Introduction

• Development: is the process of improving the quality of all human lives and capabilities
by raising people’s sustenance, self-esteem, and freedom.
• Sustenance (The Ability to Meet Basic Needs): is the basic goods and services, such as
food, clothing, and shelter, that are necessary to sustain an average human being at the
bare minimum level of living.
• Self-Esteem (To Be a Person): is the feeling of worthiness that a society enjoys when its
social, political, and economic systems and institutions promote human values such as
respect, dignity, integrity, and self-determination.
• Freedom (To Be Able to Choose): is a situation in which a society has at its disposal a
variety of alternatives from which to satisfy its wants and individuals enjoy real choices
according to their preferences.
• Development Economics: is the study of how economies are transformed from
stagnation to growth and from low-income to high-income status, and overcome absolute
poverty.
• Absolute Poverty: is a situation of being unable to meet the minimum levels of income,
food, clothing, healthcare, shelter, and other essentials.
• The countries with which this book is concerned have been labeled with many
different terms.
• A term in vogue during the 1980s was the third world.
• The best way to define it is by elimination.
• Take away the first world (the industrialized economies of western Europe, North
America, and the Pacific) and the second world (the industrialized, formerly centrally
planned economies of eastern Europe), and the remaining countries constitute the
third world.
• This terminology is used much less frequently today.
• The geographic configuration of the third world has led to a parallel distinction of
North (first and second worlds) versus South.
• The more popular classifications used today put all countries on a continuum based on
their degree of development.
• Therefore, we speak of the distinctions between developed and underdeveloped
countries, more and less developed ones, or developed countries and developing
countries.
• The United Nations employs a classification scheme that refers to the poorest nations as
the least-developed countries.
• Emerging Economies: are economies whose industrial output is growing rapidly, such as
some Asian, eastern European, and Latin American economies.
• Industrialized Countries: are the richer countries, and they are called industrialized in
recognition of the close association between development and industrialization.
• Postindustrial Countries: are the highest-income countries, and they are sometimes called
Service Based Economies because services (finance, research and development, medical
services), not manufacturing, account for the largest and most rapidly growing share of
their economies.
• The World Bank has refined the rich–poor dichotomy, which is based simply on income
levels, and yield to a four-part classification:
1) Low-income economies, with incomes of $1,135 or less in 2022, converted into dollars at
the current exchange rate.
2) Lower-middle-income economies, with incomes per capita between $1,136 and $4,465.
3) Upper-middle-income economies, with incomes per capita between $4,466 and $13,845.
4) High-income economies, with incomes per capita of $13,846 or more.
 Chapter Two
Measuring Economic Growth and
Development
 Economic Growth and Economic Development
• The terms Economic Growth and Economic Development are sometimes used
interchangeably, but they are fundamentally different.
• Economic Growth: refers to a rise in national or per capita income.
• If the production of goods and services in a country rises, by whatever means, and
along with it average income increases, the country has achieved economic growth.
• This is a relatively objective measure of economic capacity.
• There is far less of an agreement on how to define economic development.
• Economic development implies more, most people would include in their definition
increases in the material well-being of individuals as well as improvements in basic
health and education.
• Others might add changes in the structure of production (away from agriculture
toward manufacturing and services), improvement in the environment, greater
economic equality, or an increase in political freedom.
• Accordingly, economic development is a normative concept, one not readily captured by
any single measure or index.
• Countries that increase their income but do not also raise life expectancy, increase
schooling, and expand individual opportunities are missing out on some important
aspects of development.
• The extent to which economic growth supports these broader criteria for development
is related to income distribution within countries.
• If all of the increased income is concentrated in the hands of a few or spent on
monuments or a military apparatus, there has been very little development in the
sense that we mean.
• Economic growth may be central to achieving economic development, but there is
much more to economic development than growth alone such as structural change.
• Situations of growth without development are the exceptions rather than the rule, but
they do happen.
• In most cases, increases in per capita incomes and economic development have moved
together.
• Finally, it should always be kept in mind that, although economic development and
economic growth involve much more than a rise in per capita income or product, no
sustained development can occur without economic growth.
 Measuring Economic Growth
• Economic Growth: refers to a rise in national or per capita income.
• Two basic measures of national income are commonly employed.
1. Gross National Product (GNP): is the sum of the value of finished goods and services
produced by a society during a given year.
• GNP excludes intermediate goods (goods used up in the production of other goods, such
as the steel used in an automobile or the chips that go into a computer).
• GNP counts output produced by citizens of the country, including the value of goods
and services produced by citizens who live outside its borders.
• GNP is one of the most common terms used in national income accounting.
• The World Bank and other multilateral institutions often refer to this same concept as
Gross National Income (GNI).
2. Gross domestic product (GDP): is similar to GNP, except that it counts all output
produced within (inside) the borders of a country, including output produced by
resident foreigners, but excludes the value of production by citizens living abroad.
• GNP or GDP divided by total population provides a measure of per capita income.
• In most countries the differences between GNP and GDP are small.
• Because it is easier to track economic activity within a nation’s borders, GDP has become
the more widely used measure of national income by the International Monetary Fund
(IMF), UN Development Program, World Bank, and other multilateral agencies.
• We will follow this convention and refer primarily to GDP and GDP per capita as measures
of national income.
• The contribution of a sector or component of GDP, such as manufacturing or agriculture,
is measured by the value added by that sector.
• Value added refers to the incremental gain to the price of a product at a particular stage of
production.
• Example: The value added of the cotton textile industry is the value of the textiles when
they leave the factory minus the value of raw cotton and other materials used in their
production.
• At the same time, the value added is equal to the payments made to the factors of
production in the textile industry: wages paid to labor plus profits, interest, depreciation of
capital, and rent for buildings and land.
• Because the total value added at all stages of production equals total output, GDP is a
measure of both total income and total output.