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Growth and Development

Growth and Development

Economic growth without development is unsustainable - and unethical.

- Amartya Sen

Economic growth and development are both important for the sustainability of a country's national economy. Economic growth is usually a good thing, as it means the economy is increasing its output because more goods and services are being produced! But why is growth without development unethical? Read on to find out.

Growth and Development Differences

Although economic growth and development may sound similar, there are a few key differences between the two concepts.

Economic growth is an increase in the total output of a country's economy. It relates to the number of goods and services produced in the economy over a period of time.

Economic growth is usually a good sign for a country's economy. However, it does not always equate to an improvement in the overall quality of life or economic welfare in the country. This is where we can use economic development as an indicator.

Economic development assesses not only the change in output of the economy but also the quality of the output.

As a result, we can use economic development to evaluate economic welfare and overall happiness in the economy. Economic development takes into account qualitative factors as well, such as the improvement of living standards or access to healthcare and education, to name a few.

Economic Growth

Economic Development

Economic growth is a narrower concept when compared to economic development.

It is a broader concept:

economic development = economic growth + standards of living

Short term measure.

Long term measure.

Measured through quantitative metrics such as an increase in real GDP.

Measured through both qualitative and quantitative measures. For example, human development index, infant mortality and literacy rates.

Does not reflect the depletion of natural resources and other factors that affect sustainability such as pollution, congestion and diseases.

Concerned with sustainability which means meeting the needs of the present without compromising the environment for the future generations.

Table 1. Comparison between economic growth and economic development.

Growth and Development Characteristics

We can understand the growth and development characteristics with the Rostow model.

In the 1960s W.W. Rostow developed a model which argues that developing countries all go through five distinct stages. These five stages are represented through a linear model (see Figure 1 below) and they each represent a characteristic of developing economies.

The first stage is known as 'traditional society'. Rostow used this term to describe societies that were static and limited in technological capabilities. He claimed that societies in this phase are primitive and usually poor, with little to no change from generation to generation. They completely lack economic development.

The next stage is 'preconditions for take-off'. This stage can be characterised by traditional economies getting ready for 'take-off', meaning that they are beginning to show signs of industrial growth. This includes the exploitation of agriculture and other primary-sector industries, giving way for trade, savings, and investment.

The third stage is known as 'take-off' which Rostow describes as self-sustained growth. This stage includes the development of a manufacturing sector and the installation of physical infrastructure. At the end of this stage, modern social, political and economic institutions are in place but economic growth is considered more important than economic development.

The fourth stage is the 'drive to maturity' and implies the development of a wide range of industrial and commercial activities. Countries are now able to exploit their comparative advantages internationally.

The final stage is 'high mass consumption' whereby developing economies are now able to fully take advantage of self-sustained growth. They are able to allocate the increased economic output to produce social welfare, or in other words, economic development.

Growth and Development Rostows Characteristics of development StudySmarter OriginalsFigure 1. Rostow's Characteristics of development, StudySmarter Originals

It is important to note that Rostow's theory was developed a long time ago and it is rather simplistic. It is a good starting point for understanding the characteristics and stages of growth and development but it should not be taken in absolute terms.

Growth and Development Examples

Let's now examine some examples of growth and development by taking a look at the indicators and factors that affect growth and development.

Indicators of Development

Gross domestic product (GDP) and gross national income (GNI) per capita are often used as indicators of economic growth and development. This is because the per capita figure provides a more realistic representation of national income than the holistic GDP and GNI figures.

To learn more about the differences between GDP, GNP, and per capita measurements, check out our explanation on Macroeconomic Indicators.

However, in many cases, these figures still do not provide an accurate portrayal of economic development, as they are based on economic output rather than welfare. To find more accurate measures of economic development, it is essential to understand the three main components of economic welfare. They are:

  1. Welfare that has been acquired from the goods and services produced and purchased in the economy.

  2. Welfare gained from public and merit goods.

  3. Welfare derived from 'quality of life' factors.

These three factors combined can be used as an indicator of welfare as they make up total economic welfare in a country's national economy.

It is also important to note that national income measures do not account for sustainability. GDP and GNI do not take into consideration the depletion and damage of environmental resources caused by the production of various goods and services. So even though a country's economy might be growing, its natural resources may be getting depleted in the meantime.

Furthermore, GDP and GNI do not provide accurate measures of the value of the output of merit goods either, which poses yet another problem when measuring economic development.

As a result, the human development index (HDI) is often used as a measure of economic development as it takes into consideration health and education in addition to national income.

The human development index (HDI) is a macroeconomic indicator proposed by the United Nations and is made up of three different factors: life expectancy, mean and expected years of schooling, and GNI per capita.

The maximum value of a country's HDI is 1. As an example, the UK's HDI according to the United Nations is 0.932, quite close to 1. 1

Factors Affecting Growth and Development

There are three main factors that impact growth and development:

  • Investment: investing in capital goods and technology is essential for long-term economic growth (increase in output of goods and services) and development (increase in the quality of goods and services produced due to better technology).

