Economic Growth and Economic Development

Economic growth and Economic development

Context:

Economic growth and Economic Development

Economic growth without development

Is GDP good economic indicator?

GDP

Three ways of GDP measurements

Limitations of GDP

Indicators of Economic development

HDI

Green GDP

Gross National happiness

Economic growth and Economic development

Economic growth means an increase in real national income / national output. It is simply a quantitative measure and there is no chance to know about distribution of income among population.

Economic development means an improvement in the quality of life and living standards, e.g. measures of literacy, life-expectancy and health care. Economic growth is necessary to attain economic development but it is not sufficient.  The proceeds of economic growth could be wasted or retained by small wealthy elite.

Economic Growth vs Economic Development

Economic Growth Occurs When

• There is a discovery of new mineral/metal deposits.
• There is an increase in the number of people in the workforce or the quality of the workforce improves. For example, through training and education.
• There is an increase in capital and machinery.
• There is an improvement in technology.

Economic Development Occurs When

• An increase in real income per head – GDP per capita.
• The increase in levels of literacy and education standards.
• Improvement in the quality and availability of housing.
• Improvement in levels of environmental standards.
• Increased life expectancy.

Economic growth without development

It is possible to have economic growth without development. i.e. an increase in GDP, but most people don’t see any actual improvements in living standards. This could occur due to:

• Economic growth may only benefit a small section of the population or Non inclusive growth. For example, if a country produces more oil, it will see an increase in GDP. However, it is possible, that this oil is only owned by one firm, and therefore, the average worker doesn’t really benefit.
• A country may see higher GDP, but the benefits of growth may be syphoned into the bank accounts of politicians
• Environmental problems. Producing toxic chemicals will lead to an increase in real GDP. However, without proper regulation, it can also lead to environmental and health problems. This is an example of where growth leads to a decline in living standards for many.
• Military spending. A country may increase GDP by spending more on military goods. However, if this is at the expense of health care and education it can lead to lower living standards.

Is GDP good economic indicator?

Usually economic growth is measured in terms of GDP. GDP is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period and include anything produced by the country’s citizens and foreigners within its borders.

GDP can be expressed in two different ways—nominal GDP and real GDP. Nominal GDP takes current market prices into account without factoring in inflation or deflation. Nominal GDP looks at the natural movement of prices and tracks the gradual increase of an economy’s value over time.

On the contrary, real GDP factors in inflation meaning it accounts for the overall rise in price levels. Economists generally prefer using real GDP as a way to compare a country’s economic growth rate. It is calculated using a price deflator—the difference in prices between the current and base year, which is the reference year. Real GDP is how economists can tell whether there is any real growth between one year and the next.

GDP can be viewed in three different ways:

• The production approach sums the “value-added” at each stage of production, where value-added is defined as total sales less the value of intermediate inputs into the production process. For example, flour would be an intermediate input and bread the final product; or an architect’s services would be an intermediate input and the building the final product.
• The expenditure approach adds up the value of purchases made by final users—for example, the consumption of food, televisions, and medical services by households; the investments in machinery by companies; and the purchases of goods and services by the government and foreigners.
• The income approach sums the incomes generated by production—for example, the compensation employees receive and the operating surplus of companies (roughly sales less costs).

