INTRODUCTION TO ECONOMIC DEVELOPMENT Informal Ins7tu7ons

ECONOMIC DEVELOPMENT - They are those that are not designed to

regulate conduct, but oEen end up doing
Development economics is a branch of so as members seek to conform to
economics that focuses on improving fiscal, communal standards.
economic, and social condi8ons in developing
countries. Development economics considers Formal Ins7tu7ons
factors such as health, educa8on, working
condi8ons, domes8c and interna8onal policies, - They are those that are created with the
inten8on of governing human behavior.
and market condi8ons with a focus on improving
condi8ons in the world's poorest countries.
THEORIES OF ECONOMIC DEVELOPMENT
TYPES OF ECONOMIC DEVELOPMENT
Theory – systema8c explana8on of
Mercan7lism
interrela8onships among economic variables.
Mercan8lism is thought to be one of the earliest
Purpose – to explain causal rela8onships among
forms of development economics that created
these variables, to understand world beKer and
prac8ces to promote the success of a na8on.
provide basis for policy.
Economic Na7onalism
Mercan7lism and physiocracy
Economic na8onalism reflects policies that focus
• Developed in 17th century, paralleling the
on domes8c control of capital forma8on, the
rise of the na8on state.
economy, and labor, using tariffs or other
barriers. It restricts the movement of capital, • It is a na8onalist economic policy that is
goods, and labor designed to maximize the exports and
minimize the imports for an economy.
Linear Stages of Growth Model
• The policy aims to reduce a possible
The linear stages of growth model was used to
current account deficit or reach a current
revitalize the European economy aEer World
War II. This model states that economic growth account surplus, and it includes
can only stem from industrializa8on. The model measures aimed at accumula8ng
monetary reserves by a posi8ve balance
also agrees that local ins8tu8ons and social
aGtudes can restrict growth if these factors of trade, especially of finished goods.
influence people's savings rates and investments. • Mercan8lism promotes government
Structural-Change Theory regula8on of a na8on's economy for the
purpose of augmen8ng and bolstering
The structural-change theory focuses on state power at the expense of rival
changing the overall economic structure of a na8onal powers.
na8on, which aims to shiE society from being a
primarily agrarian one to a primarily industrial Economic Na7onalism
one. • promulgated in the 19th century related
to the development and industrializa8on
of the United States and Germany,
notably in the policies of the American
 System in America and the Zollverein an entrepreneurial class forms, and
(customs union) in Germany. that the secular concept
of manufacturing develops, with
• Economic na8onalists oppose
only a few sectors developing at this
globaliza8on and some ques8on the
point.
benefits of unrestricted free trade. They
favor protec8onism and advocate for v Take-off
self-sufficiency.
- Take-off then occurs when sector led
• Economic na8onalism tends to growth becomes common and
emphasize industrializa8on (and oEen society is driven more by economic
aids industries with state support), due processes than tradi8ons.
to beliefs that industry has posi8ve
v Drive to maturity
spillover effects on the rest of the
economy, enhances the self-sufficiency - AEer take-off, there follows a long
and poli8cal autonomy of the country, interval of sustained if fluctua8ng
and is a crucial aspect in building military progress, as the now regularly
power. growing economy drives to extend
modern technology over the whole
Linear-stages-of-growth model
front of its economic ac8vity
• It is one of the major historical models of
v Age of High mass consump8on
economic growth.
- The age of high mass consump8on
• The model postulates that economic
refers to the period of contemporary
moderniza8on occurs in five basic
comfort afforded many western
stages, of varying length.
na8ons, wherein consumers
v Tradi8onal society concentrate on durable goods, and
hardly remember the subsistence
- Tradi8onal socie8es are marked by
concerns of previous stages.
their pre-newtonian understanding
and use of technology. These are • Rostow asserts that countries go through
socie8es which have pre-scien8fic each of these stages fairly linearly, and
understandings of gadgets, set out a number of condi8ons that were
agriculture is predominant and likely to occur in investment,
society has a hierarchical structure. consump8on and social trends at each
state.
v Precondi8ons for take-off
Structural-change theory
- The precondi8ons to take-off
according to Rostow, refers to that • It deals with policies focused on
the society begins commiGng itself changing the economic structures of
to secular educa8on, that it enables developing countries from being
a degree of capital mobiliza8on, composed primarily of subsistence
especially through the agricultural prac8ces to being a "more
establishment of banks modern, more urbanized, and more
and currency that
 industrially diverse manufacturing and • AEer the Great Depression, economists
service economy.” felt it was important to measure
macroeconomic status to predict and
• Structural-change approaches to
prevent future economic downturns.
development economics have faced
• Established NIPA
cri8cism for their emphasis on urban
development at the expense of rural NIPA - Na7onal Income and Product Accounts
development which can lead to a
substan8al rise in inequality between o Collects data on produc8on, income,
internal regions of a country. investment, and savings
o Maintained by the Department of
Interna7onal dependence theory Commerce
o This data is reported and used to
• Interna8onal dependence theories
influence government policy
gained prominence in the 1970s as a
reac8on to the failure of earlier theories GDP (Gross Domes7c Product)
to lead to widespread successes in
interna8onal development. • Most important measure of wealth
• GDP is the dollar value of all FINAL
• These theories view developing goods and services produced within a
countries as being economically and country’s borders in a given year.
poli8cally dependent on more powerful, o Final goods are those sold to
developed countries that have an consumers
interest in maintaining their dominant o Intermediate goods are those
posi8on. used in the produc8on process
(not calculated)
Neoclassical theory
“Within a Country’s Borders”
• Neoclassical theories argue that
governments should not intervene in the • GDP does not include products made by
economy; in other words, these theories a US company overseas
are claiming that an unobstructed free • GDP does include a car made in the US
market is the best means of inducing by Toyota (Japanese company)
rapid and successful development.
Nominal vs. Real GDP
• These different takes on neoclassical
theory are the free market approach, • Nominal GDP is GDP measured in
public-choice theory, and the market- current prices
friendly approach. o Does not always measure an
increase in output
GROSS DOMESTIC PRODUCT
To measure growth from year to year,
What makes a na8on wealthy? economists measure Real GDP
• Rank the countries based on what you • Real GDP is measured by calcula8ng GDP
perceive makes the na8ons wealthy with constant price (accounts for
according to the decsrip8ons. infla8on).
Why Measure Growth?
Limita7ons of GDP o Expansion…period of economic growth
measured by a rise in real GDP

