The difference between economic growth and development

Economic growth refers to an expansion in a country's gross domestic product (GDP), which measures the total value of goods and services produced. However, economic development is a broader idea that focuses on improving people's overall welfare and living standards, rather than just increasing economic output.

Key factors in measuring economic development

Economic development involves judgements about what makes a country "better off".

It considers aspects beyond simple growth, such as:

• The size of the economy and how it affects living standards.
• Population factors, including size and health.
• Quality of life elements, like access to services and environmental conditions.

For example, growth that harms the environment, such as pollution from factories damaging rivers, is seen as less positive than sustainable growth. Similarly, development that improves roads and services in remote areas benefits more people than growth that only helps rich city dwellers.

Using national income figures to measure development

National income statistics provide a way to assess a country's economic progress by looking at averages per person, which helps compare living standards across nations.

Types of national income measures

• Real GDP per capita - This is the total economic output divided by the population, adjusted for inflation. It gives an idea of average income and is useful for tracking changes in living standards as populations grow.
• Real gross national income (GNI) per capita - Similar to GDP per capita, but includes income from abroad. Higher figures usually indicate better living standards.

Adjustments and limitations of national income data

To make fair comparisons between countries, purchasing power parity (PPP) is applied. This accounts for differences in what money can buy in various places, as currencies have different values.

However, these measures have drawbacks:

• They ignore non-monetary aspects, such as time for relaxation or general health.
• Unofficial economic activities, like informal work not reported to authorities, are not included.

Alternative measures like GPI and HDI

Beyond basic income figures, other indicators provide a more complete view of development by including social and environmental factors.

Genuine progress indicator (GPI)

GPI starts with GDP but adjusts for harmful effects and adds positive elements ignored in standard measures.

Adjustments in GPI:

• Subtracts negatives, such as costs from pollution or environmental damage.
• Adds positives, like the value of unpaid work (e.g., volunteering or household tasks).

This helps governments focus on true welfare rather than just output growth. A limitation is that valuing things like clean air or community help can be subjective and hard to measure accurately.

Human development index (HDI)

Created by the United Nations, HDI combines several factors to show progress in human welfare.

Components of HDI:

• Health - Measured by average life expectancy at birth.
• Education - Assessed by the average years of schooling and expected years of education.
• Standard of living - Based on real GNI per capita, adjusted for PPP.

HDI scores range from 0 to 1, where above 0.8 means very high development and below 0.5 indicates low development. Countries can reach similar scores in different ways, such as prioritising healthcare over education.

Income and wealth distribution

In most economies, resources are not shared equally, which affects development. Income is money earned over time, while wealth is the total value of owned assets.

Defining income and wealth

• Income - Money received regularly, such as from jobs, investments, or rents.
• Wealth - The worth of possessions like homes, land, savings, or stocks.

Wealth tends to be more unevenly spread than income, and it can generate more income over time, widening gaps.

Factors influencing income distribution

• Differences in demand for skills, leading to higher pay for some jobs.
• Dependence on government support for those without work.
• Systems of taxes and benefits that redistribute money.
• Variations in pay between public and private jobs.
• Differences in earnings across regions.

Characteristics of wealth distribution

• Assets often grow in value faster than incomes rise.
• In some places, wealth is not taxed as heavily as income, making it harder to redistribute.
• Wealthy people can build more wealth through investments, creating a cycle.

Measuring and impacts of inequality

Inequality refers to uneven sharing of income or wealth, which can be shown through diagrams and calculations. It often hinders overall development.

Tools for measuring inequality - Lorenz curve

This graph shows how income is distributed across a population.

Key features of the Lorenz curve:

• The x-axis represents the cumulative percentage of people, from poorest to richest.
• The y-axis shows the cumulative percentage of total income.
• A straight diagonal line means perfect equality (everyone has the same share).
• The further the curve bends away from this line, the greater the inequality.

Tools for measuring inequality - Gini coefficient

This number summarises inequality from the Lorenz curve.

$\text{Gini coefficient}=\frac{\text{area A}}{\text{area A}+\text{area B}}$

Where:

• Area A = Space between the equality line and the Lorenz curve
• Area B = Space under the Lorenz curve

Scores range from 0 (total equality) to 1 (one person has everything). Many countries have seen rising inequality over the past few decades.

Impacts of inequality on development

High inequality is often seen as negative, though views differ: some think it's natural or motivates progress, while others say it slows growth.

How inequality can slow development:

• Poor people may not start businesses due to:
  • Lack of money to invest.
  • Difficulty building savings.
  • No assets to use as loan security.
  • Limited access to cheap financial services.
• Wealthy individuals might send money abroad, reducing local investment.
• It can lead to social issues, like higher crime or health problems.

In poorer countries, low-income groups suffer more from economic downturns. Richer nations have less extreme poverty but may see relative poverty, where people feel left behind.

Main causes of inequality