Economic Development

DIFFERENCE BETWEEN ECONOMIC
GROWTH AND DEVELOPMENT

Difference between Economic Growth and
Development
• Economic growth means an increase in real national
income / national output.
• Economic development means an improvement in the
quality of life and living standards, e.g. measures of
literacy, life-expectancy and health care.
• Ceteris paribus, we would expect economic growth to
enable more economic development. Higher real GDP
enables more to be spent on health care and education.
• However, the link is not guaranteed. The proceeds of
economic growth could be wasted or retained by a
small wealthy elite.
Economic Growth
• Economic growth measures an increase in
Real GDP (real output). GDP is a measure of
the national income / national output and
national expenditure. It basically measures the
total volume of goods and services produced
in an economy.
Factors affecting Economic Growth in
Developing Countries
• Levels of infrastructure . e.g. transport and communication
• Levels of corruption. e.g what percentage of tax rates are actually
collected and spent on public services.
• Educational standards and labor productivity. Basic levels of literacy
and education can determine the productivity of the workforce.
• Levels of inward investment. For example, China has invested in
many African countries to help export raw materials, that its
economy needs.
• Labor mobility. Is labor able to move from relatively unproductive
agriculture to more productive manufacturing?
• The flow of foreign aid and investment. Targeted aid, can help
improve infrastructure and living standards.
• Level of savings and investment. Higher savings can fund more
investment, helping economic growth.
Economic Growth without Development
It is possible to have economic growth without development.

i.e. an increase in GDP, but most people don’t see any actual
improvements in living standards. This could occur due to:
• Economic growth may only benefit a small % of the
population. For example, if a country produces more oil, it
will see an increase in GDP. However, it is possible, that this
oil is only owned by one firm, and therefore, the average
worker doesn’t really benefit.
• Corruption. A country may see higher GDP, but the benefits
of growth may be syphoned into the bank accounts of
politicians
Economic Growth without Development
• Environmental problems. Producing toxic chemicals will lead to an
increase in real GDP. However, without proper regulation, it can also
lead to environmental and health problems. This is an example of
where growth leads to a decline in living standards for many.
• Congestion. Economic growth can cause an increase in congestion.
This means people will spend longer in traffic jams. GDP may increase
but they have lower living standards because they spend more time
in traffic jams.
• Production not consumed. If a state-owned industry increases
output, this is reflected in an increase in GDP. However, if the output
is not used by anyone then it causes no actual increase in living
standards.
• Military spending. A country may increase GDP by spending more on
military goods. However, if this is at the expense of health care and
education it can lead to lower living standards.
CAUSES OF ECONOMIC
GROWTH
Causes of Economic Growth
• Economic growth means an increase in real
GDP. Economic growth means there is an
increase in national output and national
income.
• Economic growth is caused by two main
factors:
– An increase in aggregate demand (AD)
– An increase in aggregate supply (productive
capacity)
Demand-side Causes
• In the short term, economic growth is caused by an
increase in aggregate demand (AD). If there is spare
capacity in the economy, then an increase in AD will
cause a higher level of real GDP.
• AD= C + I + G + X- M
• C= Consumer spending
• I = Investment (gross fixed capital investment)
• G = Government spending
• X = Exports
• M = Imports
Graph showing increase in AD
Factors which affect AD
• Lower interest rates – Lower interest rates reduce the cost of
borrowing and so encourages consumer spending and firms to
invest. Lower interest rates also reduce mortgage payments and
so increase the disposable income of consumers.
• Increased wages. Higher real wages increase disposable income
and encourage consumer spending.
• Increased government spending (G). e.g. government investment
on building new roads or increased spending on welfare benefits,
which increase disposable income.
• Devaluation. A fall in the value of the exchange rate (e.g. Pound
Sterling) makes exports cheaper and increases the quantity of
exports (X). A depreciation also makes imports more expensive,
reducing quantity of imports and making domestic goods
relatively more attractive.
Factors which affect AD
• Confidence. Increased consumer confidence encourages
households to spend by either running down savings or taking
out more personal credit. It enables higher spending (C).,
which encourages spending (C).
• Lower tax. Lower income tax will increase the disposable
income of consumers and increases consumer spending (C).
• Rising house prices. A rise in the price of houses creates a
positive wealth effect. Homeowners who see a rise in the
value of their houses will be more willing to spend
(remortgaging house if necessary)
• Financial stability. If there is financial stability and banks are
willing to lend, then firms will be more willing to invest and
investment will increase aggregate demand.
Long-term Economic Growth
• This requires an increase in the long-run aggregate
supply (productive capacity) as well as AD.
Reasons for increased LRAS or Potential
Growth
LRAS or potential growth can increase for the
following reasons:
• Increased capital. e.g. investment in new
factories or investment in infrastructure, such as
roads and telephones.
• Increase in working population, e.g. through
immigration, higher birth rate.
• Increase in labour productivity, through better
education and training or improved technology.
Reasons for increased LRAS or Potential
Growth
• Discovering new raw materials. For example,
finding oil reserves will increase national output
• Technological improvements to improve the
productivity of capital and labour e.g.
Microcomputers and the internet have both
contributed to increased economic growth. In the
future, economic growth may come from new
technology such as Artificial intelligence (AI) which
enables robots to take the place of human workers.
Other factors affecting Economic Growth
• Economic and political stability. Stability is

