This may not be so obvious for developed countries, like UK and US, but for developing economies, economic growth and rising incomes plays a big role in lifting people out of poverty. With higher GDP the government will be able to collect more taxes; this is because people as incomes rise and people spend more they will pay more income tax and VAT.
This investment in public services can help improve the long-term performance of the economy. For example, better infrastructure enables lower cost of trade.
Therefore, growth can cause a virtuous cycle of higher investment leading to higher growth — which enables more investment. Higher economic growth will also lead to an increase in demand for labour as firms will be producing more. Therefore unemployment will fall, this has various advantages such as lower government spending on benefits and less social problems. If the economy is in recession, then increasing the rate of economic growth will be an important step in reducing unemployment.
However economic growth has various costs. Firstly if economic growth is unsustainable and is higher than the long run trend rate inflation is likely to occur. Furthermore, this temporary boom in output is unlikely to continue and may be followed by an economic downturn or recession.
Thus, it can be very damaging to increase the rate of economic growth above the sustainable rate. This boom and bust cycle happened in the UK in the late s and early s. Also, an increase in economic growth could lead to a balance of payments problem. If increased consumer spending, like in the UK, causes the growth then there will be an increase in imports.
Is imports rise faster than exports there will be a deficit. However, growth could be export-led e. However, if growth is increased by increasing the productive capacity and increasing the long run trend rate then inflation will not occur and the growth will be sustainable. However, even an increase in the long run trend rate can have undesirable effects. In some cases, economic growth can have unintended costs to living standards.
Higher output will lead to increased pollution and congestion which can reduce living standards e. Economic development, being a dynamic concept refers to the continuous increase in production over the changing time path. Secondly, attainment of economic development indicates increase in real per capita income over time.
Here the real per capita income of a country simply indicates total money income adjusted to price level changes over time, i. Thirdly, by the term economic development we mean continuous increase in the level of real national income over longer time period, covering a period, not less than 25 to 30 years. While explaining the distinction between economic development and economic growth, C. As per this view, the term growth implies higher level of output as well as achievements in terms of increase in the volume of economic variables.
Although some economists have observed slight differences between economic development and economic growth but all these differences are imaginary and unreal and thus have little practical value.
In this connection Prof. By economic development we mean attainment of higher level of productivity in almost all the sectors and a better level of living for the general masses. The path of economic development in an underdeveloped economy is full of hurdles or impediments. Attaining higher level of economic development is a function of level of technology.
Economic development is thus a process of raising the rate of capital formation, i. Moreover, the task of economic development is influenced by a number of factors such as—economic, political, social, technological, natural, administrative etc. Lewis, there are three principal causes of economic development. While analysing the determinants of economic growth, Prof. Rostow have made sincere attempts in this regard. Spengler has listed about nineteen determinants but Rostow mentioned six propensities having much bearing on economic growth.
All these propensities are showing a clear-cut picture of determinants of economic growth neglecting the non-economic factors totally. Regarding the determinants of economic growth, Prof. Following are some of important economic and non-economic factors determining the pace of economic development in a country: Population is considered as an important determinant of economic growth.
In this respect population is working both as a stimulant as well as hurdles to economic growth. Firstly, population provides labour and entrepreneurship as an important factor service. Natural resources of the country can be properly exploited with manpower resources. With proper human capital formation, increasing mobility and division of labour, manpower resources can provide useful support to economic development.
On the other hand, higher rate of growth of population increases demand for goods and services as a means of consumption leading to increasing consumption requirements, lesser balance for investment and export, lesser capital formation, adverse balance of trade, increasing demand for social and economic infrastructural facilities and higher unemployment problem.
Accordingly, higher rate of population growth can put serious hurdles on the path of economic development Moreover, growth of population at a higher rate usually eat up all the benefits of economic development leading to a slow growth of per capita income. But it has also been argued by some modern economists that with the growing momentum of economic development, standard of living of the general masses increases which would ultimately create a better environment for the control of population growth.
Moreover, Easterlin argued that population pressure may favourably affect individual motivation and this may again lead to changes in production techniques. Thus whether growing population in a country practically retards economic growth or contributes to it that solely depends on the prevailing situation and balance of various other factors determining the growth in an economy.
Availability of natural resources and its proper utilization are considered as an important determinant of economic development.
If the countries are rich in natural resources and adopted modern technology for its utilization, then they can attain higher level of development at a quicker pace. Mere possession of natural resources cannot work as a determinant of economic development. Inspite of having huge variety of natural resources, countries of Asia and Africa could not attain a higher level of development due to lack of its proper utilization.
But countries like Britain and France have modernised their agriculture in spite of shortage of land and the country like Japan has developed a solid industrial base despite its deficiency in natural resources.
