Economic Growth: Economic growth refers to an increase in the output of goods and services in a country over a specific period. This is usually measured by the rise in GDP (Gross Domestic Product). Key factors that contribute to economic growth include:
- Discovery of New Resources: Finding new mineral or metal deposits increases the availability of raw materials for production.
- Workforce Expansion and Improvement: An increase in the number of people in the workforce or enhancements in the quality of the workforce through training and education boosts productivity.
- Increase in Capital and Machinery: More investments in capital goods like machinery and infrastructure can lead to higher production capacity.
- Technological Advancements: Innovations and improvements in technology make production processes more efficient and can create new industries.
Economic Development: Economic development is a broader concept that goes beyond mere economic growth. It includes improvements in living standards, reduction in poverty, and enhancement of overall well-being. Measures of economic development typically focus on:
- Real Income per Head: An increase in GDP per capita, which indicates that people on average are earning more.
- Literacy and Education Standards: Higher levels of education and literacy rates signify better access to knowledge and skills.
- Quality and Availability of Housing: Improved housing conditions reflect better living standards.
- Environmental Standards: Higher environmental standards indicate a cleaner, healthier environment.
- Life Expectancy: Longer life expectancy is a sign of better healthcare and living conditions.
Differences between Economic Growth and Economic Development
Economic Growth:
- Focuses solely on increasing output and economic productivity.
- Does not necessarily consider the equitable distribution of wealth.
- May lead to environmental degradation, pollution, and resource depletion.
Economic Development:
- Encompasses economic growth along with improvements in health, education, and living standards.
- Aims at reducing poverty and inequality.
- Emphasizes sustainable practices to ensure resources are available for future generations.
The Relationship between Inequality and Economic Growth
- Impact on Poverty Reduction:
- Lower initial inequality levels tend to lead to more effective poverty reduction during periods of economic growth.
- High initial inequality means economic growth has a lesser impact on reducing poverty.
- Savings Rate:
- The marginal savings rate can change with income levels; as income decreases, the rate of savings typically falls.
- Credit Market Constraints:
- Poor individuals often face difficulties in obtaining loans, limiting their ability to invest in opportunities that could improve their economic status.
- Political Economy:
- Governments sometimes implement policies aimed at reducing inequality, such as redistribution policies. However, poorly designed policies can lead to high inflation, large deficits, and lower growth.
- There is no definitive empirical relationship between inequality and economic growth, but generally, higher economic growth reduces poverty levels.
Growth Effect vs. Redistribution Effect
- Growth Effect: When people’s incomes grow without changes in income distribution, poverty levels tend to decrease.
- Redistribution Effect: If inequality rises while the mean income remains constant, poverty levels will increase.
Conclusion
Understanding the nuances between economic growth and economic development is essential for policymakers. While economic growth focuses on increasing output and productivity, economic development aims to improve overall living standards, reduce poverty, and promote sustainable practices. Addressing inequality effectively can enhance the benefits of economic growth, leading to more substantial and inclusive development outcomes.