important for reassuring firms it is a good idea
to invest in increasing capacity. If we see a rise
in uncertainty, confidence tends to fall and
this can cause firms to delay investment.
• Low inflation. Low inflation is a good climate
for encouraging business investment. High
inflation increases volatility.
COST OF ECONOMIC GROWTH
Costs of Economic Growth
• Economic growth means an increase in real GDP
– an increase real incomes. This is usually
considered beneficial, but there are also
potential costs of economic growth such as:
• Inflation
• Boom and bust economic cycles
• Current account deficit
• Environmental costs – pollution, loss of non-
renewable resources
• Congestion
• Potential of widening inequality.
Potential Costs of Economic Growth
1. Inflation
If Aggregate Demand (AD) increases faster
than Aggregate Supply (AS), then economic
growth will lead to higher inflation as firms
put up prices. Economic growth tends to
cause inflation when the growth rate is above
the long run trend rate of growth. It is when
demand increases too quickly that we get a
positive output gap and firms push up prices.
Graph showing economic growth caused by rising AD leads to
inflation.
2. Boom and bust economic cycles

If economic growth is unsustainable then high
inflationary growth may be followed by a
recession. This occurred in the UK in the late
1980s and early 1990s.
However, if economic growth is at a sustainable
rate, this will not occur. For example, between
1993 and 2007, both economic growth and
inflation were at a sustainable rate.
In this diagram we have AD increasing at the same rate as
LRAS. In this case, we get economic growth without inflation.
3. Current account deficit
Increased economic growth tends to cause an increase in spending
on imports, therefore, causing a deterioration on the current
account.
4. Environmental costs
Increased economic growth will lead to increased output and
consumption. This causes an increase in pollution. Increased
pollution from economic growth will cause health problems such
as asthma and therefore will reduce the quality of life. Economic
growth also means greater use of raw materials and can speed up
depletion of non-renewable resources. Economic growth can also
lead to problems of congestion as more people can afford to buy a
car, but it is hard to increase the supply of roads to meet demand.
5. Inequality
Higher rates of economic growth have often resulted
in increased inequality because growth can benefit a
small section of society more than others. For
example, those with assets and wealth will see a
proportionally bigger rise in the market value of rents
and their wealth. Those unskilled without wealth may
benefit much less from growth.
However, it depends upon things such as tax rates
and the nature of economic growth. Economic growth
can also be a force for reducing absolute and relative
poverty.
6. Diseases/problems of affluence
With rising living standards it can cause
unintended consequences. For example, with
rising incomes, there are more goods to steal.
Also, high growth can make people more
materialistic – which encourages crime. Crime
rates have risen since the 1930s. Also, higher
incomes enable people to afford more food –
this is a factor behind rise in obesity and health
related problems.

Economic Development

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DIFFERENCE BETWEEN ECONOMIC

GROWTH AND DEVELOPMENT

It is possible to have economic growth without development.

• Economic and political stability. Stability is

2. Boom and bust economic cycles

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