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Economic Development

Economic Development

Ever wonder what distinguishes a developed country from a developing country? Or what causes countries to become developed? Economic development is a multidimensional economic tool that tells us a lot about an economy and country. In addition, the focus of economic development exists on all levels within a country: locally, regionally, by state or province and, of course, nationally. Keep reading to see how this multidimensional tool that is found at all levels of the country, works!

Economic Development Meaning

What does the term 'economic development' mean? The word development indicates growth, progress or change. Economic development, if you have guessed it right, also refers to the same, but in regards to economics.

Economic development focuses on improving the standard of living of the individuals of an economy through the implementation of policies, programs and socioeconomic goals.

Often times economic development is used in reference to the development of developing and underdeveloped countries, however, it can also be used for developed countries as well. The reason for this is that all economies should work toward improving the standard of living, increasing real income, life expectancy, quality and availability of education and healthcare and reducing poverty for the members of the country.

Economic Development Process

Walt Rostow, a renowned American economist, developed a linear spectrum that showcased the different stages which exist in economic development process. He suggested that every country exists on some level on the spectrum and then transitions upward in each stage throughout the economic development process.

The five stages in Rostow's economic development process are:1

  1. Traditional Society
  2. Preconditions to Take-off
  3. Take-off
  4. Drive to Maturity
  5. Age of High Mass consumption

Figure 1 below shows an overview of the five stages of the Rostow model:

Economic Development Rostow model overview StudySmarterFigure 1. Rostow model overview, StudySmarter Originals

Traditional Society

In traditional society stage, Rostow suggested that the economy is based on agriculture and there is no scientific or technological intervention. Labor is distributed over the various different roles that would be required for the agriculture industry. For example, most people's jobs in this stage of economic development would be focused on farming, planting, raising and harvesting crops. In addition, due to the lack of technological advancements, these roles become fixated and long-term as they are time-consuming, which also leads to them being passed down to future generations. In this stage, the economy is focused more locally and regionally.

Preconditions to Take-off

Moving into the preconditions to take-off stage, the economy shifts from locally and regionally to national and international as a result of the availability of education. Exposure through education instills hope for progress in society which then results in changes in practice. For example, an economy in this stage will develop and use manufacturing for its output. This will not only result in more efficiency and an increase in output, but also stimulate more profit.

Take-off

Economies in the take-off stage have been introduced to industrialization. Now the economy is headed towards sustained economic growth. Although the economic growth is for a short period of time, a resulting benefit of the economic growth experienced in this stage is that it allows economies to self-sustain. The economy in this stage is characterized by specialization in key industries and these key industries will then be the driving factor of the experienced economic growth.

Drive to Maturity

In drive to maturity stage, economies are transitioning from a few key industries to more integrated and varying industries. As a result of the transition, economies require a skilled workforce. In addition, technology takes the forefront with investments being focused on research and development, all leading towards economic growth. The drive to maturity stage takes place over a long period of time but the benefits of this stage, such as a rise in the standard of living, make the length of time for the development worth it.

Age of High Mass consumption

As the name suggests, in this stage economies are experiencing an increasing amount of consumption. Economies in this stage have high amounts of surplus resulting from an increase in real income per capita which allows them to consume far more than they need. In addition, this stage allows for the service industries and social welfare to expand, which is also a contributing factor to economic growth.

Economic Development Indicators

There are economic development indicators which are quantitative measures that are used to distinguish a developed country from a developing country.

To start off, let's define a developed and developing country.

A developed country is characterized by sustained economic growth resulting from per capita GDP, technological advancements, level of industrialization and an overall greater standard of living.

A developing country is characterized by low income per capita or low per capita GDP, with a minimal industrial base and investment, low human capital index and weak or unstable governing bodies and institutions.

Economic indicators

The economic indicators for economic development are:

  • Real GDP per capita
  • Unemployment rate
  • Inflation
  • National Debt
  • Trade Balance

Real GDP per capita

The gross domestic product per capita is an indicator that provides insights into the level of aggregate output produced by an economy which also equates to the aggregate national income. The formula for real GDP per capita is:

Economic Development Real GDP per capita formula StudySmarter

Developed countries have a higher GDP per capita as they tend to have a smaller population and a higher real GDP due to greater access to technology and investment. Whereas developing countries have a lower GDP per capita as they have a greater population and lower real GDP due to limited technology and investment available.

