ECONOMIC GROWTH AND

DEVELOPMENT

Economic growth and development

Economic growth may be one aspect of economic development but it is not the same

Economic growth:A measure of the value of output of goods and services

within a time periodEconomic Development:

A measure of the welfare of humans in a society

Factors Affecting Economic Growth• Economic Factors1. Natural Resources- For economic growth, the existence of natural resources in abundance is

essential.2.Capital Formation- Capital may be defined as the stock of physical reproducible factors of

production. Capital may be human capital, raw material capital, infrastructure capital, etc.3.Technological Progress- There is no doubt that technological progress is a very important factor indetermining the rate of economic growth.4.Human Resources-A good quality of population is very important in determining the rate of

economic progress. Instead of a large population a small but high quality of human race in a country is better for development.

• Non-Economic Factors1.Political Factors Political stability and strong administration are essential and helpful in modern

economic growth. It is because of political stability and strong Economic Development and Growth administration that the developed countries have reached the level of highest economic growth in the world.

2.Social and Psychological Factors Social factors include social attitudes, social values and social institutions which change with the expansion of education and transformation of culture from one society to the other.

3.Education -It is now fairly recognised that education is the main vehicle of development. Greater progress has been achieved in those countries, where education is wide spread.

Indicators of Economic Development

Indicators of economic growth

Human Development Index

Human Development Index

• HDI – A socio-economic measure• Focus on three dimensions of human welfare:• Longevity – Life expectancy• Knowledge – Access to education, literacy

rates• Standard of living – GDP per capita:

Purchasing Power Parity (PPP)

DEVELOPING COUNTRIES

Developing countries have less standard of living and income.Moreover, they have a high rate of birth and death.Developing countries also have a high rate of unemployment and inflation because of the few investments in the country.Furthermore, GDP per capita (average income) is very low,therefore education and health aren't sufficiently providedexamples-india, sri lanka, bhutan , etc.

DEVELOPED COUNTRY

In developed countries the rate of birth and death is almost the same therefore the population isn't big, therefore money is supplied among people over the poverty rate, which means there is a good standard of living. This makes education and health more sufficient to the economy. The developedd countries also have a huge amount of exports which increases the ,money flow in the country, and the imports decrease which increases aggregate demand(GDP) or national income. This will increase the GDP per capita(average income)examples- USA , Germany, Britain, etc.

GDPIt is the sum of total values of all final goods and services produced within the nationalTerritory during a financial year.•Does not include intermediate goods and services•Not a measure of standard of living•A measure of total economic activity of a country

Nominal GDP and adjustments to GDP•The raw GDP figure as given by the equations above is called the nominal or current, GDP. •When one compares GDP figures from one year to another, it is desirable to compensate for changes in the value of money .

GDP real=GDP current x (value of money in current year/base year)

Real GDP growth rate=[Real GDP(n)-Real GDP(n-1)]/Real GDP(n-1)

GDP Deflator= NGDP/RGDP

NDPNDP=GDP-Depreciation•Depreciation represents the amount needed in order to replace the depreciated assets.

MEASURES OF ECONOMIC GROWTH

GNP•While GDP’s scope is according to location ,GNP’s scope is according to ownership/nationals.

GNP=GDP + Net factor income from abroadNet factor income =Factor income receipts-Factor income payments

NNPNNP=GNP-Depreciation

Factor Cost•A measure of national output based on the cost of factors of production.Factors of Production:1.Labour----receive wages2.Land------receive rent3.Capital---receive interest4.Enterpreneur----receive profits

Market Price MP=Factor Cost + Indirect Taxes - Subsidy

DETERMINING GDP

1.Product Approach—Sums the o/ps of every class of enterprise to arrive at the total2.Expenditure Approach—Value of total product=People’s total expenditures in buying3.Income Approach---Sum of producer’s incomes=value of their products

PRODUCTION APPROACH•Market value of all final goods and services calculated during 1 year •also called Net Product or Value added method.

