXES

NNPMP

A RO AB D

+D

Economic Development

Improvement in Quality of life, ie, better education, less poverty, higher standards of health etc. Development must be conceived as a multi-dimensional process with improvement in social indicators. Most common way to define the developing world is by Per Capita Income. Best known system is that of World Bank. World Bank has ranked countries by their levels of Gross National Income per Capita.

MEASURING GROWTH AND DEVELOPMENT

Per Capita Income

Human Development Index (first published in 1990 by UNDP). HDI is a measure of a desired standard of living that has a value between 0 and 1. HDI takes into account 3 major factors: a. Life Expectancy at birth (Healthy Life)

b.
c.

Levels of educational attainment

GDP per capita

HDI Ranking, Score and Per Capita Income (PPP)

Country India China S.Africa Oman Kuwait UK HDI Rank 127(127) 85(92) 120(71) 71(38) 44(30) 15(20) HDI Score 0.595 0.718 0.702 0.747 0.818 0.923 Per capita Income (USD) 2248 3617 8908 13356 17289 22093

Source: Human Development Report, 2005, UNDP (Rank of the country based on PCI is given in bracket)

Per Capita income Rank HDI Rank

India

China +7 S.Africa 49

Oman 33
Kuwait 14 UK +5

(A +figure indicates that HDI Rank is better than the real GDP per capita rank, -ve indicates the opposite).

HDI, GDI, GEM

HDI value lies between 0 and 1. HDI is constructed

using variables life expectancy at birth (health), literacy and mean years of schooling (Education) and per capita

income.

GDI (Gender Development Index)

and GEM(Gender

Empowerment Measure) introduced by UNDP in 1995.

GDI is simply, the HDI adjusted downwards for gender

inequality.

GEM

GEM indicates whether women are able to actively

participate in economic and political life. The variables used

for construction of GEM are:

a) % of seats held in parliament for women, b) % of women administrators and managers c) % of women as professional workers

HDI and GDP Per capita ranks (Country-wise)

(GDP Per capita rank in brackets)
Canada 5(8), France 16 (15),Norway 1(9), USA 10(3), The

Netherlands 12(19), Japan 11(7) Switzerland 7(4) Saudi Arabia 77(41), Nigeria 158(173)
Brazil 63(68), Denmark 14(10), Germany 20(16), Ireland 8

(25)
Source: Human Development Report, UNDP

HDI and GEM Values(GEM in brackets)

Srilanka 0.71(0.31), India 0.45(0.23), Pakistan 0.45 (0.19) UAE 0.86 (0.24), Kuwait 0.84 (0.33), Egypt 0.61(0.27), Moroco 0.57(0.30) OECD Countries - Canada 0.96(0.70), France 0.95(0.45),

Norway 0.94 (0.78)

USA 0.94 (0.67),Sweden 0.93 (0.78)

INTERSTATE RANKS (PCI & HDI) in India

Punjab 1(2), Haryana 2(4), Kerala 10(1), Maharashtra 3(3),

Gujarat 4(5), TN 8 (7), Karnataka 6 (6), W.Bengal 7(9), AP 5 (10)

MP 13 (14), Orissa 14(13), UP 15(17), Rajastan 11 (12), Bihar

16(15)
References: Human Development Reports-UNDP Publication,

India Development Report-IGIDR

Characteristics of Developing Nations

Low

levels of living characterised by low income, inequality, poor health and inadequate education.

Low Levels of Productivity High Rates of Population growth Substantial dependence on agricultural production and

primary-products exports
Prevalence of imperfect market Dominance, dependence and vulnerability in international

relations