4.1: The nature of economic growth and development



  1. Economic growth is the growth of real output over time. It is measured as growth in real gross domestic product (GDP).
  2. Economic development is a multidimensional concept involving improvements in standards of living, reduction in poverty, improved health and education, reduced income inequalities, increased employment opportunities and freedom,
  3. Dependency ratio is the percentage of old-age adults and below-working-age children relative to the number of working-adults in a country.
  4. Poverty cycle is any combination of events of growth and development that forms a circular chain of events starting and ending in poverty.
  5. Purchasing Power Parity (PPP) exchange rate attempts to equate the purchasing power of currencies in different countries. It is calculated by comparing the prices of identical goods and services in different countries.

Sources of economic growth


1. Natural factors

  • Increase the quantity and/or quality of a factor of production → Increase in potential growth.
  • Most countries tend to improve the quality of their natural factors, rather than quantity.
  • Quality of land can be improved by fertilization, better planning of land usage, improved agricultural methods.

2. Human capital factors

  • Encourage population growth or increasing immigration levels → Increase quantity of human capital.
  • Process for population growth is long term.
  • Quality of human capital can be improved by improving health care, education for children, vocational training, provision of fresh water and sanitation and re-training for the unemployed.

3. Physical capital and technological factors

  • Improving the quantity and/or quality of physical capital → Achieve economic growth.
  • Physical capital includes factory buildings, machinery, shops, offices, motor vehicles.
  • Social capital includes schools, roads, hospitals and houses.
  • Quantity of physical capital can be affected by level of saving, domestic and foreign investment, government involvement.
  • Quality of physical capital can be affected by higher education, research and development, access to foreign technology and expertise.
  • Improved extraction of primary products may be important for economic growth because it increases the quantity of a factor of production.
  • Capital widening exists when extra capital is used with increased labor, but the ratio of capital per worker doesn’t change. The total production will rise, but productivity is likely to remain unchanged.
  • Capital deepening exist when there is an increase in capital for each workers due to improvements in technology → leads to improvements in labour productivity and thus increases total production.


4. Institutional factors

  • Examples include adequate banking system, a structured legal system, a good education system, reasonable infrastructure, political stability and good international relationships.


Outcomes of higher levels of economic growth in terms of economic development


1. Higher incomes

  • Higher incomes → higher GDP per head of the population → improves living standards.
  • However a consequence of this is that it depends on how family income in being distributed and thys there could be a group of people that see little or no improvement.


2. Improved economic indicators of welfare

  • Economic growth → Higher averages of economic indicators of welfare, such as average life expectancy, average years of schooling and literacy rate.
  • Determined by indexes such as HDI
  • HDI is a measure of economic development and welfare. It is scored between 0 and 1. The closer the level to 1, the higher the level of HDI.


3. Higher government revenue

  • Increased GDP → Increased government revenues from taxation.
  • This can improve their provision of merit goods such as education, healthcare and infrastructure.


4. Creation of inequality

  • Economic growth → Increased GDP → Increased inequality.
  • Gap between the rich and poor grows especially in developing countries.


5. Negative externalities and lack of sustainability

  • Economic growth → Pollution, which is a negative externality.
  • People tend to use cars and planes for travel as income increases, which creates negative externalities of consumption and production where the market prices for goods and services do not reflect the full cost to society and to the environment.
    • As economies grow, demand for fuels increase → more emissions and GHGs → increases climate temperatures which is devastating to the coral reefs, forests, etc.
  • Effect of negative externalities in developing countries include:
    • Access to safe water will become even more dangerous.
    • Tropical diseases spread to other places.
    • Droughts and floods become more frequent and intense.
    • Food production is likely to suffer.
    • Rising sea levels could affect millions of people.
  • Sustainability is not working.


Common characteristics of developing countries


1. Low standards of living

  • Indicators include high poverty levels, high levels of inequality, very poor housing, low standards of health, high infant mortality rates, high levels of malnutrition and lack of education.


