Topic 1: Economic Development--An OverviewI. Cameron and Neal (and Kindleberger) make the distinction between economic growth and economic development: Economic growth: the sustained increase in the output of goods and services of a society. Economic development: economic growth accompanied by changes in the technical and institutional arrangements by which output is produced. A. What are examples of changes in technical and institutional arrangements by which output is produced?- Change to settled agriculture – Neolithic transition - technical/institutional- Breakdown of manorial system - institutional change- Invention of flying shuttle by John Kay in 1733Economic growth and economic development are intimately related.1. Can we have economic growth without economic development? Yes, output can increase simply by increasing inputs baby boom (more labor in a few decades), more acres under cultivation.2. What comes first in spurring on economic development – the economic growth or the structural change? Chicken and egg problem. It’s easy to understanddevelopment causing change, new technology brings growth. But, the causation can also run theother way. More people, means more creation. Asoutput increases, new types of institutions develop.3. The link between economic growth and economicdevelopment today Today economic growth and economic development used interchangeable—acknowledgment that sustained growth is possible only with institutional and technical change.B. Economic development as a (relative) stateof being. Countries are classified as ”developed” or “undeveloped”, “underdeveloped”, less-developed, developing. Some things to consider when making distinctions- 1). Level of wealth (or income) per capita 2). Structure of the economy (share of laborforce in Agriculture). 3). Infrastructure measures (physicians, paved roads, access to the internet). The U.S. economy today, very developed bytoday’s standards, will be considered undeveloped by historians centuries in the future. There is no “endpoint” to economic development.II. How do we measure economic development?We want to have measures for tracking economic development. Such measures allow us to make comparisons across time and spacein economic development. There are many measures/characteristics that we could use to study economic development.A. Measures of economic development in the current period. Sophisticated data collection by modern governments.The World Bank lists over 1000 “World Development Indicators” in an on-line resource available through OSU Libraries. “Basic Indicators” of development include the following measures:GDP per capita, both level and average annual growth GDP=value (dollar) of the output of an economy=C+I+G+(X-M)Average annual rate of inflation-Indicator of the stability of a government. Aregime with high inflation is usually indicative of a government printing money for its own purposes (lavish palaces and courts) or war. Life expectancy at birth—Unambiguous measure of well-being.Adult literacy, both female and total:Adult literacy is measure of human capital (productive capacity of the labor force) as well as it is negatively correlated with child labor. Strong preference for societies to want their children in school rather than at work as incomes rise.Female literacy: Indicator of gender equality. A society that doesn’t educate it’sgirls generally has lower status of women. Gross Domestic Product (GDP) = value (dollar) of the output of an economy=C+I+G+(X-M)We usually use GDP per capita as summarymeasure of standard of living and economic growth. It is widely available for a number of countries and a number of years. For the U.S. we can estimate GDP back to 1840, forthe U.K. even further back. Almost every country since 1960s.Problems with GDP per capita as a measureof welfare (and hence, why its growth does not always translate as improvement of welfare):1. Does not capture all economically important activitiesa. Black market/ informal (barter) market-much larger in less developed countries.b. Agriculture production for own consumption.c. Housework (production in the home). Some economies have seen GDP grow relatively more just as production preciously done in the home, moves to the market (child care, cleaning services, more meals out…)2. Dollar value of a good does not always equal “social” value (e.g., no accountingfor pollution costs). In the industrial revolution, wages rose, priced fell, but there was overcrowding, more disease, poor working conditions…War rises GDP (government spending) without making us better off. So does a crime wave (more prisons, police.3. Does not account for differences in “costof living” across time and spaceEven if GDP per capita were a good measure of average income,comparisons across space and time would be hindered by the fact that the “cost of living” – that is, the cost of a certain bundle of goods or a certain lifestyle – is not the same in different societies (prices – housing prices in particular, taxes, etc.)3. Welfare depends not only on size of national income but on its distribution. Honduras and Sri Lanka had same GNP per capita in 2009 – around $2,000, butdifferent income distributions:Despite these caveats, GDP still most oft-referenced measure of countries’ welfare for two main reasons: 1) Widely available (see above)2) Even with all these flaws, it is highly and predictably correlated with any other measure.B. Data Sources in historical periods, used to construct measure of Economic Development. Common data sources for historical periods are:1. censuses, surveys (population, demographic information, occupationaldistributions)2. tax records (production information, shipping information, exports and imports, wealth)3. church records (births, deaths, life expectancy)4. heights and skeletal remains (ProfessorSteckel’s research)— Individual height determined by “genetic potential” and nutrition (health) during growing year. We now believe that genetic potential does not vary by race or ethnicity. Average height of a population represents a measure of nutrition and stress (pollution, disease, work) during childhood.III. Modern Economic GrowthA. As we will see throughout the quarter, this growth has been both extensive and intensive.1. Extensive growth: increase in output due to increase in inputs