Difference Between Economic Growth and Economic Development

Economic growth and development represent different aspects of a country's economic progress and well-being. Economic growth primarily focuses on the quantitative expansion of an economy. In contrast, economic development is a broader concept, encompassing improvements in the overall well-being and quality of life of a country's population.

Economic growth and development are commonly misunderstood terms and are often used interchangeably. Both economic policies strive to achieve the financial well-being of a nation. Developed countries are concerned with maintaining and surpassing their achievements and continuing to improve their balances of growth and development indicators. On the other hand, non-developed countries have made them an essential part of the utopia or dream to achieve. This article will explain the difference between economic growth and economic development.

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Table of Content

• Difference Between Economic Growth and Development
• What Is Economic Growth?
• What Is Economic Development?

Difference Between Economic Growth and Development

• Economic growth: An increase in actual national income/national output.
• Economic development: An improvement in quality of life and standard of living.

What Is Economic Growth?

Economic growth is an economy’s capacity to produce more goods and services. It can be expressed as expanding the economy’s production possibilities, which means the economy can produce more, and its production possibilities frontier (PPF) moves upwards. 

The Inter-American Development Bank defines it as follows: Economic growth is the increase in product and income per person in the long term. Growth is how an economy (national, regional, or world economy) becomes richer. 

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Economic growth is a narrow term. It involves an increase in output in quantitative terms. Still, economic development includes changes in qualitative terms such as social attitudes and customs and quantitative growth of output or national income.

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Economic growth represents:

• Increased production: Economic growth signifies an expansion in the quantity and/or quality of goods and services produced. This expansion leads to higher levels of output and income in the economy.
• Rising standard of living: As production increases, the average standard of living for individuals typically improves, allowing them to consume more goods and services.
• Greater prosperity: Economic growth often leads to increased employment opportunities, improved infrastructure, and greater access to education and healthcare.

Factors influencing economic growth:

• Capital accumulation: Investment in physical capital (machinery, equipment, infrastructure) and human capital (education, skills, training) can drive productivity and economic growth.
• Technological advancements: Innovations and technological breakthroughs can increase efficiency, new products and services, and overall economic expansion.
• Institutional factors: Stable political and legal institutions, efficient property rights systems, and healthy business environments are conducive to long-term economic growth.
• Globalization: Openness to international trade and investment can provide access to new markets, capital, and technology, promoting economic growth.

Means to Measure Economic Growth:

• GDP growth rate: The most common measure of economic growth is the annual percentage change in GDP. A positive growth rate indicates an expansion, while a negative rate signifies a contraction (recession).
• Real vs nominal GDP: Real GDP measures the change in the production volume, adjusted for inflation, while nominal GDP includes the effect of price changes.
• Per capita GDP: This metric measures the GDP per person in a country, providing a more accurate picture of individual living standards and economic well-being.

What Is Economic Development?

Economic development can be generically defined as sustainable growth from three points of view:  social, cultural, political, and economic changes that contribute to material progress. Economic development is a sustained improvement in the material well-being of society. It is a broader concept than economic growth. It contains changes in resource supplies, the rate of capital formation, the population’s size and composition, technology, skills, efficiency, and institutional and organizational set-up. 

These changes fulfil the broader objectives of ensuring more equitable income distribution, significant employment, and poverty alleviation.

What Economic Development Represents:

• Improved living standards: Economic development aims to raise the standard of living for individuals and households by increasing income, improving access to basic necessities like healthcare and education, and creating opportunities for personal growth and development.
• Structural transformation: It involves diversification of the economy beyond primary sectors like agriculture to include robust industrial and service sectors, fostering job creation and economic growth.
• Technological advancement: Encourages innovation and adoption of new technologies to improve productivity, competitiveness, and sustainability in the global economy.
• Increased social well-being: Promotes human development by investing in education, healthcare, and skills training, empowering individuals to reach their full potential and contribute meaningfully to society.
• Reduced inequality: Aims to address income and wealth disparities, ensuring everyone has equal opportunities to participate in and benefit from economic growth.

Factors influencing Economic Development:

• Capital accumulation: Investment in physical capital (infrastructure, machinery) and human capital (education, skills) is crucial for driving productivity, innovation, and economic growth.
• Institutional development: Effective institutions, including stable legal systems, efficient property rights, and strong governance, create a predictable and transparent business environment, encouraging investment and growth.
• Openness to global markets: Engaging in international trade and investment provides access to new markets, capital, and technologies, promoting economic development and competitiveness.
• Technological advancements: Innovation and diffusion of new technologies are critical for increasing productivity, and efficiency, and creating new products and services, driving economic growth.
• Sustainable practices: Incorporating environmental sustainability into economic development ensures long-term economic viability and protects the environment for future generations.

Means to Measure Economic Development:

• Economic indicators: Traditional indicators like GDP per capita, unemployment rates, poverty rates, literacy rates, and life expectancy help assess economic progress and well-being.
• Human development index (HDI): This composite index combines measures of income, health, and education, providing a broader picture of human development and well-being.
• Subjective well-being surveys: Measures of happiness and life satisfaction are increasingly used to complement traditional economic indicators and capture individuals' subjective experiences and living standards within an economy.
• Inequality metrics: Measures like the Gini coefficient help assess the distribution of income and wealth within an economy, indicating the level of economic inequality and its potential impact on development.

To summarize, economic development is a process that constitutes a long chain of interrelated changes in fundamental supply factors and demands that ultimately lead to growth in a country's net national product over the long term.

An example of the difference between economic growth and economic development can be illustrated through the case of Bangalore.

Economic Growth

Bangalore has recently become a central hub for technology and IT services. The city has seen substantial economic growth, with numerous tech companies setting up operations there, rapidly increasing the region's Gross Domestic Product (GDP). This growth has been marked by high levels of foreign investment and job creation, particularly in the IT sector. The city’s infrastructure, including roads, office spaces, and tech parks, has expanded to support this economic growth.

Economic Development

However, alongside this economic growth, Bangalore has faced challenges related to economic development. Despite the booming IT industry, the city has struggled with issues such as traffic congestion, pollution, and inadequate public infrastructure, affecting the quality of life of residents.

To address these challenges, various government initiatives and non-governmental organizations have focused on improving living conditions. For instance, programs aimed at enhancing public transportation, providing affordable housing, and improving healthcare services have been introduced. Additionally, initiatives to support education and skill development have been launched to ensure that the benefits of economic growth reach a broader segment of the population, especially marginalized communities.

Conclusion

Economic growth, measured by real GDP, helps address socio-economic issues and improve living standards. However, it must be balanced with responsible environmental policies to prevent resource depletion. Economic development, aiming at citizen welfare, considers broader factors like life expectancy and literacy. Both growth and development are vital for a nation’s progress, ensuring prosperity and the well-being of its people. Striking this balance is key to sustainable and inclusive growth.

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