Economic Growth vs Economic Development

Economic growth and economic development are related concepts but have distinct meanings. Here are the key differences between the two:

Economic Growth:

Economic growth refers to an increase in the production of goods and services within an economy over a specific period. It is typically measured by the growth rate of the Gross Domestic Product (GDP), which represents the total value of all goods and services produced within a country's borders.

Key features of economic growth include:

Quantitative Measure: Economic growth primarily focuses on the quantitative expansion of economic output. It is concerned with increasing the size of the economy and measuring changes in factors such as GDP, industrial output, employment levels, and income.

Narrow Focus: Economic growth typically emphasizes the expansion of the production capacity and the overall level of economic activity. It is often driven by factors such as investment, technological progress, increased productivity, and improved efficiency.

Income and Output: Economic growth is commonly associated with an increase in per capita income and the overall level of economic output. It is often measured by indicators like GDP per capita or real GDP growth rates.

Economic Development:

Economic development, on the other hand, goes beyond the narrow focus of economic growth and incorporates broader aspects of human well-being and societal progress. It encompasses qualitative improvements in various dimensions of economic, social, and environmental conditions.

Key features of economic development include:

Qualitative Measure: Economic development encompasses not only the quantitative expansion of economic activity but also the improvement of living standards, social welfare, and overall human development. It includes factors such as education, healthcare, poverty reduction, infrastructure development, and environmental sustainability.

Broad Focus: Economic development takes into account social, political, and institutional factors that influence the well-being of individuals and societies. It recognizes the importance of equitable distribution of income, reducing poverty, enhancing social justice, promoting gender equality, and fostering inclusive institutions.

Human Development: Economic development emphasizes the capabilities and opportunities available to individuals, focusing on aspects such as education, healthcare, access to basic services, and overall quality of life. Measures such as the Human Development Index (HDI) consider indicators beyond GDP, including education, life expectancy, and income distribution.

As a result, the economy can operate at its full potential at 3 different points. B, C or D. If the output of the economy increases from  A -> B, we would say this is economic growth without development, as we are now producing more capital goods (10 -> 18 units of Capital Goods) but the same amount of merit goods (8). 

If the output increases from A -> C, we could say the economy is now experiencing both economic growth and economic development. This is because the amount of both capital goods produce (10 -> 15) and merit goods produced (8 ->10) has increased.

Finally, if the output increased from A -> D, we could say this economy is experiencing economic development as the amount of merit goods produced is rising (8 -> 12) whilst capital goods remain constant (10) 

Relevance of GDP (PPP) and GNI (PPP) in Economic Development

Both GDP (PPP) and GNI (PPP) are useful for understanding a country’s economic development, but they offer different insights into economic well-being and living standards. Here’s why each metric matters:

GDP (PPP) and Economic Productivity

• Insight into Domestic Production: GDP (PPP) focuses on the productive capabilities within a country. A high GDP (PPP) suggests strong domestic economic activity, with ample resources for creating jobs, investing in infrastructure, and driving economic growth.

• Relevance in Development: For many developing countries, a high GDP (PPP) can signal progress toward industrialization, economic diversification, and improved domestic capacity for goods and services. For instance, countries like China have focused on increasing GDP (PPP) through domestic manufacturing and service sectors, which creates jobs and raises the overall standard of living.

GNI (PPP) and National Income

• Insight into Income and Wealth: GNI (PPP) captures all income earned by citizens, whether earned at home or abroad. In countries with significant overseas employment, such as the Philippines and India, remittances contribute heavily to GNI, boosting total income available for residents and enhancing the standard of living.

• Relevance in Development: GNI (PPP) is particularly useful for understanding economic resilience, especially in developing countries. When GNI (PPP) is higher than GDP (PPP), it indicates reliance on foreign income, which can be beneficial for local economies, providing stability and additional funds for education, healthcare, and infrastructure.

When One is Bigger Than the Other: What it Means for Development

For analysing economic development and individual prosperity, GDP (PPP) per capita and GNI (PPP) per capita are generally more informative. These indicators better capture average income, quality of life, and standards of living and are more useful in understanding how economic output or income translates to benefits for the average citizen.

For a broad analysis of a country’s economic power or capacity, total GDP (PPP) and GNI (PPP) figures are suitable, especially in comparisons of global influence or market size.

GDP (PPP) is Higher than GNI (PPP) (GDP > GNI)

A higher GDP (PPP) than GNI (PPP) suggests that the country’s economic activity is primarily domestically driven, with minimal foreign income inflows. This could be due to a small expatriate community, few overseas investments, or limited reliance on remittances.

In this case, the economy’s growth relies more on internal resources, which can be a sign of strong domestic production and economic independence. However, it may also mean limited access to additional income sources that can help reduce poverty and stimulate local spending.

GNI (PPP) is Higher than GDP (PPP) (GNI > GDP)

When GNI (PPP) exceeds GDP (PPP), it indicates that a significant portion of the nation’s income comes from abroad, either through remittances or investments. This is common in countries with many citizens working overseas or countries with substantial foreign-owned assets.

A higher GNI (PPP) reflects a reliance on foreign income, which can have both positive and negative effects. On the positive side, remittances and foreign investments bring additional funds, which can enhance residents’ quality of life and support local economies. However, excessive dependence on foreign income can be risky, as economic issues in other countries could reduce these income sources.

Measuring Economic Development

Economic development is a comprehensive concept that goes beyond simple economic growth. Unlike growth, which primarily measures an increase in GDP or income, economic development encompasses improvements in living standards, education, health, and income equality. Understanding how we measure this development is essential for policymakers, as it reveals areas needing intervention to improve overall well-being.

Why Do We Measure Economic Development?

• Track Progress: Helps in monitoring improvements or declines in living conditions over time.

• Identify Gaps: Reveals disparities within and between countries, aiding targeted policy interventions.

• Guide Policy: Informs governments on areas to allocate resources effectively, such as healthcare, education, or infrastructure.

Measuring economic development accurately is challenging because it involves multiple dimensions, from financial measures to quality of life indicators. There are two main types of indicators: single and composite indicators, each with distinct roles and limitations.

Single indicators focus on measuring one specific aspect of a country’s economic development, such as income or output. These indicators offer straightforward and easily interpretable insights, typically regarding economic productivity or income levels. However, while useful for comparing basic economic conditions, single indicators often lack depth and do not account for social, environmental, or equity dimensions.

Examples of Single Indicators

Gross Domestic Product (GDP) per Capita

GDP per capita is calculated by dividing a country's total economic output (GDP) by its population, providing an average income per person.Often used as a measure of economic productivity and average wealth in a country A high GDP per capita, as seen in countries like Norway and Switzerland, often correlates with a higher standard of living, though it may not reflect income distribution.

Gross National Income (GNI) per Capita

GNI per capita includes all income earned by a country’s residents, including foreign investments and remittances, divided by the population. Indicates the total income of a country’s residents, showing the influence of global financial flows on the domestic economy. In countries with significant expatriate populations, such as the Philippines, GNI can be notably higher than GDP due to remittances from overseas workers.

Gini Coefficient (Income Inequality)

The Gini coefficient measures income distribution within a country, with values ranging from 0 (perfect equality) to 1 (maximum inequality). Highlights income inequality, showing how evenly wealth is distributed among a population. Countries like South Africa have high Gini coefficients, indicating significant income disparity, while Nordic countries typically have lower values, reflecting more equitable income distribution.