Unemployment rate

The unemployment rate is an indicator that provides insights regarding the unemployed individuals in the labor force who are actively looking for employment. The formula to calculate the unemployment rate is:

Developed countries have a lower unemployment rate than developing countries due to various factors such as access to education and training, size of the population, stability and opportunities in the job market, and the existence and quality of social welfare programs, to name a few.

Inflation

Inflation is an indicator that provides insights into the changes in the price of goods and services as a percentage of an increase in the cost of living. It also provides insight into the purchasing power of the economy's currency. Higher inflation is indicative of lower purchasing power of the currency, in other words, fewer goods and services can be purchased for the same dollar value. The formula to calculate inflation is:

Economic Development Inflation Rate Formula StudySmarter

Where:

  • Inflation rate is measured by Consumer price index (CPI). The consumer price index is a tool which is used to measure the changes in the weighted average prices of a represented basket of goods and services.
  • Target year (T) is the CPI of the current year or the CPI of the year being compared to the base year
  • Base year (B) is the CPI for the year to which the current year CPI is being compared to

Developing countries have a higher inflation rate than developed countries due to various factors such as volatile exchange rates alongside an unstable central bank to manage monetary policy. In addition, higher inflation rates in developing countries are due to rapid economic growth which creates a chain reaction of increased disposable income, increases in demand and as a result an increase in prices.

National Debt

The national debt of a country is an indicator which provides insights into the net accumulation of the borrowing of the government from domestic and foreign lenders. Developed countries have a lower national debt vs. developing countries due to various factors, the main one being, that developing countries need the capital to stimulate economic growth and tend to borrow from developed countries. In addition, the national debt can be difficult to pay off over time due to it accumulating from one generation to another.

Trade Balance

The trade balance of a country is an indicator which provides insights into the net exports of a country. Developing countries have greater net exports as they export more goods than developed countries as means of economic growth.

Human Development Index

The human development index is the most used indicator for economic development. It takes into account three dimensions for economic development:

  1. Standard of living - measured by income per capita
  2. Education - measured through literacy rate
  3. Longevity- measured through average life expectancy and infant mortality

Levels of poverty

The level of the country's population living below the poverty line determines the level of economic development of the country. Developing countries have higher levels of poverty due to greater population size and lower standards of living.

Literacy rate & Education

The literacy rate of a country is the percentage of the population that can read and write. There is a positive correlation between higher literacy rates and economic development. Access to education provides insights into the percentage of the population that has obtained primary, secondary, and tertiary education. An educated population can contribute to the economic development of an economy.

Average life expectancy

The average life expectancy indicator provides insights into an estimated age a person can expect to live. Developed countries have a higher life expectancy due to their existing and increasing economic development in comparison to developing countries.

Infant mortality rate

The infant mortality rate provides insights into the probability of a child dying before the age of one. Developing countries have a higher infant mortality rate due to the higher level of poverty, and lower access to healthcare.

Economic Development and Economic Growth

Economic development and economic growth may often go hand in hand, but that is not always the case. They are in essence different.

Economic development focuses on the standard of living, it is inclusive of both qualitative and quantitative measures. The goal of economic development is to foster an economy where its members not only benefit from wealth but also from education, health and prosperity, allowing economic development to be a multidimensional economic tool.

In contrast, economic growth focuses on the increase in the output produced by an economy from one period to another. Economic growth solely considers opportunities to stimulate growth within an economy to increase real GDP.

Economic Development Examples

Here are some examples of economic development in some of the different sectors of the economy:

  • Financial - establishing a stabilized central bank system that can implement and monitor monetary policies will result in economic development.
  • Healthcare - healthcare reform, accessibility to healthcare services and facilities to all members of the economy will result in economic development.
  • Education and training - funding and access to public education and training services, especially for the minority and low-income population will result in economic development.
  • Transportation & Infrastructure - building or repairing highways, bridges, and roads, alongside the acceptability of public transportation services will result in economic development.

