1. By : Gaurang Badheka MEBE, Sem-2
Economic Growth
By : Gaurang Badheka
MEBE, Sem-2

2. Basic question… What is the difference between GROWTH and DEVELOPMENT?
How to measure economic growth?
What are the indicators of economic growth?

3. Growth vs. Development
Economic growth may be one aspect of economic development but is not the same
Economic growth:
A measure of the value of output of goods and services within a time period
Economic Development:
A measure of the welfare of humans in a society

4. Economic growth
A sustained annual increase in an economy’s real national income over a long period of time.
Sustained
Real income
Long period

5. Economic growth
Due to the limitation of the previous definition, new definition can be derived.
Economic growth means the annual increase in the real per capita income of a country over a long period of time
Here focus is on “per capita income” or in simple terms “standard of living”.

6. Economic growth
Using measures of economic performance in terms of the value of income, expenditure and output
GDP – Gross Domestic Product
The value of output produced within a country during a time period
GNP – Gross National Product
The value of output produced within a country plus net property income from abroad
GDP/GNP per head/per capita
Takes account of the size of the population
Real GDP/GNP
Accounts for differences in price levels in different countries

7. Problems with GDP / GNP Reliability of data?
How accurate is the data that is collected?
Distribution of income?
How is the income distributed – does a small proportion of the population earn a high percentage of the income or is income more evenly spread?
Quality of life?
Can changes in economic growth measure changes in the quality of life?
Does additional earnings power bring with it additional stress, increases in working hours, increased health and family problems?
Impact of exchange rate?
Difference in exchange rates can distort the comparisons – need to express in one currency, but which one and at what value?

8. Problems with GDP / GNP Black/informal economy?
Some economic activity not recorded – subsistence farming and barter activity, for example
Some economic activity is carried out illegally – building work ‘cash in hand’, drug dealing, etc.
Work of the non-paid may not be considered but may contribute to welfare – charity work, housework, etc.

9. Development
Development incorporates the notion of a measure/measures of human welfare
As such it is a normative concept – open to interpretation and subjectivity
What should it include?

10. Development Poverty Inequality Political freedoms Sustenance
Sustainable development
Self esteem
Proportion of activity in different sectors of the economy:
Primary
Secondary
Tertiary

11. Economic growth
Growth is a widely held economic goal. The expansion of total output relative to population means rising real wages and incomes and thus higher standards of living.
The focus of economic growth:
factors which expand an economy’s production capacity overtime;
public policies designed to increase economic growth

12. Major variables of growth
Supply Factor: Four ingredients of growth relate to the physical ability off the economy to expand.
Increase in the quantity and quality of natural resources
Increase in the quantity and quality of human resources
Increase in the supply of capital goods
Improvements in technology

13. Major variables of growth
Demand Factor: To realize the economy’s growing production potential, a nation must fully employ its expanding supplies and resources. This requires a growing level of aggregate demand.
Efficiency Factor: To reach the economy’s production potential, a nation must achieve not only full employment but also economic efficiency.
Productive efficiency & Efficiency in Allocating resources

14. Total output = worker-hours x labor productivity
Labour & productivity
A nation’s real GNP in any year depends on the input of labor (measured in worker-hours) multiplied by labor productivity (measured as real output per worker per hour)
Total output = worker-hours x labor productivity

15. Quality of labour Factors that caused poor labor quality:
Decline in Experience Level
Less Able Workers
Slow Rise in Educational Attainment

16. Technological advancement
Includes not only new production techniques but also new managerial practices and new forms of business organization.
Linked with the discovery of new knowledge, which permits firms to combine a specific amount of resources in new ways to achieve a greater output
Reflected by the improvement of capital goods
Technological advancements = capital formation (investment)

17. Policy issues Are we saving enough? Too much?
What policies might change the saving rate?
How should we allocate our investment between privately owned physical capital, public infrastructure, and “human capital”?
How do a country’s institutions affect production efficiency and capital accumulation?
What policies might encourage faster technological progress?

18. Benefits of economic growth
Increases in economic growth should enable more of everything to be produced
Increases possibility of providing consumer goods for all
More consumer goods, etc. could be equated with an increase in living standards
Wealth generated may eventually ‘trickle down’ to those who are poor by means of income distribution – taxes and benefits, etc.

19. Benefits of economic growth
Improved standards of living associated with increase in the availability of luxury goods:
TVs, home appliances, vehicles
Fridges and freezers
Swimming pools, bungalows, etc .
In addition:
Infrastructure – roads, rail, energy, water, communication networks
Health and education provision
All associated with a ‘decent’ standard of living.

20. Improvement in welfare
Welfare associated with well-being:
Welfare is improved by the provision of support services for those not necessarily able to help themselves – often on the margins of society. Welfare includes:
Pensions
Benefits – sickness, disability, etc.
Support – maternity, holidays,
Housing
Infrastructure – homes for the elderly
Such welfare provision often funded through income redistribution - taxes

21. Costs of economic growth
Economic growth can bring with it costs:
Not all income distributed equally
Wealth often in the hands of a few
‘Trickle down’ does not always seem to work in practice
Corruption may reduce redistribution effects
Growth funded in part by spending on weapons which do not benefit the population as a whole

22. Costs of economic growth
Environmental problems
Expansion and growth brings with it the problems of pollution – often developing countries do not have the infrastructure to cope with the waste generated nor the legislation or regulation to influence those who produce it.

23. Costs of economic growth
Negative Externalities
Pollution – dumping of hazardous waste
Environmental degradation – over farming reduces productivity of the soil, deforestation, damage to eco-systems and reduction in biodiversity
Non-renewable resources – finite resources

24. Costs of economic growth
Resource allocation
Consumer Goods?
Capital Goods?
Necessity of generating growth through allocating resources to the sources of growth – capital goods
Makes population poorer as fewer consumer goods initially available – often these consumer goods represent the basic essentials of life

25. Important contributors
Quality of Capital
Education and Training
Political Will
Proper resource management
Infrastructure development
Investments and businesses
Regulatory framework
Quality and availability of natural resources

26. Important economic indicators
Trends in Gross Domestic Product (GDP): Contribution of Agriculture, Industry and Services
Purchasing Power Parity (PPP) Index
Fiscal Deficit
Trends in Inflation Rate
Interest Rates
Credit Off-take
Balance of Payment
Foreign Exchange Reserves

27. Important economic indicators
Crude Oil Rates
Foreign Direct Investment (FDI) Trends
Rain fall Index
Sensex
Exchange Rate
Savings/GDP Ratio
Human Development Index
Electric Power Generation