Economic Growth & Development: Economics | IBPS PO Prelims & Mains Preparation - Bank Exams PDF Download

Introduction

Economic growth development pertains to the increase in a nation's income or output of goods and services compared to a previous period. Conversely, economic development entails sustained, long-term growth and augmented income for a country. Developed nations can address crucial aspects like healthcare and gender equality. Economic growth signifies the continuous rise in a country's real national and per capita income. On the other hand, economic development involves the persistent improvement of the material well-being of society. It's crucial to understand that economic development is a broader concept compared to economic growth.

Recent Update on Economic Growth

The World Bank revised its forecast for India's real GDP growth for 2022-23 to 6.5% from the previous estimate of 7.5% on 6th October 2022. This adjustment is attributed to the impact of declining global interest rates on India's exports. According to the Asian Development Outlook, data from the first three quarters of the year indicates a notable 7.1% growth in India's GDP. This growth was primarily fueled by a strong performance in industrial production and significant investments.

What is Economic Growth?

Economic growth is the total value of final goods and services produced within an economy during a specific period. It is measured in real terms to adjust for inflation and provide an accurate representation of the economy's performance. Typically, it is expressed as a percentage increase in Gross Domestic Product (GDP).

Factors Affecting Economic Growth

Economic growth can be influenced by various factors, including:

• Investment in Physical Capital: This involves spending on machinery, equipment, and infrastructure, which can enhance productivity and facilitate economic growth.
• Technological Progress: Advances in technology lead to increased efficiency and innovation, driving economic growth. For example, the widespread adoption of the internet has transformed many industries.
• Human Capital Development: Investing in education and healthcare can improve the skills and health of the workforce, contributing to economic growth. Countries with well-educated populations tend to have higher productivity levels.
• Political Stability and Good Governance: Stable political environments and effective governance structures are essential for fostering economic growth. Predictable policies and regulations create a conducive business climate, attracting investment and promoting growth.
• Natural Resources: The availability and sustainable management of natural resources can impact economic growth. Countries rich in resources like oil or minerals may experience growth based on these assets, but sustainable management is crucial for long-term prosperity.

What is Economic Development?

Economic development refers to the enhancement of a nation's economy over time, with a focus on augmenting its wealth and improving the standard of living for its populace. This multifaceted process encompasses factors such as income growth, enhanced employment prospects, better healthcare facilities, and superior educational opportunities. The ultimate goal is to establish a robust and prosperous economy that benefits the entire society.

Factors Governing Economic Development

Various elements influence the trajectory of economic development:

• Human Resources: The augmentation of human capital within an economy contributes significantly to its overall advancement and progress.
• Education: Increased literacy rates in a population not only enhance workforce efficiency but also foster economic development by promoting better comprehension and knowledge.
• Infrastructure Development: Advancements in infrastructure bolster the economy's efficiency and elevate the standard of living for its residents.
• Natural Resources: The presence of natural resources such as forests, wildlife, and minerals holds the potential to drive economic growth and development.
• Capital Formation: The rate of savings and investment, known as capital formation, plays a pivotal role in a country's economic development. The prosperity of a nation is intricately linked to its capital formation rate.

Difference between Economic Growth and Economic Development

The difference between economic growth and economic development is presented below for better comprehension:

Features of Economic Development

The key aspects of economic development are outlined below:

• Economic Development entails enhancing the living standards of a nation's citizens through advancements in social indicators like healthcare and education.
• It leads to a decrease in poverty levels and enhances the overall quality of life for individuals.
• This process is characterized by positive changes that bring about structural transformations in the economy, including improvements in infrastructure.
• Economic development is an ongoing and continuous process that evolves over time.
• It plays a crucial role in elevating the per capita income of a country, consequently boosting the national income.

Five pillars of Economic Development

The Five pillars of Economic Development are crucial for understanding the process of economic growth and sustainability. These pillars form the foundation for a country's economic progress and well-being.

Measurements of Economic Development

• Economic development is a multifaceted concept that goes beyond mere economic growth. 
• It encompasses qualitative improvements in various aspects of people's lives. 
• Several indicators are used to measure economic development, providing a comprehensive view of a country's progress.

Green GDP

• Green GDP is a significant measurement tool that adjusts the traditional GDP by accounting for environmental degradation. 
• By subtracting the costs of environmental damage from the GDP, the Green GDP provides a more accurate reflection of a nation's economic health while considering its environmental impact. 
• The concept of Green GDP originated from the need to incorporate environmental factors into economic assessments to promote sustainable development.

Gender Inequality Index

The Gender Inequality Index (GII) evaluates gender disparities in the economy across three primary dimensions:

• Reproductive health: This facet assesses maternal mortality rates and adolescent birth rates.
• Empowerment: This aspect is gauged by the share of parliamentary seats held by women and the percentage of adult males and females above 25 years with at least some secondary education.
• The Gender Inequality Index serves to reveal the authentic status of women within different countries, spotlighting key areas where gender discrepancies persist.

Gender Development Index

The Gender Development Index (GDI) quantifies gender inequalities in accomplishments within three fundamental facets of human development:

• Health is assessed through the life expectancy at birth for both females and males.
• Education is evaluated by the expected years of schooling for children and adults aged 25, for both females and males.
• Command over economic resources is determined by the estimated earned income for females and males.

Human Capital Index

• The Human Capital Index aims to capture the intricate nature of education, employment, and workforce dynamics. It aids various stakeholders in making well-informed decisions.
• It gauges Learning and Employment outcomes on a scale ranging from 0 (lowest) to 100 (highest) across five different age groups, providing a comprehensive demographic profile of a country.