Limitations of GDP

• Goods and Services Omitted From GDP: It measures the value of goods and services that are bought in markets, so it excludes:
  • Household Production: Household production is productive activities at the home that do not involve market transactions. As more services, such as childcare, meals and laundry are provided in the marketplace, the measured growth rate overstates development of all economic activity.
  • Underground Production: Underground production is the part of the economy that is hidden from the view of the government either because people want to avoid taxes and regulations or because the goods and services being produced are illegal. If the underground economy is a reasonably stable proportion of all economic activity, the growth rate will be accurate.
  • Leisure Time: Leisure time is an economic good that does not get measured in the official GDP figures. Increases in leisure time lower the economic growth rate, but we value our leisure time and we are better off with it. Increased output is not worth very much if we have little or no time to enjoy it.
• Health and Life Expectancy: While obviously important factors determining the standard of people’s living, they are omitted from real GDP. Health and life expectancy have improved as infant deaths and death in childbirth have almost been eliminated. Life expectancy has increased from 70 years at the end of WWII to nearly 80 years today. These gains have been checked somewhat by AIDS and drug abuse, which take away from our standard of living.
• Political Freedom and Social Justice: Political freedom and social justice are not measured by real GDP. A country might enjoy a very large GDP but have limited political freedom and social justice and, hence, have a lower standard of living.
• There is no scope for the positive or negative effects created in the process of production and development.
• Environmental degradation is a significant externality that the measure of GDP has failed to reflect.
• GDP also fails to capture the distribution of income across society

Alternative measurements

GDP is not a measure of “wealth” at all. It is a measure of income. It is a backward-looking “flow” measure that tells the value of goods and services produced in a given period in the past. It tells nothing about whether a country produces the same amount again next year. Economic development and well-being of population can be measured using various yardsticks.

HDI

• The United Nations Development Programme (UNDP) introduced the HDI in its first Human Development Report (HDR) prepared under the stewardship of Mahbub-ul-Haq in 1990.
• HDR, 1990 has defined human development as the process of widening people’s choices as well as raising the level of well-being achieved.
• HDI measures the average achievements in a country in three basic dimensions of the human development: a long and healthy life, access to knowledge and a decent standard of living.

• The HDI simplifies and captures only part of what human development entails. It does not reflect on inequalities, poverty, human security, empowerment, etc.

Green GDP

• The Green Gross Domestic Product is an economic growth index that quantifies and calculates the environmental consequences of that growth.
• Green GDP monetizes the effects of the loss of biodiversity and the costs of climate change.
• This is just another way to try to quantify and measure the monetary impact of the environmental damage caused by a country’s economic growth.
• The idea is that, while the economy might look like it’s growing now, the damages caused by that growth will inevitably drag it downward in the future.
• The preciseness of the Green GDP’s measurement methods is debatable; after all, since the future costs are not actually known, those calculations are based on speculation – well-informed speculation, but still.
• What it really gives us is another way of looking at economic growth, putting it in perspective alongside its potential future economic consequences.

History of environmental accounting in India

• A Framework for the Development of Environmental Statistics (FDES) was developed by the Central Statistics Office (CSO) of India in the early 1990s. The Compendium of Environment Statistics is being released since 1997.
• As per the recommendations of Technical Working Group on Natural Resource Accounting (NRA) in the later 1990s, a pilot project on NRA in the State of Goa was initiated during 1999-2000.
• Later a Technical Advisory Committee was constituted in the year 2010 under the Chairmanship of Kirit Parikh to bring out a Synthesis Report combining the findings of all these studies. The report recommended the preparation of a National Accounting Matrix that would include environmental accounts.
• The High powered expert group under Partha Dasgupta was constituted subsequently in 2011 with the mandate of developing a framework for green national accounts of India and for preparing a roadmap to implement the framework.
• Following the guidance of International Organisation of Supreme Audit Institutions (INTOSAI) on the framework for of environmental auditing, Comptroller and Auditor General of India(CAG) also conducts environmental audit in India. This process was formalised with the introduction of specialized guidelines for conduct of environmental audits. This laid down broad guidelines to enable India’s auditors to examine whether the auditee institutions gave due regard to the efforts of promulgating sustainability development and environmental concerns, where warranted.

Gross National Happiness

• Gross National Happiness is a term coined by His Majesty the Fourth King of Bhutan, Jigme Singye Wangchuck in the 1970s.
• The concept implies that sustainable development should take a holistic approach towards notions of progress and give equal importance to non-economic aspects of wellbeing.
• The Gross National Happiness Index is a single number index developed from 33 indicators categorized under nine domains.
• The concept of GNH has often been explained by its four pillars: good governance, sustainable socio-economic development, cultural preservation, and environmental conservation

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