Economic Growth

By : Gaurang Badheka

MEBE, Sem-2

Basic question…

• What is the difference between GROWTH and DEVELOPMENT?

• How to measure economic growth?

• What are the indicators of economic growth?

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

Economic growth

• A sustained annual increase in an economy’s real national income over a long period of time.

• Sustained

• Real income

• Long period

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”.

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

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?

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.

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?

Development • Poverty • Inequality• Political freedoms• Sustenance• Sustainable development• Self esteem• Proportion of activity in different sectors of the

economy:– Primary– Secondary– Tertiary

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

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

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

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

Quality of labour

• Factors that caused poor labor quality:

– Decline in Experience Level

– Less Able Workers

– Slow Rise in Educational Attainment

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)

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?

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.

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.

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

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

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.

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

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

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

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

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