  • Education: this is also important for both economic growth and development. When education and training levels are high in a population, people are more likely to find jobs or even set up their own businesses, increasing the overall output of the national economy. Education also develops peoples' intellect. Therefore, by investing in education, not only will the economy grow but economic welfare in the long term will also increase.

  • Healthcare: investing in healthcare improves living standards. For instance, life expectancy is one of the main measures used to construct the HDI. Life expectancy can be improved by investing in healthcare and thus improving societal welfare overall.

Barriers to Growth and Development

Unfortunately, growth and development are not always straightforward. Certain barriers may arise that prevent an economy from sustainably growing and developing.

Corruption: corruption includes any dishonest or fraudulent behaviour often exhibited by people in power. A common example of corruption is bribery. This leads to the misallocation of resources and prevents normal economic flow from occurring, preventing adequate economic growth and development.

Institutional factors: at times, developing countries might lack certain institutional factors that are present in developed countries. For instance, legal, judicial, or financial systems might be less established causing problems with the fair provision of goods and services from businesses to consumers, preventing economic growth.

Infrastructure: oftentimes developing countries may lack the infrastructure necessary for economic growth. For instance, the lack of roads or means of long-haul transportation can make it more difficult for firms to access raw materials or to transport their finished goods, leading to higher costs and slower development.

Human and physical capital: inadequate human or physical capital may also prevent economic growth and development. As outlined above, investment in physical capital and education and training are all necessary for economic growth. However, the lack of investment or means of investment in these factors may significantly delay both economic growth and development.

Policies for Growth and Development

There are various micro and macroeconomic policies that may be implemented to encourage economic growth and development. Some examples of policies that may be used include fiscal policy, monetary policy, and supply-side policies.

However, finding the correct policy to implement is far from an easy task. It is important to make sure that while the economy is growing, the growth is sustainable.

The limited availability of natural resources and the environment should also be kept in mind. In the future, the depletion of resources may lead to far larger problems that outweigh the benefits of short-term economic growth. As a result, it is important to consider policies that reduce the risks of market failure caused by economic growth.

Examples of such policies include the use of taxation to eliminate the negative externalities that arise as a result of production or fiscal policies that encourage the redistribution of income and wealth (ie. progressive taxation). The equitable distribution of income is generally regarded as an indicator of economic development.

Economic growth and development may prove difficult to pursue. Due to the various factors that impact growth and development and the numerous trade-offs and barriers which may occur when pursuing them, effective policies need to be chosen carefully in order to generate sustainable growth and development.

Growth and Development - Key Takeaways

  • Economic growth is an increase in the total output of a country's economy. It relates to the number of goods and services produced in the economy over a period of time.
  • Economic development assesses not only the change in output of the economy but also the quality of the output.
  • W.W. Rostow proposed that developing countries all go through five distinct stages.
  • These five follow a linear model and they each represent a characteristic of developing economies. The five stages include:
    • 'Traditional society'
    • 'Preconditions for take-off'
    • 'Take-off'
    • 'Drive to maturity'
    • 'Mass consumption'
  • The gross domestic product (GDP) and gross national income (GNI) per capita are often used as indicators of economic growth and development.
  • The human development index (HDI) is a macroeconomic indicator proposed by the United Nations and is made up of three different factors: life expectancy, mean and expected years of schooling, and GNI per capita.
  • Growth and development may be affected by investment, education, and healthcare.
  • The barriers to growth and development include:
    • Corruption
    • Infrastructure
    • Institutional factors
    • Human and physical capital
  • There are various micro and macroeconomic policies that may be implemented to encourage economic growth and development.
  • Some examples of policies that may be used include fiscal policy, monetary policy and supply-side policies.

Sources

1. United Nations, ‘Human Development Report’, 2020.

Frequently Asked Questions about Growth and Development

Economic growth is an increase in the total output of a country's economy. It relates to the number of goods and services produced in the economy over a period of time. Economic development assesses not only the change in output of the economy but also the quality of the output.

There are three main factors that impact growth and development: investment, education and healthcare. For instance, investment in capital goods and technology is essential for long-term economic growth and development. Investing in capital goods can increase the output of goods and services produced in the economy (economic growth) whereas new technology may increase the quality of goods and services produced (economic development).

Economic growth is an increase in the total output of a country's economy. However, economic development also takes into account the quality of the output. As a result, economic development can be used to evaluate economic welfare and overall happiness in the economy, as it takes into account qualitative factors as well, such as the improvement of living standards or access to healthcare and education, to name a few.

There are various micro and macroeconomic policies that may be implemented to encourage economic growth and development. Examples of such policies include the use of taxation to eliminate the negative externalities that arise as a result of production or fiscal policies that encourage the redistribution of income and wealth (ie. progressive taxation) - as the equitable distribution of income is generally regarded as an indicator of economic development.

