CONCEPT OF ECONOMIC GROWTH AND DEVELOPMENT.

The concept of economic growth and development are clearly explained here 

with clear cut distinction between the two concepts. In addition to this, some 

selected growth theories were analysed and explained. We give a 

comprehensible analysis of growth arithmetic and enumerate and explain main 

features of developed and developing countries, and analyse reason why 

economic growth may not lead to development.

At the end of this post student should be able to;

i. Explain what is meant by Economic growth and Development.

ii. Differentiate between economic growth and economic development.

iii. Understand reasons why economic growth may not lead to economic 

development.

3.0 Main Content

3.1 Concept of Economic Growth and Development

Economic growth is defined as the expansion in a nations real output or it can be 

define as the expansion in a nations capability to produce goods and services its 

people want. Economic growth also refers to an increase in real aggregate 

output (real GDP) reflected in increased real per capital income. The rate of 

economic growth is measured as the percentage increase in real GDP overtime. 

Economic growth can equally be defined as increase in a nation‘s output which 

is identifiable by sustainable increase in real per capita income (Bakare-Aremu, 

T.A).

Economic development on the other hand is a sustainable increase in real GDP 

that implies increased real per capital income, better education and health as well 

as environmental protection, legal and institutional reforms and an efficient 

production and distribution system for goods and services (Fashola, M.A ).

Self Assessment Exercise

i. What is Economic Growth and how is it different from Economic

development?

3.2 Distinction between Economic Growth and Development

The terms growth and development are often misused by laymen to mean the 

same thing. But this is not so. 'The summary below focuses on the distinction 

between growth and development.

Fashola (1998) argues that economic growth is an aspect of economics that deals 

with national income objectives; whereas development incorporates other 

objectives such as: equitable welfare distribution, national self reliance, balance 

sectorial development, balanced regional development; ecological balance, social 

and environmental stability, among others.

Todaro (1977) contends that growth stimulates improvement in incomes and 

output while development involves radical changes in institutional, social and 

administrative structure, as well as in popular attitudes and sometimes even 

customs and beliefs.

Schumpeter (1934) stresses that growth is a gradual and steady change in the 

long run which comes about by a general increase in the rate of savings and 

population. Development on the other hand is a discontinuous and spontaneous 

change in the stationary state which forever alters and displaces the equilibrium 

state previously existing.

Maddison (1970) was of the opinion that the raising of the income levels in rich 

countries is economic growth. But the achievement of the same objective in 

underdeveloped countries is economic development.

Kindleberger (1965).advances that economic growth means more output while 

development implies both more output and changes technical and Institutional 

management by which it is produced and distributed.

Bakare (1999) perceives development as the process of optimizing the resources 

of a nation to meet the needs of the people and their enlightened aspiration and 

endowing them with the capacity to sustain their achievement. It need be stated 

that growth is a necessary but not a sufficient condition for attaining 

development. Without growth there cannot be development. But without 

development, there can be growth.

Bakare-aremu (2009) defined Economic growth as a continuous increase in 

National output which is identifiable by sustainable increase in real Per capita 

income which translates to general wellbeing of an average citizen. However, 

when this leads to structural positive transformations then development is 

implied.

It is also necessary to note that the existence of growth in a country may not lead 

to development in a situation where there is growing income inequality which 

can strengthen abject poverty. More so, inter-sectorial imbalance will not 

promote development because an increase in national output not accompanied by 

equitable distribution of income will create setback for sectors such as housing, 

utilities, health "Services, food production, transport and communication. As 

such development cannot be sustained because diseases, mortality rate, 

starvation, misery, and industrial inefficiency cannot be eradicated. Other 

reasons why economic growth may not lead to development can be attributed to 

environmental degradation, moral, intellectual and spiritual decadence; these 

would be discussed in the latter study unit.

Self Assessment Exercise

i. What are the major difference between economic growth and economic 

development?

ii. Can there be development without growth?

3.3 Measurement and Arithmetic of Growth

Economic growth concerns the relative change in the real value to volume of 

goods and services produced by a country for final demand (i.e. demand by 

households, consumers, governments, capital formation and net exports); 

represent the national product, national output, or national income. At market 

value, national output represents revenue or earnings by the business (or 

production) sector. Such earnings are ultimately income to the factors of 

production, namely; wages to labour, rent to land and real estate interest to 

capital and profit to entrepreneurship or the business. So output in monetary 

value in income. It is in this that national product (output) in the things same and 

national income.

In precise terminology, we speak of Gross Domestic Products (GDP) and Gross 

National Products (GNP) in volume of national income. GDP refers to the 

market disposable value of output produced within the country i.e. produced 

domestically. On the other hands, GNP refers to total income occurring to the 

nation or at the disposal of the nation. Therefore, to obtain the GNP, we 

subtraction GDP, all incomes that are repatriated abroad to foreign owned factors 

of production (such as interest on foreign loan, dividends to foreign shareholders, 

and part salaries repatriated abroad on account of expatriate personnel) and add 

all incomes from abroad on account of the citizens of or residents in the country. 

What is subtracted is referred to as factors payments to abroad (FP) and what is 

added is referred to as factors income (FI).

The difference between factor payments to and incomes from abroad is the net 

factor payments (NFP). A net factors payment is almost always positive for 

developing countries on account or substantial foreign investment, foreign equity 

ownership, and-management by expatriates of the modern sector of their 

economies.

Thus we can state:

GNP = GDP - FP + Fl ……………………………(1)

= GDP - (FP - FI)………………………………...(2)

= GDP - NFP …………………………………… (3)

GNP is almost always significantly smaller than GDP

GNP is more relevant than GDP for measuring economic growth since GNP is 

the nationally available income to the people and hence more related to their 

material welfare as opposed to GDP which is income generated within the 

country but partly belonging to the people of other countries who partly own the 

resources employed in generating the GDP. Since the average income of the 

people is more significant than total income, as far as economic welfare is 

concerned, GNP per head of the population is preferred to total GNP for the 

purpose of measuring economic growth.

Other measures of economic growth are the volume of electricity generated per 

head, total energy consumed per head, and index of industrial production net of 

population growth. These measures may be more reliable than per capital GNP, 

because the internal measurement is compounded by the changing price levels 

which have to be estimated and adjusted for in evaluating the real GNP or GD P 

at constant prices of a given year.

Arithmetic of Growth

The illustration below stand for standard arithmetic of growth;

Self Assessment Exercise

Suppose GDP increase by 15% and price level by 45%. Calculate the real 

growth rate in the economy.

4.0 Conclusion

The unit survey the concept of economic growth and development, it

differentiate between economic growth and development as well stating the 

major characteristics of the developed and underdeveloped or developing

countries.

5.0 Summary

The unit review concepts of economic growth and development and those issues

that are highly related to it such as theories of growth, distinction between 

economic growth and economic development,

6.0 Tutor-Marked Assignment

i) Differentiate between economic growth and economic development.

ii) Given that economic grow at 12% and population grow at 9%, 

calculate per capita growth of income.

iii) Examine the Rostow stages of growth.

7.0 References/Further Readings

Attah B.O, Bakare, T.A. & Daisi, O.R., (2011); Anatomy of Economics 

Principles, Q&A (Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, 

Lagos, Nigeria

Amacher, R and Ulbrich, H, (1986); Principles of Economics, South Western

Publications Co. Cincinnafi, Oliso

Bakare –Aremu T.A, (2013); Fundamental of Economics Principles

(Macroeconomics), Raamson Printing Press, Oke-Afa, Isolo, Lagos, Nigeria