Similarly, Britain has developed its industrial sector by importing some minerals and raw materials from abroad. However, an economy having deficiency in natural resources is forced to depend on foreign country for the supply of minerals and other raw materials in order to run its industry. Thus in conclusion it can be observed that availability of natural resources and its proper utilization is still working as an important determinant of economic growth. Capital formation and capital accumulation are playing an important role in the process of economic development of the country.
Here capital means the stock of physical reproducible factors required for production. The increase in the volume of capital formation leads to capital accumulation. Thus it is quite important to raise the rate of capital formation so as to accumulate a large stock of machines, tools and equipment by the community for gearing up production.
Moreover, capital formation requires the suitable skill formation so as to utilise physical apparatus or equipment for raising the productivity level. In an economy, capital accumulation can help to attain faster economic development in the following manner: Various developed countries like Japan have been able to attain higher rate of capital formation to trigger rapid economic growth. Normally, the rate of capital formation in underdeveloped countries is very poor. Therefore, they must take proper steps, viz.
In order to attain a rapid economic growth, the rate of domestic savings and investment must be raised to 20 per cent. Naturally, in the initial period, it is not possible to step up the rate of capital formation at the required rate by domestic savings alone. Initially, to step up the rate of investment in the economy, inflow of foreign capital to some extent is important. But with the gradual growth of domestic savings in the subsequent years of development, the dependence on foreign capital must gradually be diminished.
Being a technologically backward country, India has decided to permit foreign direct investment in order to imbibe advanced technology for attaining international competitiveness under the present world trade and industrial scenario.
Capital-output ratio is also considered as an important determinant of economic development in a country. By capital-output ratio we mean number of units of capital required to produce per unit of output. It also refers to productivity of capital of different sectors at a definite point of time. But the capital output ratio in a country is also determined by stage of economic development reached and the judicial mix of investment pattern.
Moreover, capital-output ratio along with national savings ratio can determine the rate of growth of national income. This is a simplified version of Harrod-Domar Model. This equation shows that rate of growth of GNP is directly related to savings ratio and inversely related to capital-outlet ratio. Thus to achieve a higher rate of growth of national income, the country will have to take the following two steps: Favourable investment pattern is an important determinant of economic development in a country.
This requires proper selection of industries as per investment priorities and choice of production techniques so as to realise a low capital-output ratio and also for achieving maximum productivity. Thus in order to attain economic development at a suitable rate, the Government of the country should make a choice of suitable investment criteria for the betterment of the economy. The suitable investment criteria should maximise the social marginal productivity and also make a balance between labour intensive and capital intensive techniques.
Another determinant of economic development is the occupational structure of the working population of the country. Too much dependence on agricultural sector is not an encouraging situation for economic development. Increasing pressure of working population on agriculture and other primary occupations must be shifted gradually to the secondary and tertiary or services sector through gradual development of these sectors.
In India, as per census, about As per World Development Report, , whereas about 45 to 66 per cent of the work force of developed countries was employed in the tertiary sector but India could absorb only 18 per cent of the total work force in this sector. The rate of economic development and the level of per capita income increase as more and more work force shift from primary sector to secondary and tertiary sector.
Thus to attain a high rate of economic development, inter-sectoral transfer of work force is very much necessary. The extent and pace of inter-sectoral transfer of work force depend very much on the rate of increase in productivity in the primary sector in relation to other sectors. Extent of the market is also considered as an important determinant of economic development. Expansion of the scale of production and its diversification depend very much on the size of the market prevailing in the country.
Moreover, market created in the foreign country is also working as a useful stimulant for the expansion of both primary, secondary and tertiary sector of the country leading to its economic development. Japan and England are among those countries which have successfully extended market for its product to different foreign countries. Moreover, removal of market imperfections is also an important determinant of economic development of underdeveloped countries.
Accordingly, market in those countries must be free from all sorts of imperfections retarding the economic development of the country. Removal of market imperfections will make provision for flow of resources from less productive to more productive occupations which is very much important for the development of an underdeveloped economy.
Technological advancement is considered as an important determinant of economic growth. By technological advancement we mean improved technical know-how and its broad- based applications. With the advancement of technology, capital goods became more productive. The following conditions must be satisfied for attaining technological advancement in a country: As underdeveloped countries have failed to fulfill these conditions thus their development process is neither self-sustaining nor cumulative.
Thus in order to attain a higher rate of development, the underdeveloped countries should adapt only that type of technology which can suit their requirements. Developing countries like Mexico, Brazil and India have been applying technologies developed by advanced countries as per their own conditions and requirements.
Thus to attain a high level of economic development, the under-developed countries should try to achieve technological progress at a quicker pace. In recent years, economic planning has been playing an important role in accelerating the pace of economic development in different countries.
Economic development is considered as an important strategy for building various social and economic overhead infrastructural facilities along with the development of both agricultural, industrial and services sectors in a balanced manner.
