Chapter 1

GMGM2014-ECONOMICS AND
DEVELOPMENT
CHAPTER 1
“PRINCIPLES AND CONCEPTS”

2
Principles and Concepts Development
• What is the real meaning of development?
• Why do some countries develop and others
remain poor?
• What are the sources of development and
how do we measure development?
• Does historical record of development help
us understand it better?
• What are the most influential theories of
development and are they compatible?
• Is development process of developing
nations independent or interdependent with
that of developed nations?

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Definition of Economic Development: 1950s
• In economic terms, development is the capacity
of a nation to generate and sustain an annual
increase in its GNP of 5% or more.
• Traditional economic measures:
– GDP: is the market value of all final goods and
services produced within a country in a given
period of time
Y=C+I+G+NX
– GNP: is the market value of all final goods and
services produced by permanent residents of a
country in a given period of time
GNP= GDP+ net factor income from
abroad

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Definition of Economic Development:
• Common alternative index is the rate of growth of income per
capita or per capita GNP
– Per capita GNP: is the per-head value of final goods and
services produced by permanent residents of a country in a
given period of time. It is converted to USD using the current
exchange rate.
– PPP Measure: the number of units of a country’s currency
required to purchase the same of basket of goods and
services in the local market that a US $1 would buy in the
USA. Under PPP, exchange rates should adjust to equalize the
price of a common basket of goods and services across
countries. Penn World Tables rank countries using the PPP
method.

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Definition of Economic Development:
1970s
• Decreasing of GNP in the 1970s and increasing
emphasis on “redistribution from growth”
• Increasing emphasis on non-economic social
indicators
• Economic development consists of the
reduction or elimination of poverty, inequality
and unemployment within the context of a
growing economy.

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Definition of Economic Development: 1990s
• World Bank in its 1991 WDR asserted that the
“challenge of development is to improve the
quality of life.”
• The improved QOL involves higher incomes,
better education, higher standards of health
and nutrition, less poverty, a cleaner
environment, more equality of opportunities,
greater individual freedom, and a richer cultural
life.

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• Economic factors
– capital
– Labor
– Natural resources
– technology
– established markets (labour, financial, goods)
• Non-economic factors (institutional, social, values)
– attitudes toward life and work
– public and private structures
– cultural traditions
– systems of land tenure, property rights
– integrity of government agencies

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Todaro and Smith said:
“Development is a multi dimensional
process involving changes in social
structures, popular attitudes, and
national institutions, as well as the
acceleration of economic growth, the
reduction of inequality, and the
eradication of poverty.”

Classifying Countries
• Most Developed Countries (MDCs)
– the richest of the industrialized and democratic
nations of the world.
https://www.youtube.com/watch?v=H4UdNzC2vMo
• Less Developed Countries (LDCs)
– countries with little industrial development, little
wealth, and high population growth.
• Least Developed Countries (LLDCs)
– very low per capita income, low literacy rates, and
very little in the way of manufacturing industries.
• www.youtube.com/watch?v=MauZwxPEF88

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Defining the Developing World
• The UN’s System
• World Bank’s System
– Classification by levels of GNI per capita
(Table 2.1)
• The UNDP’s Human Development Index
– Classification by levels of human development
(Table 2.9)
• The OECD’s system

Copyright © 2006 Pearson
Addison-Wesley. All rights
reserved.
2-11
Table 2.1

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2-12
Table 2.1 (cont’d)

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2-13
Table 2.1 (cont’d)

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Figure 2.1

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Figure 2.1 (cont’d)

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Size and income level
2014
GDP=$568.5billion
Population 178.5 million
GNI per capita=$2950
MALAYSIA-2014
GDP=$326.9billion
Population 30.19million
GNI per capita=$10,660
US-2014
GDP=$17.42 trillion
Population 318.9million
GNI per capita=$55,200
http://data.worldbank.org/country

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Table 2.3

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Common Characteristics of Developing
Nations
• Low levels of living
– Per capita national income (Figure 2.2)

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Figure 2.2

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Table 2.4

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Nations
– Per capita national income
– Relative growth rates of national and per capita
income (Table 2.5)

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Table 2.5

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Nations
income
– Distribution of national income (Table 2.6)

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Table 2.6

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2-25
Nations
income
– Distribution of national income
– Extent of poverty (Table 2.7)

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Table 2.7

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Nations
income
– Distribution of national income
– Extent of poverty
– Health (Figure 2.3 and Table 2.8)

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Figure 2.3

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Table 2.8

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Nations
– Per capita national
income
– Relative growth rates of
national and per capita
income
– Distribution of national
income
– Extent of poverty
– Health
– Education
– The Human
Development Index

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Table 2.9

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Nations
• Low levels of productivity
• High rates of population growth and
dependency burdens (Table 2.11)

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Nations
• Low levels of productivity
• High rates of population growth and
dependency burdens
• Substantial dependence on agricultural
production and primary exports (Table 2.12
and Figure 2.4)

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Table 2.12

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2-37
Figure 2.4

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2-38
Nations
• Low levels of
productivity
• High rates of population
growth and
dependency burdens
• Substantial dependence
on agricultural
production and
primary-product
exports
• Prevalence of imperfect
markets
• Dependence and
vulnerability

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How Developing Countries Today Differ from Developed
Countries in Their Earlier Stages
• Physical and human
resource endowments
• Per Capita incomes and
levels of GDP in relation to
the rest of the world
• Climate
• Population size,
distributions and growth
• Historical role of
international migration
• International trade benefits
• Basic R&D capabilities
• Stability and flexibility of
political-social institutions
• Effectiveness of domestic
economic institutions

Developed Developing
• Good educational system;
school required
• Schooling not available to
all citizens of country.
Developed vs. Developing

• Widely available health
care.
• Poor health care; not
enough doctors.