Economic Development - Key takeaways

  • Economic Development focuses on improving the standard of living of the individuals of an economy through the implementation of policies, programs and socioeconomic goals.
  • The five stages in Rostow's economic development process are:
    1. Traditional Society
    2. Preconditions to Take-off
    3. Take-off
    4. Drive to Maturity
    5. Age of High Mass consumption
  • The indicators for economic development include:
    • Real GDP per capita
    • Unemployment rate
    • Inflation
    • National Debt
    • Trade balance
    • The human development index
  • Economic development focuses on the standard of living, it is inclusive of both qualitative and quantitative measures.
  • Economic growth focuses on the increase in the output produced by an economy from one period to another.

References

  1. Admin. (2018, July 18). Country-level strategy: Is there a route for the development of countries? Evodio Kaltenecker. Retrieved July 6, 2022, from https://evodiokaltenecker.com/country-level-strategy-is-there-a-route-for-the-development-of-countries/

Frequently Asked Questions about Economic Development

The role of economic development is to improve the standard of living of individuals of an economy and country. 

Economic development is important because it's the only way forward. In order for countries and economies to grow, the focus on economic development is key as it will for a better standard of living for all members of the country.

A few examples of economic development are:

-  funding or making education and training accessible to the members of the economy 

- focusing on building a strong infrastructure such as highways, bridges and roads which will aid in  smooth transportation for imports and exports

- accessibility to healthcare services and facilities to all members of the economy 

- establishing a stabilized central bank system that can implement and monitor monetary policies 



The 5 stages of economic development are:


  1. Traditional Society 
  2. Preconditions to Take-off
  3. Take-off
  4. Drive to Maturity
  5. Age of High Mass consumption


Final Economic Development Quiz

Question

How would you define economic development?

Show answer

Answer

Economic Development focuses on improving the standard of living of the individuals of an economy through the implementation of policies, programs and socioeconomic goals.

Show question

Question

What are the 5 stages of economic development?

Show answer

Answer

  1. Traditional Society 
  2. Preconditions to Take-off
  3. Take-off
  4. Drive to Maturity
  5. Age of High Mass consumption

Show question

Question

An economy in the traditional society stage of economic development  will have which of the following characteristic:

Show answer

Answer

the economy is based on agriculture 

Show question

Question

An economy in the preconditions to take-off stage of economic development  will have which of the following characteristic:

Show answer

Answer

the economy develop and use manufacturing for its output

Show question

Question

An economy in the take-off stage of economic development will have which of the following characteristic:

Show answer

Answer

the economy has been introduced to industrialization 

Show question

Question

An economy in the preconditions to drive to maturity stage of economic development  will have which of the following characteristic:

Show answer

Answer

the economy is transitioning from a few key industries to more integrated and varying industries

Show question

Question

An economy in the age of high mass consumption stage of economic development will have which of the following characteristic:

Show answer

Answer

the economy is experiencing an increased amount of consumption 

Show question

Question

Developed countries have a higher GDP per capita as they tend to have a smaller population and a higher real GDP due to greater access to technology and investment. Whereas developing countries have a lower GDP per capita as they have a greater population and lower real GDP due to limited technology and investment available. 

Show answer

Answer

True

Show question

Question

The unemployment rate is an indicator that provides insights regarding the employed individuals in the labor force who are actively looking for employment


Show answer

Answer

False

Show question

Question

Higher inflation is indicative of lower purchasing power of the currency, in other words, fewer goods and services can be purchased for the same dollar value.


Show answer

Answer

True

Show question

Question

The national debt of a country is an indicator which provides insights into the net accumulation of the ------------------- of the government from domestic and foreign --------------------.


Show answer

Answer

borrowing; lenders

Show question

Question

The trade balance of a country is an indicator which provides insights into the -------------------  -------------------- of a country.


Show answer

Answer

net exports

Show question

Question

What are the three dimensions that the human development index takes into account?

Show answer

Answer

  1. Standard of living - measured by income per capita 
  2. Education - measured through literacy rate
  3. Longevity- measured through average life expectancy and infant mortality 

Show question

Question

Economic development focuses on the standard of living, it is inclusive of both qualitative and quantitive measures.


Show answer

Answer

True

Show question

Question

How would you define economic growth? 

