Economic Development: Concepts and Measurement
Economic Development
Economic development is a qualitative phenomenon that involves the structural transformation that improves the modes of production and the standards of living of a certain economy. It includes economic and social changes and progress for the people of the country.
There is a link between the increase in productivity and the increase in income: In the labor market, when a worker produces a product for a certain value, their income is linked to that value. So, the more productive the workers are, the higher the incomes they will receive. If incomes rise, consumption is also going to increase and, together with this, also the savings. When the population has more savings, it is likely that the investment will also rise, which will lead to an increase in productivity and so on.
Sustainable Development
A new conception of economic progress is sustainable development, which was introduced by the Central Bank in the 1990s. It is the growth rate that can be extended indefinitely in time, to the extent that it does not exploit or degrade the environment, or produce excessive income inequality, which is not contemplated by economic development. This organizing principle meets human development goals at the same time as sustaining the ability of natural systems to provide natural resources.
Economic Growth
We understand economic growth as a quantitative phenomenon. Economic growth is the actual increase in product or income of a certain economy. The way the economic growth rate of a country is calculated is by comparing the production obtained in two different periods.
The Vicious Circle of Poverty
The vicious circle of poverty is a theory that speaks about how underdeveloped countries generate a chain that does not let them prosper and that cannot be left due to the lack of different aspects. The vicious circle of poverty starts with low savings because people spend most of their wages on necessary goods, which makes a low investment due to the lack of money. After that, as there is no investment, productivity is also very low, generating very low incomes, which derives in decreasing consumption, and starts the chain again.
Purchasing Power Parity Index (PPP)
The problem is that every country uses a different currency and when using the exchange rate, the result obtained is the same GDP but in another currency, which does not show the relative purchasing power. So, we use the purchasing power parities (PPP) as a conversion factor that considers the prices of the goods in the country and in the international market.
GDP: Three Methods of Calculation
- Value Added Approach: Sum of all values added.
- Expenditure Approach:
- Domestic Demand: Private Consumption + Public Consumption + Gross Capital Formation (GCF).
- GCF: Gross Fixed Capital Formation + Change in Inventories.
- Trade Balance: Exports – Imports.
- Income Approach:
- Compensation of Employees + Gross Operating Surplus (GOS).
- Income Balance: Compensation of Employees + Property Income (the two from each are subtracted and the results are finally summed).
Other Important Economic Indicators
- Gross National Product (GNP): GDP – Income Balance.
- Gross National Disposable Income (GNDI): GNP + Transfers Balance (Current Transfers Receivable – Current Transfers Payable).
- Gross Savings: GNDI – Final Consumption (Private + Public Consumption).
- Lending/Borrowing: Gross Savings – GCF.
- Current Account Balance: Goods Balance + Services Balance + Income Balance + Transfers Balance.