what is economic development | how economic development can be measured

what is economic development

Why economic development?

The study of economic development is one of the newest, most dashing and most attracting branches of the broader discipline of economic. “Economic development” is a branch of economic which deals with causes and cures of mass poverty. The concept of economic development goes back to the appearance of “industrial Revolution” in Europe in the 18^th century. These were such countries like U.K, France, and Germany which initiated the process of industrialization first and afterward, This process spread over to japan, Russia, and USA. The counties from Asia, Africa and Latin America failed to avail the fruits of industrial Revolution. In this way, an international division came into being ___ The rich countries and the poor counties.

After world war II, there rose the desire for economic development in the backward nations of the world. Accordingly, the poor countries of the world are struggling for the removal of poverty, illiteracy, starvation, unemployment, malnutrition, diseased, economic stragnation, and environmental pollution; whereas in the industrial countries of the west, people are living with high luxurious facilities. The question arises, why the former are living in such poverty and how can the barriers of poverty be broken? The answer lies only in economic development. So, what is economic development and how can we clearly understand it?

indicator of economic development

What is Economic Development? how economic development can be measured? Which method is batter and why?

OR

How Economic Development can be measured and what kind of problems are faced in Pakistan (or India)

Introduction

     Economic development is long time multi-dimensional process under which not only the productive capacity of country increase  but also ensure that national income is fairly distributed among the people over the long run. Economic development is concerned with the promotion of economic activity through various means including education, modern technology, infrastructure facilities etc.

Definition of Economic Development

     There are a large number of definitions givens by different economists but some renowned definitions are given below

According to kindle Berger

    “ Economic development relies both on more output and changes in technical and institutional  arrangements by which it is produced and distributed.”

According to Meier and Baldwin

      “Economic development is process whereby an economy’s real national income increase over a long period of time , and if the rate of development is greater than the rate of growth of population, then Per Capita Real Income will increase.”

     If we analyze the above-mention definition of economic development, it is concluded that:-

1. A Process: 

Economic development is a process which results in an increase in production and changes occur on demand side as well as supply side.

     Changes on supply side

(1)    Discovery of new resources

(2)    Changes in population</
div>

(3)    Capital formation/capital accumulation

(4)    Use of better techniques of production.

      Changes on Demand Side

(1)    Changes in social and institutional life

(2)    Changes in the level of production and distribution of NI(nation income)

(3)    Changes in size and nature of tastes of the people

2. Long Period of Time: The process of economic development requires a long period of time. This period consists of 25 years or more. That is, if real GNP rises till the period of 25 years, there will be economic development in real sense

3. Increase in Real Gross National Product (GNP) : Economic development will take place when the real GNP of a country increase which is the basic objective of this process.

4. Increase in Real Per Capital Income: If an increase in real per capital income of a country occurs for a long time, then the country moves towards economic development.

Measurement of Economic Development

     There are different methods to measure economic development in a country

1.    Increase in Real Gross National product method

2.    Increase in Real Per Capital Income method

3.    Economic welfare as a measure

4.    Basic Needs Approach

5.    Physical Quality of Life index (PQLI)

6.    Human Development index (HDI)

1. Real Gross National Product method

Real Gross National Product is an important and a common indicator of economic development of a country. Real GNP refers to the country’s total output of final goods and services in real terms instead of money terms. In the light of meier and Baldwin’s definition, if the GNP of a country increase over along period of time, the country is considered to be making economic development. A short period rise in national income due to business cycle does not represent economic development

           Limitations/Shortcomings/Difficulties

1.                An accurate statistic about national income is not available
2.                It is very difficult to assess the value of a number of goods and services in money terms.
3.                National Income statistic fail to describe the distribution of income in the economy.
4.                While calculating National Income, there is a danger of Double Counting.
5.                Due to the faster growth rate of population as compared to the growth rate of National Income, there will be no economic development.
6.                Income from illegal activities and transfer of payment are not included in NI(National Income)

2. Real Per Capital Income Method

Real Per Capital Income Method is treated as  an indicator of economic development. The quantity of goods and services received by an individual of a country in a year or the average income of the people of a country as known as real per capital income. Economic development is considered as the process whereby Real Per Capital Income increase over a long period of time which results people living in a country are able to buy more goods and services than before at average . Consequently, the average poverty will come down and living standard of the country will improve.

