MAGDA NGUYEN

Tue, 07.11.2010

(a) Using examples, explain the difference between economic growth and economic development. (10)
(b) Is economic growth always a desirable policy objective for a government? (15)

(a)

The concepts “economic development” and “economic growth” both refer to upward changes
in an economy. However, these two concepts are distinguished, mainly, based on their
economic implications. That is, economic development concerns with changes with a bigger
scale in income, savings and investments, which in fact means the changes in standard of
living and well-being of population; while economic growth concerns with changes in total
real output per capita per person. Clear differences are shown when this is applied to real
world economy.

Let us look at one example which significantly shows the economic growth: mining in
Australia. Since 1840s, mining has become Australia’s primary industry and contributor to the
Australian economy. The first Australia’s economic minerals were silver and lead. After that,
the discovery of copper at Kapunda in 1861 and gold, which was found near New South
Wales in 1851, has led to great economic boom in Australia, called “gold rush”. The gold rush
has brought many advantages to Australian economy. Most significantly, by the 1850s, 40%
of world’s gold was produced in Australia. Besides, Australia has become the world’s largest
coal exporter, with 35% of international trade. The rapid growth of mining industries has
immediately led to expanded output of minerals, which results in Australia’s economic
growth. One of the most significant evidences is that two thirds of Australian exports to China
is energy and minerals. Moreover, more than half of the Australia's iron ore exports are to
China.

What are the main indicators for economic growth? It is usually recognized that the Gross
Domestic Product (GDP) and the Gross National Product (GNP) are the key indicators for
economic growth. GDP comprises the total production of a country including all the foreign
productions that took place on its land; while GNP also comprises the total production of a
country but excluding all the foreign productions on its land, and including all the productions
that took place in other countries but by its people. Generally, the total real output of a
country is concerned. The great increase in the real output of mining industries is clearly
shown ever since the mining resources have been discovered in Australia. One more well-
known indicator for economic growth is the Unemployment Rate. When the total output
increases, the unemployment rate should reduce as more people are hired. When mining
industries started to expand their production, naturally, more people have been hired, resulting
in lower unemployment rates, which led to greater economic growth. Economic growth is
generally a shift of the Production Possibility Curve:
 Capital goods

Capital
goods

Consumer
goods

Economic Development is a slightly broader concept than economic growth. Economic

Development refers to the changes in a country on a bigger scale. Economic development is
estimated based on the standard living and well-being of the population. The main indicators
of economic development are economic growth, health care and education.

There is one very significant example of economic development: economy of India. Since the
mid-1980s, India has opened up its markets through the economic liberalization and it has
gradually progressed towards a free market economy. Its economic growth has reached 7.5%
by the late 2000s and is highly capable of reaching the government’s target of 10% in 2011.
Although there was a quick increase in economic growth of India, and the fast rising of the
Indian living standards, there is still more than 70% of Indian population living in great
poverty - that is, living on less than $2 per day. On the other hand, since the great
development in India, on the agriculture aspect, it has become the largest producer of
milk, cashew nuts, coconuts, tea, ginger, turmeric and black pepper. 60% of Indian population
is employed for Indian agriculture. India has ranked second in agriculture output, fourteenth
in industrial output, and fifteenth in service output. There is an economic development in
India because all the indicators are moving towards to a higher level. Such as: it is clearly
shown that Indian economic growth is steadily increasing, improved health care is shown by a
lower rate of malnutrition in children, and higher level of education has been reached by less
illiteracy.
(b)

Generally speaking, economic growth is one of the main objectives of every economy. It is so
because economic growth brings about many advantages to the economy, the most important
of which is the nation’s wealth. As country’s total output increases, money that flows into the
country also increases, thus businesses will be more profitable. The greater the economic
growth, the more likely it is to lead to economic development, which will push up the living
standards of a country and will lower the poverty rates. Besides, economic growth tends to
stimulates higher employment, raise the investments, bring the potential environmental
benefits, etc. Therefore, generally, every economy wants its economic growth to be higher
and higher.

However, economic growth does not come risk-free and that is why economic growth is not
always a desirable policy objective for a government. While economic growth brings 4 main
benefits, it also brings 4 main costs which may make countries unwilling to push up the
growth. First, there might be the inflation risk. When a country’s total output increases, then
the demand is likely to grow. If the demand grows beyond the potential productivity, there
will be an increasing pressure put on interest rates which causes inflation to increase. Second,
while it is concluded that economic growth can bring potential environmental benefits
because a country will have more money to spend on environmental problems, if we consider
short run, there is a number of negative environmental impacts. As the amount of production
and consumption grow sharply, negative externalities come about, such as: noise, pollution
and traffic jams. Third, inequalities are taken into consideration. Let’s take an example of the
India’s economy. India has reached towards the economic development. However, more than
70% of its population still live in great poverty. That is because of inequalities. The benefits
of growth are not equally distributed among the population, which leads to rich people getting
richer and poor people becoming poorer. And the last but not least, economic growth might
result in regional disparities. Due to the sharp growth of economic factors, although the
average living standards seem to be rising, the difference in living standards between different
regions might be greater and greater. The gap between the rich and the poor may lead to
increase in the relative poverty and increase the gap between different regions within one
country.