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Answer

Economic growth focuses on the increase in the output produced by an economy from one period to another.

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Question

What's regional economic development?

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Answer

When the region's business growth helps the enhancement and development of regional growth.

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Question

Regional economic development may also be viewed as part of a larger endeavor to eliminate regional inequities by helping to develop economic areas and employ their people. 

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Answer

True

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Question

One of the main reasons regional economic development is so important is because it's clear that productive economies across the world are structured regionally.


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Answer

True 

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Question

Why is it seen as a better idea to use regional strategies for economic growth rather than federal?

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Answer

Because regions better recognize their strengths and what is vital to them.

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Question

Underprivileged communities are urged to enhance their financial, social, and environmental well-being through understanding the value of their area's resources and residents. 


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Answer

True

Show question

Question

Wealth generation via economic progress improves living standards and is thus seen as a _________for regional development.


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Answer

requirement

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Question

Mild regional variations can stimulate economic activity and increase efficiency.


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Answer

True

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Question

Name some of the strategies for increasing regional economic development.

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Answer

Educating people, keeping/attracting talent, entrepreneurship, diversity, and industrial development.

Show question

Question

Educating the workforce is one of the least commonly used strategies for economic development


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Answer

False

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Question

What are some of the ways companies can attract/keep talent?

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Answer

By offering flexibility, speeding up the recruitment process so as to secure top candidates, and creating and presenting more advancement opportunities.

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Question

As startups grow and get bigger, plenty of new jobs are created which increases the _______ of the local economy.


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Answer

productivity

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Question

Startups are expensive!

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Answer

False

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Question

Firms that promote diversity have a stronger foundation in the markets than those that don't promote diversity.


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Answer

True

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Question

How can companies appeal to people of different genders, from different backgrounds, etc?

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Answer

By increasing the diversity of their team!

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Question

The United States Regional Economic Development Authority (USREDA) is a recognized leader in the processing of investment-based immigration, providing diverse ______ possibilities.


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Answer

investment

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Question

Explain economic development

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Answer

Economic development entails programs, policies, and actions that strive to enhance a community's economic well-being and quality of life.

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Question

Explain funding economic development.

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Answer

Funding economic development refers to the numerous programs, typically created and managed by some level of government, intended to boost economic productivity, employment, and quality of living for low-income individuals.

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Is it fiscal policy or monetary policy that funds economic growth?

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Answer

It is typically accomplished through fiscal policies.

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Question

Define fiscal policy.

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Answer

Fiscal policy refers to the government's use of its expenditure and taxes to influence economic activity.

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Define monetary policy.

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Answer

Monetary policy refers to the control by the Federal Reserve of the amount of money circulating in an economy

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Question

Why tax revenue is one of the main sources of funding economic development?

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Answer

Because economic development programs are typically related to fiscal policy rather than monetary policy, any source of tax revenue can become a source of economic development funding.  

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Question

What are some of the economic development programs the government can fund?

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Answer

Building infrastructure, hiring individuals to work government jobs, or subsidizing (providing money to assist) private businesses that will employ out-of-work individuals.  

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Question

What is the source of funding for economic development programs at a national level?


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Answer

Grants provided by the federal government.

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Question

What are some sources of funding for economic development?

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Answer

  • grants
  • sales taxes
  • property taxes
  • gasoline taxes
  • bonds 

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Question

What are tax credits?

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Answer

Tax credit refers to the sum that can be offset against a tax liability.

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Question

Are tax credit a way of funding economic development?

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Answer

Yes.

Show question

Question

What is the role of economic funding in development?

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Answer

Such funding is crucial because it helps local businesses develop further, hiring more people and generating more goods and services. More income for families means more consumption takes place in the economy, providing opportunities for further development.

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Question

What is a grant?

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Answer

A grant refers to monetary funds given to businesses and ideas to stimulate economic growth by the federal government.

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Question

What is first nation economic development funding?

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Answer

First nation economic development funding helps indigenous entrepreneurs, businesses, communities, and organizations by providing monetary funds.

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Question

Give an example of federal funding for an economic development program for needy families.

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Answer

The Pell Grant is a federal grant to low-income college students that is available for up to six years of higher education. As a grant, it does not need to be repaid. 

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