Transcript of "Economic growth and development and Income"
Economic growth and development
Economic growth may be one aspect of economic
development but it is not the same
A measure of the value of output of goods and services
within a time period
A measure of the welfare of humans in a society
Factors Affecting Economic Growth
• Economic Factors
1. Natural Resources- For economic growth, the existence of natural resources in abundance is
2.Capital Formation- Capital may be defined as the stock of physical reproducible factors of
production. Capital may be human capital, raw material capital, infrastructure capital, etc.
3.Technological Progress- There is no doubt that technological progress is a very important factor in
determining the rate of economic growth.
4.Human Resources-A good quality of population is very important in determining the rate of
economic progress. Instead of a large population a small but high quality of human race in a
country is better for development.
1.Political Factors Political stability and strong administration are essential and helpful in modern
economic growth. It is because of political stability and strong Economic Development and
Growth administration that the developed countries have reached the level of highest economic
growth in the world.
2.Social and Psychological Factors Social factors include social attitudes, social values and social
institutions which change with the expansion of education and transformation of culture from
one society to the other.
3.Education -It is now fairly recognised that education is the main vehicle of development. Greater
progress has been achieved in those countries, where education is wide spread.
Human Development Index
HDI – A socio-economic measure
Focus on three dimensions of human welfare:
Longevity – Life expectancy
Knowledge – Access to education, literacy
• Standard of living – GDP per capita:
Purchasing Power Parity (PPP)
Developing countries have less
standard of living and income.
Moreover, they have a high rate
of birth and death.
Developing countries also have a
high rate of unemployment and
inflation because of the few
investments in the country.
Furthermore, GDP per capita
(average income) is very
low,therefore education and
health aren't sufficiently provided
examples-india, sri lanka, bhutan ,
In developed countries the rate of
birth and death is almost the same
therefore the population isn't
big, therefore money is supplied
among people over the poverty
rate, which means there is a good
standard of living. This makes
education and health more sufficient
to the economy. The developedd
countries also have a huge amount of
exports which increases the ,money
flow in the country, and the imports
decrease which increases aggregate
demand(GDP) or national income.
This will increase the GDP per
, Germany, Britain, etc.
MEASURES OF ECONOMIC GROWTH
It is the sum of total values of all final goods and services produced within the national
Territory during a financial year.
•Does not include intermediate goods and services
•Not a measure of standard of living
•A measure of total economic activity of a country
Nominal GDP and adjustments to GDP
•The raw GDP figure as given by the equations above is called the nominal or current, GDP.
•When one compares GDP figures from one year to another, it is desirable to compensate
for changes in the value of money .
GDP real=GDP current x (value of money in current year/base year)
Real GDP growth rate=[Real GDP(n)-Real GDP(n-1)]/Real GDP(n-1)
GDP Deflator= NGDP/RGDP
•Depreciation represents the amount needed in order to replace the depreciated assets.
•While GDP’s scope is according to location ,GNP’s scope is according to ownership/nationals.
GNP=GDP + Net factor income from abroad
Net factor income =Factor income receipts-Factor income payments
•A measure of national output based on the cost of factors of production.
Factors of Production:
MP=Factor Cost + Indirect Taxes - Subsidy
1.Product Approach—Sums the o/ps of every class of enterprise to arrive at the total
2.Expenditure Approach—Value of total product=People’s total expenditures in buying
3.Income Approach---Sum of producer’s incomes=value of their products
•Market value of all final goods and services calculated during 1 year
•also called Net Product or Value added method.
1.Estimating the Gross Value of domestic Output out of the many various economic activities;
2.Determining the intermediate consumption, i.e., the cost of material, supplies and services
used to produce final goods or services; and
3.Deducting intermediate consumption from Gross Value to obtain the Net Value of
Net Value Added = Gross Value of output – Value of Intermediate Consumption.
Value of Output = Value of the total sales of goods and services + Value of changes in the
•The sum of Net Value Added in various economic activities is known as GDP at factor cost.
•GDP at factor cost plus indirect taxes less subsidies on products is GDP at Market Price.
GDP(Y)= C + I + G + (X-M)
C=Consumption by private citizens
1.Consumption by Private citizens(C)
Examples include food, rent, jewelry, gasoline, and medical expenses but does not include
the purchase of new housing.
business investment in equipment, but does not include exchanges of existing assets
Examples include construction of a new mine, purchase of software, or purchase of machinery
and equipment for a factory. Spending by households (not government) on new houses is also
included in Investment.
the sum of government expenditures on final goods and services.
It includes salaries of public servants, purchase of weapons for the military, and any investment
expenditure by a government
Goods and services produced for other nation’s consumption
Must be deducted to avoid counting foreign supply as domestic
Net Exports= Exports(X)-Imports(M)
Y= C+ I + G + NX
Goods and services provided by governments and non-profit organizations free of charge or
for economically insignificant prices are included. The value of these goods and services is
estimated as equal to their cost of production.