     Per Capital Income = National Income/Population

           Limitations/Shortcomings/Difficulties

1.                It is diffical to have the correct statistic of National Income and population.
2.                It does not reflect the distribution of National Income or regional inequalities of income
3.                It does not throw light on the quality of life aspect, which is very important
4.                If LDCs(less developed countries) adopt this method, then there will be hardly any development because in LDC per capital income rises veru slowly and nominally in presence of high population high population growth rate.
5.                Per capital income method reflects the living standard of the people. But perhaps it is not so, as Brunei, Qatar, and Kuwait have the highest per capital income respectively $32,843, $72,677 and $32737 but the average living standard of US citizen ($65,062) and U.K ($42,036) is far above than that of then.

3. Economic Welfare as Measure

According to this method, economic development is a process whereby there is an increase in the consumption of goods and services of individuals. As Okun and Richardson say, “economic development is a sustained and secular improvement in material well-being which will be reflected in an increase in goods and services”.

           Limitations/Shortcomings/Difficulties

1. The increase in the production of goods and services ignore social opportunity cost
2. From the economic welfare point of view, we must consider not only what is produced but how it is produced?
3. If the increase in goods and services has been produced at the cost of exploitation of labor, reduction in wages, air and noise pollution etc. it will not be economic development.
4. Due to economic development, it is possible that people are having more goods and services than before but it is not necessary that the distribution of goods and services has been fairer one
5. We cannot equate an increase in output per head with an increase in economic welfare.

4. Basic Needs Approach

According to this Basic Need Approach if the people are In the position to avail more amount of food, have better access to educational facilities, availability of clean water supply, water sewerage , health care, shelter, and clothing etc. All such would represent economic development. Therefore, if people of country fail to get above needs even GNP has gone up, it will not represent economic development.

           Limitations/Shortcomings/Difficulties

1.            Without increase National Income, it is difficult to improve these indicators .
2.       It only stresses upon social indicators and social development.
3.       There are different items in this method having different impotance and weight under different economic and political setup of countries. In such situation, the comparison in countries seems difficult.

5. Physical Quality of Life Index (PQLI)

Morris D. Morris developed ” Physical Quality of Life Index (PQLI)” where he included just three indicators like life expectancy, literacy rate, and infant mortality rate. The scale of 1 to 100 was used for this index. 1 indicated the poorest level and 100 indicated the highest level of development. Different countries are ranked in development on the basis of their physical quality of life index.

           Limitations/Shortcomings/Difficulties

1. It stresses upon a qualitative aspect of life and ignores the quantitative aspect.
2. It is a limited measure; it has not included so many social and psychological indicators
3. As many developed countries have got maximum limit of physical quality of life index. So according to this method there is no scope for their further growth.
4. Without quantitative development, it is difficult to improve a qualitative aspect of life

6. Human Development Index (HDI)

Human Development Index developed by United Nations is based on three measures: life expectancy literacy rate and income to meet the basic needs of life in a country. HDI rank all countries into three groups named low human development (0.0 to 0.5), medium human development (0.51 to 0.79) and hogh human development (0.8 to 1). According to UNDP HDI index of 2017 Pakistan had 0.562 HDI, India was 0.640 and Bangladesh was 0.608

           Limitations/Shortcomings/Difficulties

1.       The three indicators which have been included in HDI are good but not the idea ones.
2.       The HDI measure does not consider the income inequalities in a country.
3.       The modern experts using Human Governance Index (HGI) instead of HDI. HDI is the combination of good economic governance good political governance and good civil governance.

alternative measures of development

Which Method of calculating Economic development is best and why

     The above mention methods of measuring economic development reveal that each method has certain limitations and no one is objection free. However, physical quality of life index basic needs approach human development index and economic welfare, as measure cannot be considered better than Real National income method and Real Per Capital Income method because they just explain the qualitiative aspect of economic development. Without quantitative development qualitative development cannot be achieved. When we make a comparison between Real National Income and Real per capital income methods we find that the former is better than the later because

1.      The increase in real per capital income is based upon the increase in real GNP.
2.      If real per capital income method is used as measure economic development, the real per capital income remains the same if the rate of increase in real national income is equal to rate of increase in population but in fact the country gets progress
3. Real per capital income method in LDCs, then we find hardly any observable development as per capital income rises very slowly.
4. Real per capital income method conceals the population problems of a country
5. For the sake of simplicity economists and international organizations use per capital income as the measure of economic development
6. Share your own thoughts with us about these method of measuring economic development you can show as your thoughts via comment. Thanks for reading