• Growth being a steady, long term rise

in GDP

• Plen8ful jobs, falling unemployment

• Peak…height of economic expansion

• Contrac8on…economic decline marked by

Influences on GDP falling real GDP

Aggregate Supply • Trough…boKom of contrac8on

o The total amount of goods and services Contrac7ons with Different Characteris7cs
available in an economy at all price levels
• Recession…real GDP falls for two straight
Aggregate Demand quarters

o The total amount of goods and services o Prolonged period of economic

demanded in an economy at all price levels contrac8on

Expansion o Usually a rise in unemployment

- It is a period of economic growth • Depression…a severe recession

measured by a rise in real GDP
• Stagfla8on…decline in real GDP, combined with
Contraction a rise in price level

- It is an economic decline marked by Keeping the Cycle

falling real GDP Typically, a sharp rise or fall in a key indicator
sparks a series of events
Is it Accurate?
4 main indicators
Many things to calculate in GDP and much is o Business investment
missed or overlooked
o Interest rates and credit
However, it does provide us with a baseline
of stats and over 8me, shows important o Consumer expecta8ons
trends
o External shocks
The measurement may not be accurate but it
Business Investment
is constant
• Spending by business or non-spending
Business Cycles
will change the cycle
• Period of macroeconomic expansion followed
Interest Rates and Credit
by contrac8on
• Low interest rates will lead to spending
• Phases of Business Cycles
• High interest rates will lead to saving
Consumer Expecta7ons • Increased popula8on without increase in
produc8on will lower the standard of
• Consumers may spend or save
living
• Like other things, consumer’s choices
drive the economy Government

External Shocks • Taxes can increase or decrease capital

deepening
• Unpredictable and disrupt aggregate
supply o It is dependent upon what the
o Wars o Floods taxes are spent on
o Natural disasters
Foreign Trade
o Oil shortage Can be posi8ve
o Discoveries • Foreign trade and running a trade deficit can
o Good weather actually be good in some ways

Economic Growth o If the goods being traded enhance capital

• A change in GDP over 8me illustrates deepening
growth o In the long run…this capital deepening can
• For economic growth to occur, it should increase produc8vity and help to pay back debt
change with popula8on that results from a trade deficit
• Real GDP per capita measures such
growth and the standard of living

Quality of Life Technological Progress

• GDP measures standard of living but not • An increase in efficiency gained by

quality of life producing more output from more
o Pollu8on inputs
o Stress o Technology
o Nutri8on
• Also does not tell how GDP is distributed o Realignment
o Poor sec8ons of the country
o Knowledge
o Poor percentage of popula8on
• Technological progress is measured by
Capital Deepening
looking at the amount of GDP that
• The process of increasing capital per worker increases from technology and not labor

o Goal is to increase produc8vity

o Savings and inves8ng lead to capital

deepening

Popula7on

• Increased popula8on without capital

deepening will lower the standard of
living