Goods and services produced for own-use by businesses are attempted to be included
Renovations and upkeep by an individual to a home that she owns and occupies are included
Services provided by banks and other financial institutions without charge or for a fee that
does not reflect value imputed to them ,are included
•GDP calculated this way is also called GDI
•Measures GDP by adding incomes that firms pay households for factors of production they
hire- wages for labour, interest for capital, rent for land and profits for entrepreneurship.
These income components sum to net domestic income at factor cost.
GDP= NDI at FC + Indirect taxes - Subsidies + Depreciation
Total factor income = Employee compensation + Corporate profits + Proprietor's income +
Rental income + Net interest
Yet another formula for GDP by the income method is:
GDP= R+I + P +SA +W
where R : rents
I : interests
P : profits
SA : statistical adjustments (corporate income taxes, dividends, undistributed corporate
W : wages
CROSS BORDER COMPARISION AND PPP
The level of GDP in different countries may be compared by converting their value in
national currency according to either the current currency exchange rate, or the purchasing
power parity exchange rate.
•Current currency exchange rate is the exchange rate in the international foreign
•Purchasing Power Parity: accounts for the relative effective domestic purchasing
power of the average producer or consumer within an economy.
Sell an entire CPI basket in one country, convert the cash at the currency exchange
market rate and then re-buy the same basket of goods in the other country with the
CPI: Consumer Price Index
• Money or benefits that an individual or business receives
in exchange for providing goods or services, or through
• Income is consumed to fuel day-to-day expenditures.
• In businesses, income can refer to a company's
remaining revenues after all expenses and taxes have
been paid. In this case, it is also known as "earnings".
• Most forms of income are subject to taxation.
• There are three broad types of income:
• Money made by anyone (other than winning lottery or
receiving inheritance) will fall into one of these income
• Each income category has its own set of benefits and
• Any income that is generated by working.
• Salary or money made from hourly employment is considered
• Activities generating earned income include:
Working a job
Owning a small business
Any other activity that pays based on time/effort spent
• Disadvantages –
– once you stop working, you stop making money.
– earned income is taxed at a higher rate than any other type of income.
• Advantages –
– don’t need any startup capital in order to make earned income.
• Any income generated by selling an investment at a higher
price than it was bought at.
• Activities generating portfolio income include:
Trading (buying/selling) Paper Assets
Buying and Selling Real Estate
Buying and Selling of any other Assets
• Disadvantages –
– requires a lot of knowledge and experience to make money trading
– little control over investments, other than the ability to buy or sell.
– requires startup capital.
– taxable at very high rates.
• Advantages –
– generates income at exponential rates.
• Any income generated from assets purchased or created.
• Activities generating passive income include:
Rental Income from Real Estate.
Creating and Selling Intellectual Property.
Affiliate or Multi-Level Marketing.
• Advantages –
passive income is generally recurring income.
investments allow the owners active control over the investment.
passive income investments often allow for favorable tax treatment.
investments can be funded using borrowed money.
• Income distribution is how a nation’s total GDP is distributed
amongst its population.
• The distribution of income within a community is represented
by the Lorenz curve.
• The Lorenz curve is closely associated with measures of
income inequality, the Gini coefficient.
• Lorenz curve is a simple way to describe
income distribution by a two-dimensional
• The x-axis of the curve is the cumulative
percentage of a community’s population
that is being considered.
• The y-axis of the Lorenz curve is the percent
of total income in the community.
HUMAN CAPITAL DEVELOPMENT
The Meaning of the Human Capital
• The success depends in large part on the people with higher level of
competence. In response, the people are becoming valuable assets.
• In the economic perspective, the capital refers to factors of production
used to create goods or services
• The human is the subject to take charge of all economic activities such
as production, consumption, and transaction.
• Thus, it can be recognized that human capital means one of production
elements which can generate added-values through inputting it.
Sources of Human Capital
• Investment in education
• Expenditure on health
• Expenditure on training
Relation between Human Capital and economic growth
• Human resources as a contributor to GDP
• Goals, objectives, plans and procedures made by organization
leads to productivity
• Skill-set of individuals engaged in production process and the
usage of techniques.
State of human capital formation in India
• The government plays a major role in deciding the polices of education in
reference to state government, local government and municipal
• Government role is to insure that the private providers of services like
health and education follows the standards as stipulated by the
• Different departments of education like NCERT and AICTE facilitate
institutions to provide educational services at different levels and to
promote growth in education sector.
• Similarly, the ministries of health and organizations like ICMR facilitate
medical and healthcare services to facilitate health sector.