Planning is also essential for mobilisation of resources, capital formation and also to raise the volume of investment required for accelerating the pace of development. Countries like former U. The present situation in the world economy necessitates active support of external factors for sustaining a satisfactory rate of economic growth in underdeveloped economies. Moreover, domestic resources alone cannot meet the entire requirement of resources necessary for economic development.
Therefore, at certain levels, availability of foreign resources broadly determines the level of economic development in a country. The external factors which are playing important role in sustaining the economic development include: Economic factors alone are not sufficient for determining the process of economic development in a country. In order to attain economic development proper social and political climate must be provided.
The people of a country must desire progress and their social, economic, legal and political situations must be favourable to it. Emphasising the role of non-economic factors, Prof. It is spirit itself that builds the body.
Underdevelopment countries are facing various socio-political hurdles in the path of economic development. Thus in order to attain economic growth, raising the level of investment alone is not sufficient rather it is also equally important to gradually transform outdated social, religious and political institution which put hindrances in the path of economic progress. Thus following are some of the important non-economic factors determining the pace of economic development in a country: It is the mental urge for development of the people in general that is playing an important determinant for initiating and accelerating the process of economic development.
In order to attain economic progress, people must be ready to bear both the sufferings and convenience. Experimental outlook, necessary for economic development must grow with the spread of education.
Economic progress is very much associated with the spread of education. Thus education is working as an engine for economic development.
In this connection, Prof. So, education plays pioneer role for the creation of human capital and social progress which in turn determines the progress of the country. Conservative and rigid social and institutional set up like joint family system, caste system, traditional values of life, irrational behaviour etc.
Thus to bring social and institutional change as per changing environment and to realise the modern values of life are very much important for accelerating the pace of economic development in a country. Maintenance of law and order in a proper manner also helps the country to attain economic development at a quicker pace. Stability, peace, protection from external aggression and legal protection generally raises morality, initiative and entrepreneurship.
Formulation of proper monetary and fiscal policy by an efficient government can provide necessary climate for increased investment and also can stimulate capital formation in the country.
Thus in order to accelerate the pace of economic development the government must make necessary arrangement for the maintenance of law and order, defence, justice, security in enjoyment in property, testamentary rights, assurance to continue business covenants and contracts, provision for standard weights and measures, currency and formulation of appropriate monetary and fiscal policies of the country.
But the economy of underdeveloped countries is now facing serious threat from large scale disorder, terrorism, disturbances in the international border etc. All these have led to diversion of resources and initiatives from developmental to non-developmental ends. Moreover, under such a chaotic situation, capital formation process, business initiatives and enterprise of private firms are seriously suffered and distorted leading to a stagnation of economy in these countries.
Economic development of a country also demands existence of a strong, honest, efficient and competent administrative machinery for the successful implementation of government policies and programmes for development. The existence of a weak corrupt and inefficient administrative machinery leads the country into chaos and disorder. The development process of an underdeveloped or developing economy is not an easy task rather it is a complicated one as these countries are not having any common characteristics.
Thus the underdeveloped or developing countries are facing several constraints or obstacles to its path n economic development. These short-term constraints are related to over concentration and stagnation in agricultural sector, unemployment and under-employment, low productivity of capital, the growing deficit in its balance of payment position etc. Again, the long-term constraints include infrastructural bottlenecks, financial constraints etc.
The following are some of the important obstacles or constraints on the path of economic development of underdeveloped countries: In the initial part of their development process, most of the underdeveloped countries were under foreign domination which had led to the huge colonial exploitation by the foreign rulers.
Foreign rulers converted these economies as primary producing countries engaged in the production of raw materials only to be supplied to the ruler country at cheaper prices and also a potent market for the sale of the manufacturing products produced by the ruler country.
Foreign capitalists mostly invested their capital on mining, oil drilling and plantation industries where they exploited the domestic workers to the maximum extent and remitted their profit to their parent country.
They have also destroyed the cottage and small industries by adopting unfair competition which has put a huge pressure on agriculture, disguised unemployment and poverty.
After independence, these underdeveloped countries like India had to face serious obstacles to break this deep rooted impasse of low level equilibrium traps. Market imperfections in the form of immobility of factors, price rigidity, ignorance of market conditions, rigid social structure etc.
All these imperfections have resulted low level of output and low rate of productivity per worker. This has forced the gross output of these countries for less than the potential output. Suppose the country is producing only two commodities A and B.
The production possibility curve AB represents the production frontier which shows the various combinations of commodity A and B that may be produced by the country to its maximum extent through its fuller and best possible allocation of resources. Thus AB represents the potential production curve. But the actual production curve of the underdeveloped country denoted by AB lies much below the potential production curve AB due to market imperfections resulting in misallocation and under-utilisation of resources in the country.
Thus due to market imperfections, the underdeveloped countries fail to reach the optimum production function due to lack of optimum allocation of resources.
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