Economic Growth, Development, and Global Economics Explained

Posted on Feb 6, 2025 in Economy

Economic Growth vs. Economic Development

Economic growth is a quantitative phenomenon, representing the actual increase in the product or income of an economy. The economic growth rate is calculated by comparing production across two periods.

Economic development is a qualitative phenomenon, representing the structural transformation that improves productivity and living standards. It includes economic and social changes, and progress for the people.

There’s a link between productivity and income. In the labor market, a worker’s income is linked to the value of their product. More productive workers receive higher incomes. Rising incomes lead to increased consumption and savings. Higher savings can lead to increased investment, further boosting productivity.

Sustainable development is a new conception of economic progress, introduced in the 1990s. It’s a growth rate that can be extended indefinitely without exploiting or degrading the environment, or producing excessive income inequality.

Limitations of GDP per Capita as a Measure of Development

Four main defects of “per capita income” or “GDP per capita” indicator to measure economic development level:

Statistical shortcomings: Statistics from underdeveloped countries often have low technical reliability or are non-existent.
GDP calculation issues: Items like the consumption of non-renewable resources are not considered.
The existence of the black or illegal economy, or the informal economy.
Income inequality: Income per capita may not reflect the reality of a country when income distribution is highly unequal.

Gini Index: Measuring Income Distribution

The Gini Index is calculated as: A / (A+B). It varies between 0 and 1. The lower the value, the more equitable the country’s income distribution.

Purchasing Power Parity (PPP) vs. Exchange Rates

It’s important to compare GDP using the “Purchasing Power Parity index (PPP)” instead of official exchange rates because exchange rates don’t reflect relative purchasing power. PPP takes into account the prices of goods in the country and in the international market.

PPP Exercise

a) PPP index = price of the product in country A / price of the product in country B; PPP index = 10/8 = 1.25 rupees/liras

b) Using the exchange rate, 100 million rupees equals 120 million liras. Calculating the GDP as: GDP of the country divided by the amount of population of that country.

GDP per capita A = 120M/1M = 120

GDP per capita B = 120M/1.5M = 80

Using the PPP, 100 million rupees equals 80 million liras.

GDP per capita A = 80M/1M = 80

GDP per capita B = 80M/1.5 = 80

The GDP calculated with the exchange rate shows a bigger GDP per capita for country A. But in reality, the GDP per capita is the same, as shown by the GDP per capita calculated with the PPP because PPP takes into account the prices of the goods in the country and in the international market.

Key Development Indices

Index of Multidimensional Poverty (IMP): Identifies multiple individual deprivations in education, health, and living standards.
Gender Inequality Index (GII): Reflects the disadvantages experienced by women in 3 dimensions (reproductive health, empowerment, and job market).
Human Development Index (HDI): Measures the average progress made by a country in 3 basic dimensions of human development (the enjoyment of a long and healthy life, access to education, and standard of living).
Inequality-adjusted Human Development Index (I-HDI): Adjusts the HDI with the inequality in the distribution of income.

The Vicious Circle of Poverty

The vicious circle of poverty is a theory that describes how underdeveloped countries generate a chain that prevents them from prospering due to a lack of different aspects. It starts with low savings because people spend most of their wages on necessary goods, leading to low investment. The lack of investment results in low productivity, generating very low incomes, which results in decreasing consumption, starting the chain again.

GDP per Capita of India

This graph represents the GDP per capita of India through the years, calculated with the official exchange rates (the line below) and with the PPP index (the line above). The GDP calculated with the official exchange rates is lower because exchange rates do not reflect the relative purchasing power of currencies for international comparisons, and the PPP index does.

Impact of Population Growth on Income per Capita

Fast population growth can hinder the increase of income per capita because a very young population pyramid raises dependency rates, retarding economic growth and preventing education and training development from spreading. Uneven distribution of income and wealth in developing countries reduces the possibilities of development. As population increases fast, it is more difficult for the income per capita to increase because there are not enough resources for everybody.

GDP per Capita and Price Levels

China and India have a low GDP per capita, leading to a low price level (that is why many companies prefer to offshore in China or India than in other countries, because prices there are much cheaper). Norway’s GDP per capita is way higher, which increases the prices too. The relative prices of Spain compared to the USA ones are lower and, hence, the GDP per capita is lower too. Which means that, in terms of dollars, the USA is a much more expensive country than Spain.

Government Support for Agriculture

Main instruments used by governments to support agriculture:

Structural measures to improve efficiency.
Stabilization of prices, such as”regulatory stock”.
Subsidies linked to the provision of certain inputs and/or marketing channels.
Income support, implemented by direct subsidies, high”intervention price” or protection against foreign competition.

Charter Cities and Economic Development

Charter cities are designed to increase the development of emerging economies by creating a new governance system in each of them, in order to meet the needs of societies whose governments haven’t been able to keep them from poverty or suffer from institutional failure. They could promote economic development because economic growth requires access to well-functioning institutions. By focusing their efforts and policies in the population of a specific charter city, everything could be more tailored to the needs of those that don’t have enough resources.

Country A: Morocco

Country B: Tanzania

Country C: Germany

Negative Effects of Agricultural Support Policies

The most visible negative effects of agricultural support policies are:

Higher prices for consumers.
Distortion of world markets through subsidized sales of produce that does not have an internal demand.
Capitalization of subsidies through the revaluation of factors such as land.

Importance of Industrialization for Economic Growth

Industrialization is important for economic growth because it:

Boosts productivity by incorporating technological progress and new techniques.
Requires specialization, modernization, and innovation.
Provides great multipliers which push the growth of other productive sectors.
Facilitates exports and the generation of economies of scale.
Favors the dynamism and transformation of the economy.

