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What is Economic Growth? Answered! | Economics

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Get the answer of: What is Economic Growth?

The two words ‘growth’ and ‘development’ are often used inter­changeably in economic discussion. In short, economic growth means more output, and economic development implies both more output and changes in the technical and institutional arrangements by which it is produced.

De­velopment economics is concerned with the economic and political process necessary for effecting rapid structural and institutional transformations of entire societies in a manner that will most efficiently bring the fruits of economic progress to the broadest segments of their populations.

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Therefore, the role of government and the need for some degree of centralised or, at least, coordinated economic planning and broad-based economic policies to bring about such rapid changes become a vital component of develop­ment economics.

Growth implies not only more output, but also more inputs and more efficiency, i.e., an increase in output per unit of input. Economist’s use two measures — real national income and per capita real national income — to compare how economies grow over time.

Essentially, economic growth is an increase in real national income. As more goods and services are produced, the real income of a nation (usually measured in terms of gross national product or gross domestic product) increases and people are able to consume more. Growth of national income is described as an annual rate of percentage change in real GNP or GDP per annum.

To calculate the percentage change in national income over a year, we simply divide the change in national income by the value of national income at the beginning of the year, and then multiply the quotient by 100. For instance, suppose India’s GNP was Rs. 400 crore in 1996 and Rs. 420 crores in 1997.

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So, the economy grow 5% in 1997:

Percentage change in national income = Change over year/Beginning value × 100

Though, related economic growth and economic development are not the same thing. While economic growth means more output per capita of essentially the same collection of goods and services, economic develop­ment means ‘progress’ usually represented by some different and presumbly ‘better’ life style or collection of goods.

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Development is something more than that. It is ‘growth’ plus ‘change’. Development implies changes in the structure of outputs and in the allocation of inputs by sectors. Such as the transformation of a predominantly agrarian society into a highly industri­alised nation (like that of Britain at the time of the Industrial Revolution).

Economic development is symptomized structural change such as a fall in the share of the primary sector and a corresponding size in the share of the secondary and tertiary sectors in national in the (output and employ­ment, as Colin chart has pointed out.

Economic growth plus other changes that are judged to constitute ‘pro­gress’ or to make life ‘better’. Thus, while economic growth (which is measured by the annual rate of growth of per capita income) has quantita­tive dimension, typically, economic development includes distribution and quality-of-life considerations.

If, with economic growth, there is income inequality or regional imbalance, hardly any development is said to have occurred. For development to be meaningful economic growth must touch the lower half of the income distribution. If, with economic growth, the rich gets richer and the poor poorer or the figures prosper while the people suffer, there is no development as such.

In fact, economic development is measured by certain indices related to health, education and welfare. Economic development is symptomized by a rising life expectancy at birth, a rising literacy rate, equalising trends in the distribution of income and wealth, rising numbers of educational and health service personnel per thousand people, falling death and illness rates from contagious and deficiency diseases (such as T.B.) and falling depend­ence on subsistence agriculture.

Other kinds of indices are:

(1) The rising consumption of steel and electricity per capita,

(2) Rising ratios of saving and investment to total income, and

(3) Rising proportions of the representative family budget available for purchases other than food.

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In the language of M. P. Todaro, “while economic progress is an essential component of development, it is not the only one. This is because develop­ment is not purely an economic phenomenon. Ultimately, it must encom­pass more than the material and financial side of people’s lives.”

In fact, development may be perceived as a multi-dimensional process involving the reorganisation and reorientation of entire economic and social systems. As Todaro put it, “In addition to improvements in incomes and output, it typically involves radical changes in institutional, social and administrative structures, as well as in popular attitudes, sometimes even customs and beliefs. Finally, although development is usually defined in a national context, its widespread realisation may necessitate fundamental modifications of the international economic and social systems.”

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