Three steps:

1.Estimating the Gross Value of domestic Output out of the many various economic activities;

2.Determining the intermediate consumption, i.e., the cost of material, supplies and services used to produce final goods or services; and

3.Deducting intermediate consumption from Gross Value to obtain the Net Value of Domestic Output

Net Value Added = Gross Value of output – Value of Intermediate Consumption.

Value of Output = Value of the total sales of goods and services + Value of changes in the inventories.

•The sum of Net Value Added in various economic activities is known as GDP at factor cost.

•GDP at factor cost plus indirect taxes less subsidies on products is GDP at Market Price.

EXPENDITURE APPROACHGDP(Y)= C + I + G + (X-M)

WhereC=Consumption by private citizensI=InvestmentG-Govt. SpendingX=ExportM=Imports

1.Consumption by Private citizens(C)Examples include food, rent, jewelry, gasoline, and medical expenses but does not include the purchase of new housing.

2.Investment(I):business investment in equipment, but does not include exchanges of existing assetsExamples include construction of a new mine, purchase of software, or purchase of machinery and equipment for a factory. Spending by households (not government) on new houses is also included in Investment.

3.Government Spending(G): the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government4.Export(X):Goods and services produced for other nation’s consumption5.Imports(M):Must be deducted to avoid counting foreign supply as domestic

Net Exports= Exports(X)-Imports(M)

Y= C+ I + G + NX

Goods and services provided by governments and non-profit organizations free of charge or for economically insignificant prices are included. The value of these goods and services is estimated as equal to their cost of production.

Goods and services produced for own-use by businesses are attempted to be included

Renovations and upkeep by an individual to a home that she owns and occupies are included

Services provided by banks and other financial institutions without charge or for a fee that does not reflect value imputed to them ,are included

INCOME APPROACH•GDP calculated this way is also called GDI•Measures GDP by adding incomes that firms pay households for factors of production they hire- wages for labour, interest for capital, rent for land and profits for entrepreneurship.

These income components sum to net domestic income at factor cost.

GDP= NDI at FC + Indirect taxes - Subsidies + Depreciation

Total factor income = Employee compensation + Corporate profits + Proprietor's income + Rental income + Net interest

Yet another formula for GDP by the income method is:

GDP= R+I + P +SA +W

where R : rentsI : interestsP : profitsSA : statistical adjustments (corporate income taxes, dividends, undistributed corporate profits)W : wages

CROSS BORDER COMPARISION AND PPP

The level of GDP in different countries may be compared by converting their value in national currency according to either the current currency exchange rate, or the purchasing power parity exchange rate.

•Current currency exchange rate is the exchange rate in the international foreign exchange market.

•Purchasing Power Parity: accounts for the relative effective domestic purchasing power of the average producer or consumer within an economy.

Sell an entire CPI basket in one country, convert the cash at the currency exchange market rate and then re-buy the same basket of goods in the other country with the Converted cash.

CPI: Consumer Price Index

INCOME

• Money or benefits that an individual or business receives in exchange for providing goods or services, or through investing capital.

• Income is consumed to fuel day-to-day expenditures.• In businesses, income can refer to a company's

remaining revenues after all expenses and taxes have been paid. In this case, it is also known as "earnings".

• Most forms of income are subject to taxation.

INCOME TYPES

• There are three broad types of income:

Earned Income Portfolio Income Passive Income

• Money made by anyone (other than winning lottery or receiving inheritance) will fall into one of these income categories.

• Each income category has its own set of benefits and drawbacks.

Earned Income

• Any income that is generated by working. • Salary or money made from hourly employment is considered

earned income.• Activities generating earned income include:

Working a job Owning a small business Consulting Gambling Any other activity that pays based on time/effort spent

• Disadvantages –– once you stop working, you stop making money.– earned income is taxed at a higher rate than any other type of income.

• Advantages –– don’t need any startup capital in order to make earned income.