Measurement of Economic Growth

The measurement of economic growth is crucial for understanding the health and progression of a country's economy. The primary metric used to gauge economic growth is real GDP (Gross Domestic Product), which takes into account the total value of goods and services produced within a country's borders, adjusted for inflation to provide a more accurate representation of economic performance.

Methods of Assessing Real GDP

• Quarterly Growth at an Annual Rate: This method involves calculating the change in GDP from one quarter to the next and then extrapolating it to an annual rate. For example, if there is a 0.3% increase in GDP in a quarter, this translates to a 1.2% annual growth rate.
• Four-Quarter or Year-Over-Year Growth Rate: This approach compares the GDP of a specific quarter in two consecutive years as a percentage. This comparison helps to factor in seasonal variations and provides a more stable view of economic growth over time.
• Annual Average Growth Rate: This method computes the average change in GDP across all four quarters of a year. For instance, if the four-quarter growth rates for 2022 are 2%, 3%, 1.5%, and 1%, the annual average growth rate would be calculated as (2% + 3% + 1.5% + 1%) ÷ 4, resulting in an average growth rate of 1.875% for the year.

Major Principles of Economic Development and Growth

Economic growth and development are influenced by several key principles:

• Natural resources, such as land, drainage systems, and mines, play a significant role. For example, Mercantilism highlights that a country's wealth, including gold and trade surpluses, can stimulate growth.
• Capital formation, as emphasized in Adam Smith's theory, contributes to increasing returns to economic scale. This process relies on the activity and savings of workers, which can then be invested in producing more capital.
• Human resources are vital, according to the neo-classical model, which focuses on factors like labor productivity, workforce size, and inputs. Skilled and efficient labor can enhance growth and productivity, leading to technological advancements and improved health outcomes.
• Population growth is viewed positively in underpopulated countries. However, based on the Malthusian theory, excessive population can result in food and resource scarcity, posing challenges to sustainable development.

Importance of Economic Growth and Economic Development

Economic growth and economic development play crucial roles in shaping the prosperity and well-being of a nation. Below are the key points highlighting their significance:

• Economic Growth Enhances Overall Prosperity and Standard of Living: By fostering economic growth, a country experiences an improvement in its overall prosperity and enhances the standard of living for its citizens. This is evident through increased access to goods and services, better infrastructure, and an overall rise in the quality of life.
• Creation of Job Opportunities and Decrease in Unemployment Rates: Economic growth leads to the creation of more job opportunities within the economy, subsequently contributing to a decrease in unemployment rates. This results in a more productive workforce and a higher standard of living for individuals.
• Government Revenue Boost and Investment in Public Services: Increased economic growth translates to higher revenue for the government, which can then be utilized to improve public services and invest in essential infrastructure development projects. This, in turn, enhances the overall well-being of the population.
• Encouragement of Technological Innovation and Industry Development: Economic growth encourages investment in new technologies and industries, fostering innovation and progress. This leads to advancements in various sectors, driving the economy forward and ensuring long-term sustainability.
• Reduction of Poverty and Income Inequality: Economic growth plays a vital role in reducing poverty and income inequality within a nation. As the economy expands, more opportunities for economic participation and wealth distribution arise, positively impacting the well-being of the population.
• Focus on Sustainable Development and Citizen Well-Being: Economic development is essential for ensuring long-term and sustainable growth for a country. It focuses on enhancing the well-being of citizens by providing better healthcare, education, and essential social services.
• Promotion of Balanced and Diversified Economic Growth: Developing various sectors of the economy is crucial for achieving balanced and diversified growth. This approach not only strengthens the economy but also mitigates risks associated with over-reliance on specific industries.
• Addressing Social Issues and Enhancing Quality of Life: Economic development plays a significant role in addressing social issues such as poverty, hunger, and gender inequality. By focusing on these aspects, a nation can progress towards overall stability and create a better quality of life for its people.
• Evaluation of Economic Progress by International Organizations: International organizations and commercial institutions utilize data on economic growth to assess the true state of an economy. These parameters provide valuable insights into the economic health of a nation and aid in guiding policy decisions for sustainable development.

Issues in India's Growth, Development, and Employment

The major challenges hindering India's progress in terms of growth, development, and employment are outlined below:

• Illiteracy: Despite significant strides in literacy rates, a substantial portion of the population still lacks basic education. This deficiency adversely affects the country's economic development and growth.
• Poverty: A significant number of individuals in India live below the poverty line, which undermines the country's potential for robust economic growth and development.
• Declining Growth Rate: The decrease in the growth rate has negative repercussions on the overall development of the economy.
• Inadequate Secondary Sector: India's economic growth heavily relies on the service sector, leading to challenges in accommodating the expanding workforce. The stagnation in the manufacturing sector contributes significantly to unemployment issues.
• Agriculture Sector Dependency on Monsoon: Approximately 55% of the agricultural sector in India still relies on the unpredictability of the monsoon. This dependence leaves the primary sector vulnerable to nature's whims.
• Unemployment and Underemployment: The lack of sufficient meaningful employment opportunities forces a large portion of the workforce into the agricultural sector or leaves them underemployed. This mismatch results in a high rate of unemployment.

Conclusion

• Economic development is a comprehensive concept that includes economic growth. To truly understand an economy, both growth and development need to be considered. While economic development relies on economic growth, mere growth is insufficient for overall development.
• A practical example of this interplay is the Make in India Scheme, which highlights efforts to foster both economic growth and development within the country.