The human development index (HDI) is a macroeconomic indicator, proposed by the United Nations, and is made up of three different factors: life expectancy; mean and expected years of schooling; and GNI per capita.

Final Growth and Development Quiz

Question

What is economic growth?

Show answer

Answer

Economic growth is an increase in the total output of a country's economy. It relates to the number of goods and services produced in the economy over a period of time.

Show question

Question

What is economic development?

Show answer

Answer

Economic development assesses not only the change in output of the economy but also the quality of the output.

Show question

Question

What is the main difference between economic growth and economic development?

Show answer

Answer

Economic growth is an increase in the total output of a country's economy. However, economic development also takes into account the quality of the output. As a result, economic development can be used to evaluate economic welfare and overall happiness in the economy, as it takes into account qualitative factors such as the improvement of living standards or access to healthcare and education, to name a few.

Show question

Question

Name the five stages of Rostow's development model.

Show answer

Answer

  1. 'Traditional society'
  2. 'Preconditions for take-off'
  3. 'Take off'
  4. 'Drive to maturity'
  5. 'Mass consumption'

Show question

Question

What are the characteristics of 'traditional society'?

Show answer

Answer

Rostow used this term to describe societies that were static and limited in technological capabilities. He claimed that societies in this phase are primitive and usually poor, with little to no change from generation to generation. They completely lack economic development.

Show question

Question

Name the characteristics of the 'preconditions for take-off' stage.

Show answer

Answer

This stage can be characterised by traditional economies getting ready for 'take-off', meaning that they are beginning to show signs of industrial growth. This includes the exploitation of agriculture and other primary-sector industries, giving way for trade, savings and investment.

Show question

Question

The 'take-off' stage can be described simply as:

Show answer

Answer

Self-sustained growth

Show question

Question

Name the characteristics of the 'drive to maturity' stage.

Show answer

Answer

'Drive to maturity' implies the development of a wide range of industrial and commercial activities. Countries in this stage are able to exploit their comparative advantages internationally.

Show question

Question

What is the final stage of Rowtow's model?

Show answer

Answer

The final stage is known as 'high mass consumption' whereby developing economies are now able to fully take advantage of self-sustained growth. They are able to allocate the increased economic output to produce social welfare, or in other words, economic development.

Show question

Question

List the three main components of economic welfare.

Show answer

Answer

  1. Welfare that has been acquired from the goods and services produced and purchased in the economy.

  2. Welfare gained from public and merit goods.

  3. Welfare derived from 'quality of life' factors.

Show question

Question

What is the human development index?

Show answer

Answer

The human development index (HDI) is a macroeconomic indicator proposed by the United Nations. It is made up of three different factors: life expectancy, mean and expected years of schooling, and GNI per capita.

Show question

Question

What is the maximum value for a country's HDI?

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Answer

1

Show question

Question

Name three key factors that impact growth and development.

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Answer

  1. Investment
  2. Education
  3. Healthcare

Show question

Question

Which of the following is NOT a barrier to growth and development?

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Answer

Redistributive policy

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Question

Name an example of a policy that might be used to reduce the risk of market failure that arises as a result of economic growth.

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Answer

The use of taxation to eliminate the negative externalities that arise as a result of production or fiscal policies that encourage the redistribution of income and wealth (ie. progressive taxation). The equitable distribution of income is generally regarded as an indicator of economic development.

Show question

Question

Economic growth is an increase in the ________ of a country's economy.  

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Answer

total output

Show question

Question

___________ assesses not only the change in output of the economy but also the quality of the output. 

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Answer

Economic development

Show question

Question

Economic growth takes into account qualitative factors such as the improvement of living standards or access to healthcare and education.

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Answer

False

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Question

____________ is a short-term measure.

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Answer

Economic growth

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Question

___________ is measured through both qualitative and quantitative measures.  

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Answer

Economic development

Show question

Question

Economic growth is concerned with sustainability.

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Answer

False

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Question

Economic development = ________ + standards of living 

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Answer

economic growth 

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Question

Only quantitative metrics are required to measure economic growth.

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Answer

True

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Question

According to the Rostow model, the "take-off" is the 

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Answer

3rd stage

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Question

The Rostow's model starts with

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Answer

Traditional society

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Question

Traditional societies were limited in terms of technological development, but rich.

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Answer

True

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Question

In the ________ stage of the Rostow's model, they are able to allocate the increased economic output to produce social welfare, or in other words, economic development. 

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Answer

final

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Question

"These three factors combined can be used as an indicator of welfare as they make up total economic welfare in a country's national economy." What are the three factors mentioned here?

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Answer

  1. Welfare that has been acquired from the goods and services produced and purchased in the economy.

  2. Welfare gained from public and merit goods.

  3. Welfare derived from 'quality of life' factors.

Show question

Question

HDI is made up of 3 factors such as:

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Answer

Life expectancy, mean and expected years of schooling, and GNI per capita. 

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