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 Home » Tutorials » Economics » Economic Growth and Development

Economic Growth and Development




Economies grow and develop, they expand and advance, and they progress and prosper. There are phases when they decline too, and there are economies that experience continuous decay. If one considers long stretches of human history, one knows that economies (civilizations) disappeared altogether. We will not take into account such long stretches of time. We shall not consider too distant a past either. We will leave them to historians, may be, economic historians.
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Let us take a normal view. We shall then accept decline as an occasional, temporary phenomenon. We shall, therefore, use positive terms only. Of the positive terms, which have been used to describe changes as well as to prescribe changes, two have survived. They are growth and development. Because we shall primarily look at nations and countries as economies, and use terms such as ‘economic growth’ and ‘economic development’. We shall often try to distinguish ‘economic’ from ‘noneconomic’ though there are cases where it becomes difficult to do so.

In order to accommodate decline in level, we use phrase ‘negative growth’ and to describe perverse tendencies, we may use words ‘de-development’ or ‘maldevelopment’ though, we will not have occasions to use them.

You may find that, sometimes in many scientific treatises and very often in colloquy, words ‘growth’ and ‘development’ are used in interchangeable fashion. But, normally a distinction is made between the two, particularly in economics literature. It is maintained along the following lines. You might have noticed that the word ‘growth’ is used to describe increase in stature or size. It is used to describe a uni-dimensional change, as in the case of stature of a child or a uniform expansion in all directions, as in the case of size of a balloon. Even when we refer to development of a child, we refer to various dimensions of its personality. When we do not refer to dimensional aspects we use the word ‘growth’. Even schools and institutes, colleges and universities, hotels and hospitals grow. But, we are often quick to point out certain features that are not captured by word ‘growth’. It is rare, if ever, that growth takes place without development or development takes place without growth. In most cases, they would accompany each other. There may be cases when one is dominant and the other is dormant. In such cases, people talk of growth without development or development without growth. It is, therefore, good to make an analytical distinction between the two.

Economic Growth

Let us take here a comprehensive view of the economy, taking all activities together, and call its growth as economic growth.

Let us look at it from the view point of production. The total quantum of goods and services produced in an economy in a given year is referred to as Gross Domestic Product. Let us measure it at factor cost and write it in its abbreviated form GDPFC. The GDPFC in 2000-01 was around Rs 17,00,000 crore. This is a flow of goods and services produced during the year 2000-01, measured in value terms. We may be interested in knowing whether the flow this year is larger than the flow last year. If so, we should know the measure of the flow last year. In order to see that we measure the ‘real’ change in flow, we should compute the magnitude of flows in both the years in the same prices. The prices may belong to 2000-01 or 1999-2000 or to 1993-94; the point is that the prices should relate to only one common year so that we measure only the change in flow of output, not a mix of change in output and change in prices. Such GDPs are said to be measured at constant prices. Suppose you look into a recent issue of the National Accounts Statistics published by the Central Statistical Organisation and find that at 1993-94 prices, the GDPFC for 1999-2000 and 2000-01 are Rs.10,00,000 crore and Rs.10,60,000 crore respectively. The growth in flow called GDPFC in absolute terms is Rs.60,000 crore. In relative terms it is 6 per cent and it is called growth rate. If we prepare a whole series for 10, 20 or 50 years then we often add words ‘per annum’ or ‘per year’ to growth rate. The growth rate is often expressed in terms of per cent per annum. This is a positive change; there could be a negative change also.

Suppose, we look at a twenty-year period and use yearly figures for flow of output of goods, which is measured in terms of GDPFC at constant prices. The growth rates calculated on yearly basis would differ from year to year. Shall we use nineteen year-to-year figures of growth rate, some of which may be negative, to describe the change? Or, should we just compare the initial figure with the final figure? If we adopt the former, how to summarise the nineteen figures? If we adopt the latter, it is possible that one of these (initial or final) figures is just ‘abnormal’ as it does not fall in line. Would it not be a good idea to speak of general tendency and ignore abnormal fluctuations around the general tendency of increase? Economic growth should, therefore, be taken as a long-term tendency reflected by increase in flow of final goods and services produced by the economy.

If there is a general tendency of growth but there are occurrences of decline, the rates of growth will be negative in certain years. Shall we then say that, while the potential of economy to produce is continuously increasing, the potential is sometimes not realised? There could be various reasons for occasional decline. In economies that depend to a large extent on external trade conditions in other countries may affect the realisation. Monsoon may widely fail in certain years and economy may get derailed for a while. Internal demand may for a variety of reasons fail to make full use of the potential. Some economists put too much emphasis on supply potential and ignore demand conditions. They define economic growth as long-term increase in production potential of the economy. Some economists feel that it is growth of per capita GDPFC, not GDPFC, that should be used to gauge the growth of an economy. But the point to be noted is that economic growth is a long-term phenomenon about the change in total economic activity of an economy.

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