Q. Economic growth in country X will occur if

• there is technical progress in the world economy
• there is population growth in X
• there is capital formation in X
• the volume of trade grows in the world economy

Answer: (c) there is capital formation in X

Notes:

• Capital formation (investment) brings additional income/production in the economy which enhances growth.
• The capital formation in any country boosts its development as investment activities increases resulting in high production, increase in per-capita income, employment generation, the standard of living, poverty reduction, etc.
• The increase in population has both pros and cons for the economy. If the population is skilled then it will generate more output for the economy. But in case if the economy itself is not in a position to stand still then in such case it will prove a burden to the country.
• Technical progress refers to the introduction of new and improved technologies for the production of goods and services. Despite having their advantages, when these technologies enter the market it requires a heavy investment in training workers and sometimes these technologies replace human beings resulting in unemployment.
• The volume of trade may be favourable or non- favourable depending upon the overall trade surplus or deficit.

Economic Growth

• Economic growth is an increase in the production of economic goods and services, compared from one period of time to another.
• It can be measured in nominal or real (adjusted for inflation) terms.
• Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used.

Ways to generate economic growth:

• The first is an increase in the amount of physical capital goods in the economy.
  • Newer, better, and more tools mean that workers can produce more output per time period.
• The second method of producing economic growth is technological improvement.
  • Improved technology allows workers to produce more output with the same stock of capital goods, by combining them in novel ways that are more productive.
  • Example: The invention and use of Petroleum became a better and more productive method of transporting goods in process and distributing final goods more efficiently.
• The third way to generate economic growth is to grow the labour force.
  • All else equal, more workers generate more economic goods and services.
• The last method is increases in human capital.
  • This means labourers become more skilled at their crafts, raising their productivity through skills training, trial and error, or simply more practice. Savings, investment, and specialization are the most consistent and easily controlled methods.

Economic Development

• Economic development is defined as a sustained improvement in material wellbeing of society.
• Economic development is a wider concept than economic growth.
  • Apart from growth of national income, it includes changes – social, cultural, political as well as economic which contribute to material progress.
  • It contains changes in resource supplies, in the rate of capital formation, in size and composition of population, in technology, skills and efficiency, in institutional and organizational set-up. These changes fulfil the wider objectives of ensuring more equitable income distribution, greater employment and poverty alleviation.
• In short, economic development is a process consisting of a long chain of interrelated changes in fundamental factors of supply and in the structure of demand, leading to a rise in the net national product of a country in the long run.
• On the whole, the economic growth is a narrow term.
  • It involves increase in output in quantitative terms but economic development includes changes in qualitative terms such as social attitudes and customs along with quantitative growth of output or national income.
  • But, Economic development without growth is almost inconceivable.

Differences between Economic Growth and Economic Development