Regulations in Service Activities

Regulations in service activities are often necessary because users are unaware of the characteristics and circumstances of the services until they have consumed them, allowing the appearance of market failures. Examples include”moral hazar” and”adverse selection”

Growth of the Service Sector

The service sector has gained weight in most economies because:

Consumption of services can be considered consumption of luxury goods.
The service sector’s relative productivity usually grows at lower rates than the rest of the sectors.
Lower levels of effective competition and the difficulty of exporting and importing some services reduce the incentive to increase efficiency and productivity.

Foreign Trade and Economic Development

Foreign trade promotes economic development by:

Allowing firms to take advantage of the large size of the world markets.
Encouraging countries to specialize on the basis of their relative advantages.
Allowing consumers to choose from a more diverse variety of goods.
Securing resources via exports of foreign investment.

The Dutch Disease

a) The “Dutch disease” is the relationship between the increase in the exports of a specific sector like natural resources, or inflows of foreign aid or foreign investment, and a decline in other sectors, such as manufacturing. As exports increase in the growing sector, the nation’s currency becomes stronger compared to currencies of other nations.

b) The term ‘Dutch disease’ was first coined by the Economist in the late 70´s to describe the decline in Netherlands manufacturing after the discovery of gas fields in the early 1960s.

c) Economic historians claim that the discovery of large silver reserves in its American colonies triggered in Spain a phenomenon known as the Dutch disease.

Advantages of Migrants for the Country of Origin

Migration becomes an outlet for problems such as unemployment and social tensions. In addition, income from remittances (transfers of migrants) is an important source of external financing.

Factors NOT Related to the Rise of Financial Markets Since 1973

Factors NOT related with the rise of financial markets since 1973:

The creation of the WTO in 1992
The fast economic growth in China and India

Phases of the Demographic Transition

1st phase: minimal or stationary population growth, where both birth and mortality rates are very high due to a low life expectancy and a lack of resources.
2nd: better sanitary conditions, higher productivity in agriculture, lower death rates and, with birth rates remaining high, it creates a demographic explosion.
3rd: as the economic development progresses, birth rates start to gradually decline and it puts the population into a stationary demographic situation; population size growth continues but at a lower rate.
4th: population growth stabilizes due to low birth and death rates.
5th: population size is stable or slightly declining and the working population decreases as there are more elder than young people.

Sources of Human Capital

Main sources for human capital are: education of parents, schools, universities, adult education and learning on the job. In Spain, all those sources are pretty low compared to other countries like Belgium, UK or Sweden, Sweden has a 175 & Spain only 75. Out of all the sources, the best one in Spain is the education in schools.

Factors Influencing International Migration Flows

Factors that promoted international migration flows in the last years:

People move to improve their living conditions and employment.
Rapprochement between geographical areas through modern means of communication and transportation.
Wars and natural disasters that many refugees try to flee from.

Factors that restrict international migration flows:

Developed countries set barriers for migration flows.
Political obstacles rise, when cultures are very different or it is difficult to integrate the culture of the origin country to the one of destination and ghettos appear.
When the recipient country is not able to employ national people, some rejections of migrants could appear.

Advantages of Migrants for the Recipient Country

They increase the supply of labor, especially if the cost of the education of migrants has been supported by their country of origin. The flexibility of the labor markets in the receiving countries is also improved, since migrants contribute to the elimination of bottlenecks in the labor market (unskilled jobs that nationals are not willing to perform). This effect will be of growing importance in the future as a result of the ageing of the population in developed countries.

Disadvantages of Migrants for the Country of Origin

Loss of skilled labor: the most negative impact on the country of exit is that young graduates leave to offer their services to other countries. Population and markets: businesses do better with a bigger market and more buyers. Social/Family: when parents leave, children and other dependents suffer the most.

Outputs of the Educational System

2 main outputs of the educational system and how can they be measured:

Performance of the education: can be measured and evaluated by international exams.
Equity: equality of opportunity regardless of social background.

Arguments for Protectionist Policies

6 reasons why countries try to protect and insulate their companies from international competition:

To protect strategic industries for national security reasons.
To protect infant industries.
To avoid balance-of-payments crises.
To promote national employment.
To protect from unfair foreign competition.
To deal with”social dumpin”.

Basic Principles of GATT

Countries signing the GATT must respect the following basic principles:

Free trade: prohibits practices such as dumping or subsidies on exports.
Transparency: non-tariff barriers must not be increased.
Consolidation: countries pledge not to raise tariffs in the future.
Non-discrimination: tariff reductions granted to a 3rd country must be extended to the rest of the countries adhering to the agreement.
Reciprocity: tariff reductions are articulated on the basis equivalent concessions.

Efficiency in Education Spending

This graph represents how efficient countries are when it comes to spending money on education and the results they obtained in a general test, specifically in maths. Finland is the most efficient one. Italy is the country that is managing this expenditure the worst.

Internal Trade: Fundamentals and Implications

International trade enables countries to specialize in the production of goods and services (gains from specialization). Possibilities of consumption are expanded.

Heckscher-Ohlin theorem: Countries tend to specialize in the production and export of those goods that are more abundant (or cheapest), while imports increase in shortage (or expensive).
Stolper-Samuelson theorem: when the price of a good rises due to a bloom in its exports, the factor used in its production will experience a higher remuneration in the country where it is more abundant.
Intra-industry trade: countries tend to export and import goods from the same industries.
Theory of the product cycle: the most advanced countries are those which create the most innovative products and export them to the rest of the world.
Inter-industry trade: exports and imports are from different sectors and industries.