What is rural development
It essentially focuses on action for the development of areas that
are lagging behind in the overall development of the village
economy. Some of the areas which are challenging and need fresh
initiatives for development in rural India include
• Development of human resources including
– literacy, more specifically, female literacy, education and skill
– health, addressing both sanitation and public health
• Development of the productive resources of each locality
• Infrastructure development like electricity, irrigation, credit, marketing,
• Special measures for alleviation of poverty
Importance of rural development in India
1. Improving agriculture is a must for industrialization. Agriculture is carried on in
villages, so rural development is needed to improve agriculture.
Industry needs a literate labor force. But most of the people live in villages (70% in
India). So rural development is needed to increase the education level of the
majority of the population.
3. Finally, rural development is needed to reduce the migration of people from
villages to cities. The current rate of rural-to-urban migration in India is
unsustainable. It is much more than the rate at which industrial jobs and urban
infrastructure are growing. So rural development is a must to slow down the ruralto-urban migration.
Facts related to rural development in India
• Credit and marketing schemes.
- As the time gestation between crop sowing and realization of income after production is
quite long, farmers borrow from various sources to meet their initial investment on
seeds, fertilizers, implements and other family expenses.
- India adopted a social banking system and multi agency approach to meet the needs of
• Emerging alternate marketing channels.
- Earlier the farmers directly sell their produce to
consumers, it increases their incomes.
- Several national and multinational fast food chains are increasingly entering into contracts
with farmers to encourage them to cultivate farm products of the desired quality by
providing them with not only seeds and other inputs but also assured procurement of the
product at the pre-decided prices.
• Diversification into productive activities.
- Diversification includes two aspects - one relates to change in cropping pattern and the
other relates to a shift of workforce from agriculture to other allied activities and nonagriculture sector.
- The need for diversification arises from the fact that there is greater risk in depending
exclusively on farming for livelihood and is necessary not only to reduce the risk from
agriculture sector but also to provide productive sustainable livelihood options to rural
- The diversification into productive activities are:
• Sustainable development.
Efforts in evolving technique which are eco friendly are essential for sustainable
development. It means to produce by meeting the requirements as made by the law as is
complying with nature.
Development that meets the need of the present generation
without compromising the ability of the future generation to meet
their own needs.
sustainable development aims at decreasing the absolute poverty
of the poor by providing lasting and secure livelihoods that
minimize resource depletion, environmental degradation, cultural
disruption and social instability.
The present generation can promote development that enhances
the natural and built environment in ways that are compatible with1. Conservation of natural assets.
2. Preservation of the regenerative capacity of the world’s natural
3. Avoiding the imposition of added costs or risks on future
According to Herman Daly, a leading environmental
economist, to achieve sustainable development, the
following needs to be done
1. Limiting the human population to a level within the
carrying capacity of the environment.
2. Technological progress should be input efficient and not
3. Renewable resources should be extracted on a
sustainable basis, that is, rate of extraction should not
exceed rate of regeneration.
4. For non-renewable resources rate of depletion should
not exceed the rate of creation of renewable
5. Inefficiencies arising from pollution should be corrected.
Strategies for sustainable development
Use of non-conventional sources of energy
LPG, Gobar gas in rural areas
CNG in urban areas
Solar power through photovoltaic cells
Problems in Employment
Share in Ouput and Employment of different sectors
Agriculture: 20% in GDP, 57% in Employ.
Industry: 23% in GDP,18% in Employ.
Services: 57% in GDP, 25% in Employ.
Problems in Employment
• There are 458 million workers in India in 2004-05
• Out of this 423 million workers are
informal/unorganised workers (92%).
• Growth in employment more in unorganised sector.
• Thus, quality of employment is a problem
• Workers in this sector do not have social security.
• Government is trying to provide minimum social
security to unorganized workers
Comparison between Economic development
in India and China
The Nature Of Economic Growth
The first aspect of this is the significant difference in the nature and
structure of growth in the two countries.
Growth measured in terms of GDP can be investment-driven
and/or consumption driven. In mature economies we can point to
the balance between the two.
The majority of developed economies see investment at around
20-25% of GDP. In the case of India, the investment share of GDP is
slightly above average for the industrialised world.
In China the position is very different, with investment accounting
for over 40% of GDP sustained over the past 10 years or so.
Structural change over four decades
• China: “classic” pattern, moving from primary to
manufacturing sector, which has doubled its share of
workforce and tripled its share of output.
• India: Move has been mainly from agriculture to services in
share of output, with no substantial increase in
manufacturing, and the structure of employment has not
changed much. Share of the primary sector in GDP fell from
60 per cent to 25 per cent in four decades, but share in
employment still more than 60 per cent.
Required changes in Development
phasing out of collectivized agriculture
gradual liberalization of prices
increased autonomy for state enterprises
creation of a diversified banking system
development of stock markets
rapid growth of the private sector
opening to foreign trade and investment
China has implemented reforms in a gradualist fashion. In recent
years, China has renewed its support for state-owned enterprises in
sectors it considers important to "economic security," explicitly
looking to foster globally competitive national champions.