2. Low levels of productivity

  • Causes include education standards, low levels of health, lack of investment in physical capital, lack of access to technology.


3. High rates of population growth and dependency burden

  • Developing countries have crude birth rates that are more than double than the rates of developed countries.
  • Child dependency ratio = % of population under 15

% of population 15 to 64

  • Old age dependency ratio = % of population over 65

% of population 15 to 64

  • Developed countries are considering to increase the retirement age in order to keep people working longer and to thus reduce the old age dependency ratio.


4. High and rising levels of unemployment and underemployment

  • Developing countries tend to have higher rates of unemployment, between 10-20%.
  • However, the true nature of unemployment can be understood when categorizing three groups of unemployed people.
    • People who have been unemployed for a long time that they gave up searching.
    • Hidden employment: private business/ work + illegal workers.
    • People who would like to work for full time, but work for part-time at the moment.


5. Substantial dependence on agricultural products and primary product exports

  • Developing countries over depend on primary sector products as their main source of income and GDP.


6. Prevalence of imperfect markets and limited information

  • Economies in developing countries have been moving towards market oriented approach to economic growth.
  • Market oriented approach doesn’t work in many countries because they face imperfect markets and imperfect knowledge.
  • They lack necessary factors to work efficiently, such as lacking a sufficient banking system, legal system, adequate infrastructure, accurate information systems that lead to the misallocation of resources and misinformed purchasing decisions.


7. Dominance, dependence and vulnerability in international relations

  • Developing countries are dominated by developed countries most of the time due to economic and political power they have.
  • Also, developing countries are dependent on trade, access to technology, aid and investment and so are vulnerable on the international stage as they are dominated by decisions of developed countries.


Factors of diversity among developing countries


1. Resource endowment

  • Human resources can be undernourished and poorly educated, but the developing country be endowed with resources. Vice versa can also happen.
  • Countries in Africa are perfectly endowed with resources, such as oil and diamonds, but they have high levels of poverty.
  • Countries such as Japan and Singapore and poorly endowed with resources, but their economy has been well for last couple of decades.


2. Historical background

  • Extent to the effect of colonization of developing countries, by developed countries, depends on the duration of the colonization and whether the independence was given to the developing country free or not.
  • Colonization on some countries, such as Singapore and Hong Kong, have positive effects.
  • Other countries, such as Vietnam and Nigeria, have negative effects.


3. Geographic and demographic factors

  • Some developing countries, such as India and China, tend to be very big while other developing countries, such as Jamaica, Nauru, tend to be small in size.
  • Population also tends to differ as China and India are highly populated and Fiji tends to have low no. of people living there.


4. Ethnic and religious breakdown

  • Developing countries have a wide range of ethnic and religious diversity → Higher chance of political unrest and internal conflict.
  • Examples include Egypt, India, Morocco.


5. Structure of industry

  • Many developing countries, such as Ethiopia, rely on primary sector products for their income and economic growth.
  • Other developing countries, such as India and Bangladesh, rely more on secondary sector products.
  • Some countries are mainly exporters of of services in the form of tourism.


6. Per capita income levels

  • Developing countries tend to have varied per capita income levels.
  • Malaysia and Thailand tend to have high per capita income levels while Ethiopia and Sierra Leone tend to have low per capita income levels.


7. Political structure

  • Political structures in developing countries are democracies, monarchies, military rule, single party states, theocracies and transitional political systems.
  • It is difficult to provide one basic solution to make developing countries developed due to varied political structures.


International development goals

Remember the acronym: PEAR DICE!!


  1. Promote gender equality and empower women.
  2. Eradicate extreme poverty and hunger.
  3. Achieve universal primary education.
  4. Reduce child mortality.
  5. Develop a Global Partnership for Development.
  6. Improve maternal health.
  7. Combat HIV/AIDS, malaria and other diseases.
  8. Ensure environmental sustainability.