Portfolio Income• Any income generated by selling an investment at a higher

price than it was bought at.• Activities generating portfolio income include:

Trading (buying/selling) Paper Assets Buying and Selling Real Estate Buying and Selling of any other Assets

• Disadvantages –– requires a lot of knowledge and experience to make money trading

paper assets.– little control over investments, other than the ability to buy or sell.– requires startup capital.– taxable at very high rates.

• Advantages –– generates income at exponential rates.

Passive Income

• Any income generated from assets purchased or created.• Activities generating passive income include:

Rental Income from Real Estate. Business Income. Creating and Selling Intellectual Property. Affiliate or Multi-Level Marketing.

• Advantages –– passive income is generally recurring income.– investments allow the owners active control over the investment.– passive income investments often allow for favorable tax treatment.– investments can be funded using borrowed money.

INCOME DISTRIBUTION

• Income distribution is how a nation’s total GDP is distributed amongst its population.

• The distribution of income within a community is represented by the Lorenz curve.

• The Lorenz curve is closely associated with measures of income inequality, the Gini coefficient.

Lorenz Curve

• Lorenz curve is a simple way to describe income distribution by a two-dimensional graph.

• The x-axis of the curve is the cumulative percentage of a community’s population that is being considered.

• The y-axis of the Lorenz curve is the percent of total income in the community.

Gini Coefficient

• The Gini coefficient is a measure of statistical dispersion intended to represent the income distribution of a nation's residents.

• The Gini coefficient is defined mathematically based on the Lorenz curve. • The Gini coefficient is the ratio of the area that lies between the line of

equality and the Lorenz curve over the total area under the line of equality.

• The Gini coefficient, G, is most easily calculated from unordered size data as the “relative mean difference” divided by the mean size µ,

G=

The Meaning of the Human Capital• The success depends in large part on the people with higher level of

competence. In response, the people are becoming valuable assets. • In the economic perspective, the capital refers to factors of production

used to create goods or services • The human is the subject to take charge of all economic activities such

as production, consumption, and transaction.• Thus, it can be recognized that human capital means one of production

elements which can generate added-values through inputting it.

Sources of Human Capital• Investment in education• Expenditure on health• Expenditure on training

HUMAN CAPITAL DEVELOPMENT

Relation between Human Capital and economic growth

• Human resources as a contributor to GDP• Goals, objectives, plans and procedures made by organization

leads to productivity• Skill-set of individuals engaged in production process and the

usage of techniques.

State of human capital formation in India

• The government plays a major role in deciding the polices of education in reference to state government, local government and municipal corporations.

• Government role is to insure that the private providers of services like health and education follows the standards as stipulated by the government authorities.

• Different departments of education like NCERT and AICTE facilitate institutions to provide educational services at different levels and to promote growth in education sector.

• Similarly, the ministries of health and organizations like ICMR facilitate medical and healthcare services to facilitate health sector.

What is rural development

It essentially focuses on action for the development of areas that are lagging behind in the overall development of the village economy. Some of the areas which are challenging and need fresh initiatives for development in rural India include

• Development of human resources including – literacy, more specifically, female literacy, education and skill

development – health, addressing both sanitation and public health• Development of the productive resources of each locality• Infrastructure development like electricity, irrigation, credit, marketing,

transport facilities • Special measures for alleviation of poverty

Importance of rural development in India

1. Improving agriculture is a must for industrialization. Agriculture is carried on in villages, so rural development is needed to improve agriculture.

2. Industry needs a literate labor force. But most of the people live in villages (70% in India). So rural development is needed to increase the education level of the majority of the population.

3. Finally, rural development is needed to reduce the migration of people from villages to cities. The current rate of rural-to-urban migration in India is unsustainable. It is much more than the rate at which industrial jobs and urban infrastructure are growing. So rural development is a must to slow down the rural-to-urban migration.

Facts related to rural development in India

• Credit and marketing schemes. - As the time gestation between crop sowing and realization of income after production is

quite long, farmers borrow from various sources to meet their initial investment on seeds, fertilizers, implements and other family expenses.

- India adopted a social banking system and multi agency approach to meet the needs of rural credit.

