Chapter 1 – Introduction, page 1 of 7• the distinction between economic growth and economic development:• economic growth – takes place when there is a sustained (ongoing for at least 1-2years) increase in a country’s output (as measured by GDP or GNP) or in the per capitaoutput (GDP or GNP per person) – the growth of GDP per capita or GNP per capita is abetter indicator of growth than GDP or GNP because if the population grows faster thanoutput, output (GDP or GNP) could grow while output per person (GDP or GNP percapita) falls – in this case it is misleading to say “growth” is occurring• economic development – occurs when the standard of living of a large majority of thepopulation rises, including both income and other dimensions like health and literacy• the reason for this distinction between economic growth and economic development isbecause of the way income is distributed:• it is possible for a nation’s economic output per person to increase (growth),but a large number of people can have their income decrease at the same time ifthe increase in output is earned by a small percentage of the population• for example, if 80% of the population is in traditional agriculture and 20% arein the modern sector then the average income per person can increase due tolarge gains by the modern sector minority but the income of the 80% of thepopulation in the traditional sector can simultaneously be falling over time• thus an increase in GDP per capita is insufficient to say development isoccurring• development occurs when income increases along with other standards of living(reduced mortality rates, lower illiteracy, increased in education, increase in lifeexpectancy)• for example, in a hypothetical nation where the majority of people are nomadic andrely on traditional agriculture - if a foreign firm exploits a discovery of oil in this nationand there is no accompanying increase in schooling, literacy, health etc. then growthmay occur but not development• note that “standard of living” is a somewhat a vague term that requires a more precisedefinition to be made operational• also, it is unclear what percent of people in an economy must have a rising standard ofliving for “development” to be said to be occurring – there is judgement involved• historical context of economic development:• the experience of economic development in the modern world is unprecedented• a simple, static view of the world observes that 1/5 to 2/5 of the world is relativelyrich and has a high standard of living, 3/5 to 4/5 of the world is poor while the gapbetween the rich and poor countries is growing; though this may be a realistic picture ofthe past 30-50 years, it is not true if a longer period of time is considered• no economic development occurred before the Industrial Revolution and all countrieshad large majorities of their populations near the subsistence level (just enough to eatand stay moderately healthy)• economic development has led to a fairly high level of prosperity• modern economic development is a process of technological development (in powerand transportation, for example) and institutional change (such as the development ofthe modern market economy)• it is hard to separate the development of capitalist institutions and technologicaldevelopment because institutions promoted technological developmentChapter 1 – Introduction, page 2 of 7• the diffusion of the Industrial Revolution was geographically unequal – it started inthe late 18th century in Britain then spread to Germany and the United States, thencontinued to other countries by the late 19th century, and reached the rest of the world inthe 20th century• around 1970 the underdevelopment of the less developed countries (South) was attributed bysome to their exploitation by the developed countries (the North), and true development wasthought to be impossible for the South under the existing structure of the world economy• the facts have not born out the latter view point• since 1960 and 1970 some non-European countries have experienced modern economicgrowth (such as South Korea) and this has continued to spread• there is less of a general distinction between developed and developing countries,more of a continuum from low to low-middle to upper-middle to high incomecountries• differences between rich and poor countries (the “glass half-empty, half-full” theme):• overall over the last 50 years the gap between developed and developing countries hasgrown even though development and growth has occurred in many developingcountries• between 1960-1995 the GDP per capita in developing countries grew at an average rateof 1.3% per year (some experienced higher average growth rates, such as China,Indonesia, and South Korea); this led to improvements in living standards• between 1960-1995 the GDP per capita in developed countries grew at an average rateof 2.4%• between 1820-1870 during the Industrial Revolution Great Britain’s GDP/capita grewat an average annual rate of 1.2% per year (the highest economic growth of all countriesduring the early Industrial Revolution) – note that this is LESS than the growth rate ofdeveloping countries between 1960-1995• before 1960 the estimated rate of growth in developing countries was 0% (for example,China between 1850 and 1950)• other indicators of development:1960 1996Average life expectancy at birth in developing countries 50.5 63.5Infant mortality rate (number of infants per thousand that die in theirfirst year of life) in developing countries123 55• the growth rate – what it means:• the growth rate between two years, such as 1960 and 1961, is given by the formula:196119601961GDPGDPGDPgrowthrate−=, where GDP1960 is the GDP in 1960 and GDP1961 is theGDP in 1961• for example, if the rate of growth between 1960 and 1961 is 1.3%, then to find the GDPin 1961, multiply the GDP in 1960 by 1.013:19601961013.1 GDPGDP ×=• note that the growth rate is given in per year terms (so if the growth rate is 1.3%, theeconomy grows an average of 1.3% every year)• in order to figure out the GDP over a longer period of time, say between 1960 and 1965(a period of 5 years):Chapter 1 – Introduction, page 3 of 7519601965)013.1(×= GDPGDPnotice that the growth rate is the average annualized rate (exactly 1.3% growth probablydoesn’t occur every year; it is the average annual growth rate or more exactly, the ratethat would