What is the difference between economic growth and economic development?

Difference between economic growth and economic development

Economic Growth is often seen as the ‘holy grail’ of economic policy. This simplistic emphasis on economic growth is often criticised because of the limitations of economic growth in improving living standards.

Some suggest rather than economic growth, we should measure economic development through measures such as Human Development Index (HDI) which looks at GDP but also statistics such as literacy and health care standards.

Some also argue we should not be using GDP but, a happiness index. Economic Growth can definitely have limitations in improving living standards. Economic development is the increase in the standard-of living in a nation’s population with sustained growth from a simple, low- income economy to a modern, high-income economy.

Also, if the local quality of life could be improved, economic development would be enhanced. Its scope includes the process and policies by which a nation improves the economic, political, and social well- being of its people.

Goncalo L. Fonsesca at the New School for Social Research defines economic development as “the analysis of the economic development of nations.” The University of Iowa’s Center for International Finance and Development states that:

“Economic development’ is a term that economists, politicians, and others have used frequently in the 20th century. The concept, however, has been in existence in the West for centuries.

Modernisation, Westernisation, and especially Industrialisation are other terms people have used when discussing economic development. Although no one is sure when the concept originated, most people agree that development is closely bound up with the evolution of capitalism and the demise of feudalism.”

The study of economic development by social scientists encompasses theories of the causes of industrial – economic modernisation, the phases or waves of economic development historically used by economic developers, plus organisational and related aspects of enterprise development in modern societies.

It embraces sociological research on business organisation and enterprise development from a historical and comparative perspective; specific processes of the evolution (growth, modernisation) of markets and management-employee relations; and culturally related cross-national similarities and differences in patterns of industrial organisation in contemporary Western societies.

Economic development refers to social and technological progress. It implies a change in the way goods and services are produced, not merely an increase in production achieved using the old methods of production on a wider scale.

Economic growth implies only an increase in quantitative output; it may or may not involve development. Economic growth is often measured by rate of change of gross domestic product (e.g., per cent GDP increase per year.) Gross domestic product is the aggregate value-added by the economic activity within a country’s borders.

Economic development typically involves improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP does not take into account other aspects such as leisure time, environmental quality, freedom, or social justice; alternative measures of economic well-being have been proposed. A country’s economic development is related to its human development, which encompasses, among other things, health and education.

Dependency theorists argue that poor countries have sometimes experienced economic growth with little or no economic development; for instance, in cases where they have functioned mainly as resource- providers to wealthy industrialised countries. There is an opposing argument, however, that growth causes development because some of the increase in income gets spent on human development such as education and health.

According to Ranis, we view economic growth to human development as a two-way relationship. Moreover, Ranis suggested that the first chain consist of economic growth benefiting human development with GNP.

Namely, GNP increases human development by expenditure from families, government and organisations such as NGOs. With the increase in economic growth, families and individuals will likely increase expenditures with the increased in incomes, which leads to increase in human development. Further, with the increased in expenditures, health, education tend to increases in the country and later will contribute to economic growth.

In addition to increasing private incomes, economic growths also generate additional resources that can be. Used to improve social services (such as healthcare, safe drinking water etc.). By generating additional resources for social services, unequal income distribution will be limited as such social services are distributed equally across each community; benefiting each individual.

Thus, increasing living standards for the public. It depends on the distribution of higher incomes. Economic growth could bypass the poorest in society. Economic growth may cause negative externalities such as pollution, higher crime rates and congestion which actually reduce living standards.

Economic Growth may conflict with the environment, e.g. global warming. It depends on what is produced. The Soviet Union has fantastic rates of economic growth, but, often through producing a lot Steel and Pig Iron that was not actually very useful. Economic growth can be unsustainable, especially if it is a boom and bust.

Economic Growth definitely has limitations and we need to be aware of these. But, notwithstanding these limitations potential problems, economic growth is still very important. It reduces Poverty.

Growth doesn’t necessarily reduce poverty. But, without economic growth it is very difficult to make any meaningful and sustained reduction in poverty. This is especially important in developing economies.

It reduces unemployment. A stagnant economy leads to higher rates of unemployment and the consequent social misery.

Gross National Product (GNP), in economics, a quantitative measure of a nation’s total economic activity, generally assessed yearly or quarterly. The GNP equals the gross domestic product plus income earned by domestic residents through foreign investments minus the income earned by foreign investors in the domestic market.

Gross domestic product, often confused with GNP, is calculated from the total value of goods and services produced in an economy over a specified period. Since World War II, GNP has been generally regarded as the most important indicator of the status of an economy.

In the United States, the economy is considered to be in recession if there are two consecutive quarters of decrease in GNP. Despite the fact that GNP does not allow for inflation, overall value of production, and other factors, it is nevertheless a significant measurement of economic health.

In 1995 the International Bank for Reconstruction and Development (World Bank) created a new system for measuring national wealth, based on the value of natural and mineral resources.

Budget deficits:

The deep recession has led a corresponding rise in budget deficit. Economic growth is essential to improve governments’ budget deficits.

Living Standards:

If managed correctly, economic growth enables an increase in resources for important public services like education and health care. Economic growth enables an increase in social spending without an increase in tax rates.