• Emerging alternate marketing channels. - Earlier the farmers directly sell their produce to consumers, it increases their incomes. - Several national and multinational fast food chains are increasingly entering into contracts

with farmers to encourage them to cultivate farm products of the desired quality by providing them with not only seeds and other inputs but also assured procurement of the product at the pre-decided prices.

• Diversification into productive activities. - Diversification includes two aspects - one relates to change in cropping pattern and the

other relates to a shift of workforce from agriculture to other allied activities and non-agriculture sector.

- The need for diversification arises from the fact that there is greater risk in depending exclusively on farming for livelihood and is necessary not only to reduce the risk from agriculture sector but also to provide productive sustainable livelihood options to rural people.

- The diversification into productive activities are: Agro-processing industry Animal husbandry Fisheries Horticulture

• Sustainable development. Efforts in evolving technique which are eco friendly are essential for sustainable

development. It means to produce by meeting the requirements as made by the law as is complying with nature.

Sustainable development Development that meets the need of the present generation

without compromising the ability of the future generation to meet their own needs.

sustainable development aims at decreasing the absolute poverty of the poor by providing lasting and secure livelihoods that minimize resource depletion, environmental degradation, cultural disruption and social instability.

The present generation can promote development that enhances the natural and built environment in ways that are compatible with-

1. Conservation of natural assets.2. Preservation of the regenerative capacity of the world’s natural

ecological system.3. Avoiding the imposition of added costs or risks on future

generations.

According to Herman Daly, a leading environmental economist, to achieve sustainable development, the following needs to be done1. Limiting the human population to a level within the

carrying capacity of the environment. 2. Technological progress should be input efficient and not

input consuming.3. Renewable resources should be extracted on a

sustainable basis, that is, rate of extraction should not exceed rate of regeneration.

4. For non-renewable resources rate of depletion should not exceed the rate of creation of renewable substitutes.

5. Inefficiencies arising from pollution should be corrected.

Strategies for sustainable development Use of non-conventional sources of energyLPG, Gobar gas in rural areasCNG in urban areasSolar power through photovoltaic cellsWind powerBiocomposting

Problems in Employment• Share in Ouput and Employment of different sectors• Agriculture: 20% in GDP, 57% in Employ.• Industry: 23% in GDP,18% in Employ.• Services: 57% in GDP, 25% in Employ.

Problems in Employment• There are 458 million workers in India in 2004-05• Out of this 423 million workers are

informal/unorganised workers (92%).• Growth in employment more in unorganised sector. • Thus, quality of employment is a problem• Workers in this sector do not have social security.• Government is trying to provide minimum social

security to unorganized workers

The Nature Of Economic GrowthThe first aspect of this is the significant difference in the nature and structure of growth in the two countries. Growth measured in terms of GDP can be investment-driven and/or consumption driven. In mature economies we can point to the balance between the two. The majority of developed economies see investment at around 20-25% of GDP. In the case of India, the investment share of GDP is slightly above average for the industrialised world.

In China the position is very different, with investment accounting for over 40% of GDP sustained over the past 10 years or so.

Comparison between Economic development in India and China

Structural change over four decades

• China: “classic” pattern, moving from primary to manufacturing sector, which has doubled its share of workforce and tripled its share of output.

• India: Move has been mainly from agriculture to services in share of output, with no substantial increase in manufacturing, and the structure of employment has not changed much. Share of the primary sector in GDP fell from 60 per cent to 25 per cent in four decades, but share in employment still more than 60 per cent.

Required changes in Development policies

phasing out of collectivized agriculture gradual liberalization of prices fiscal decentralization increased autonomy for state enterprises creation of a diversified banking system development of stock markets rapid growth of the private sector opening to foreign trade and investment China has implemented reforms in a gradualist fashion. In recent

years, China has renewed its support for state-owned enterprises in sectors it considers important to "economic security," explicitly looking to foster globally competitive national champions.

THANK YOU

• Abinash Pandia• Raj Rajeswar• Ankit Chauhan• Shashank Kumar• Sunny kumar