• Many manufacturing and
service industries. Farmers
use technology.
• Live by subsistence farming
in rural areas. Few
businesses.

• Participate in international
trade
• Few items to trade

• People mostly live in cities. • People live mostly in rural
areas.

• People have access to
telephone and are part of
global network.
• Modern communications
are not found outside of
city.

FIRST WORLD COUNTRIES
• the term "First World" refers to so called
developed, capitalist, industrial countries,
roughly, a bloc of countries aligned with the
United States after World War II, with more or
less common political and economic interests:
North America, Western Europe, Japan and
Australia.

SECOND WORLD COUNTRIES
• "Second World" refers to the
former communist-socialist, industrial states,
(formerly the Eastern bloc, the territory and
sphere of influence of the Union of Soviet
Socialists Republic) today: Russia, Eastern
Europe (e.g., Poland) and some of the Turk
States (e.g., Kazakhstan) as well as China.

THIRD WORLD COUNTRIES
• "Third World" are all the other countries,
today often used to roughly describe the
developing countries of Africa, Asia and Latin
America.
The term Third World includes as well
capitalist (e.g., Venezuela) and communist
(e.g., North Korea) countries, as very rich (e.g.,
Saudi Arabia) and very poor (e.g., Mali)
countries.

What makes a nation third world?
• Despite ever evolving definitions, the concept of the third world
serves to identify countries that suffer from high infant
mortality, low economic development, high levels of poverty,
low utilization of natural resources, and heavy dependence on
industrialized nations.
• These are the developing and technologically less advanced
nations of Asia, Africa, Oceania, and Latin America.
• Third world nations tend to have economies dependent on the
developed countries and are generally characterized as poor with
unstable governments and having high rates of population
growth, illiteracy, and disease.
• Most third world nations also have a very large foreign debt.

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What is growth?
• Economic growth is the increase of a nation’s
real output (GDP).
• Results from:
– Greater quantities of natural resources, human
resources, and capital,
– Improvements in the quality of resources, and
– Technological advances that boost productivity.

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What is Development
• Economic development is the process by
which a nation enhances its standard of living
over time.
• The economic standard of living is often
defined as GDP per capita.

Economic Development vs. Economic
Growth
• Economic Growth is a narrower concept than economic development. It is an increase in a country's real
level of national output which can be caused by an increase in the quality of resources
(by education etc.), increase in the quantity of resources & improvements in technology or in another
way an increase in the value of goods and services produced by every sector of the economy. Economic
Growth can be measured by an increase in a country's GDP (gross domestic product).
• Economic development is a normative concept i.e. it applies in the context of people's sense
of morality (right and wrong, good and bad). The definition of economic development given by Michael
Todaro is an increase in living standards, improvement in self-esteem needs and freedom from
oppression as well as a greater choice. The most accurate method of measuring development is the
Human Development Index which takes into account the literacy rates & life expectancy
which affect productivity and could lead to Economic Growth. It also leads to the creation of more
opportunities in the sectors of education, healthcare, employment and the conservation of the
environment.It implies an increase in the per capita income of every citizen.
• Economic Growth does not take into account the size of the informal economy. The informal economy is
also known as the black economy which is unrecorded economic activity. Development alleviates people
from low standards of living into proper employment with suitable shelter. Economic Growth does not
take into account the depletion of natural resources which might lead to pollution, congestion & disease.
Development however is concerned with sustainability which means meeting the needs of the present
without compromising future needs. These environmental effects are becoming more of a problem for
Governments now that the pressure has increased on them due to Global warming.
• Economic growth is a necessary but not sufficient condition of economic development.

Basis Economic Development Economic Growth
Economic development implies changes
in income, savings and investment along
with progressive changes in socio-
economic structure of country
(institutional and technological changes).
Economic growth refers
to an increase in the real
output of goods and
services in the country.
Factors:
Development relates to growth of human
capital indexes, a decrease in inequality
figures, and structural changes that
improve the general population's quality of
life.
Growth relates to a gradual
increase in one of the
components of Gross
Domestic Product:
consumption, government
spending, investment, net
exports.

Measurement:
Qualitative.HDI (Human
Development Index), gender-
related index (GDI), Human
poverty index (HPI), infant
mortality, literacy rate etc.
Quantitative. Increase in
real GDP. Shown by PPF.
Concept: Normative concept
Narrower concept than
economic development

Effect:
Brings qualitative and
quantitative changes in the
economy
Brings quantitative changes
in the economy
Relevance:
Economic development is
more relevant to measure
progress and quality of life in
developing nations.
Economic growth is a more
relevant metric for progress
in developed countries. But
it's widely used in all
countries because growth is a
necessary condition for
development.

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