Factors Influencing Growth & Development
Economics: IB Diploma, topic 3.6.1
Economic Growth vs Economic Development
There are a number of key differences between economic growth and development.
Economic growth
- Economic growth is measured by an increase in real GDP.
- While this allows for higher real incomes, which means people can afford a higher standard of living, it is very important for economists to realise that an increase in real GDP does not equate to economic development, although it may contribute.
- Supporting research & development is viewed as a huge supporter of economic growth. South Korea has grown rapidly since 1992 and its R&D has been up to 3.5% of GDP.
Economic development
- The United Nations (UN) defines development as "the expansion of people’s freedom to live long, healthy and creative lives; to advance other goals they have reason to value; and to engage actively in shaping development equitably and sustainably on a shared planet.”
Common Characteristics of Less-Developed Economies
Less-developed economies often have certain characteristics which stop them from developing faster:
Low investment and savings
- Increasing the quality or quantity of physical capital can increase the productivity of an economy.
- A country or business needs to save money to invest the savings in capital. If a country does not save, then investment in physical capital will be lower.
Command economy and corruption
- In some low-income countries, which are less economically developed, there are:
- Command economies, where the price mechanism (or invisible hand) does not allocate resources.
- Corruption and infighting, where resources and investment are not directed to the place where it is intended.
- For example, the Democratic Republic of Congo is resource-rich, but politics seems to have slowed economic development.
Lack of education
- Education is sometimes called the accumulation of human capital.
- High levels of education can make the labour force more productive and increase the output of an economy.
Loans and borrowing
- If households or businesses cannot borrow money (get access to capital), then they won't be able to invest in houses, capital (like machinery) or inventory. This will harm economic growth and development.
Test yourself on Factors Influencing Growth & Development
Which of the following are included in the UN's definition of development?
Which of the following are often characteristics of less-developed economies?
Which of the following terms refers to an economy where the government allocate resources rather than the price mechanism?
Which of the following is an example of a command economy?