Module 1 in AE 12 (Economic Development)

Course Content: On Principles and Concepts of Development

Overview

Welcome to Module 1
The course is about the fundamental economic concepts and applications, evaluating
the rationality of the principles to ultimately be used as a basis of policymaking whether
in the private or public sector. It highlights the basic issues of economic development as
a precursor to higher economics or policymaking decisions, notwithstanding the
interrelationship of local concerns in the economy and the international market. The
factors that impact economic development such as agriculture, construction,
manufacturing, mining, public administration, services, transport, and utilities are
discussed throughout the course.
The content is developed around a set of objectives mandated by the Commission on
Higher Education as part of the required subjects of BS Accountancy, AB/BA/BS
Economics, BS Business Administration, and allied fields such as Law, History, Political
Science, International Studies, Policy Science, and Public Administration to name some
(CMO No. 32 S. 2017).
Below is a schedule for Module 1:

Activity Description Time to Complete

Overview
1 Share an Experience/Reflection Activity 15 minutes
2 Truest Definition of Economic Growth and Economic 10-15 minutes
Development
3a What are the three key success factors to consider in 10-20 minutes
an economy as an environment “easy to do business”
with.
Self-Assessment
10 minutes
Different definitions of Globalization from the
3b Experts/history of Globalization/Effects of Globalization 40 minutes
(Section 1)

Activity, Discuss and Share (Sections 2 & 3) 60-120 minutes

Optional Discussion 30-45 minutes

4a Enrichment Activity 30 minutes

4b Take an-assessment quiz 15-35 minutes

Conclusion: Watch a Video 7-10 minutes

Lesson 1
TARGET

On successfully completing the section, students will be able to:

1. Describe the concept of economic growth and development.
2. Discuss the relationship of economic growth and public policy.
3. Explain the determinants of productivity, key factor for economic growth and
development.

HOOK (Share an experience or idea.)

Activity 1: Share and Discuss (15-25 minutes):

1. Look at this picture and try to figure out what clear message it wants to convey.
2. Share your observation to the class.
Your discussion post will be graded using the rubric below:

Skills/Points 5 3 2
Depth of Reflection Demonstrates a conscious & Demonstrates a Demonstrates a
thorough understanding of thoughtful limited
the subject matter/topic understanding of understanding of
the subject the subject
matter/topic matter/topic
Use of textual Uses specific and convincing Uses relevant Uses
evidence examples examples incomplete/vaguely
developed
examples
Language use Uses Uses language Uses vague
precise/stylistic/sophisticated that is fluent & language
language original

Activity 2: Story Analysis - Share an idea/insights.

What is the truest definition of development? (10-25 minutes)

1. Share and Discuss (15-25 minutes). Analyze the situation and write a 1-2
paragraphs essay that explains your interpretation and understanding of the
truest definition of globalization.

Your discussion post will be graded using the rubric below:

Features Expert (5) Accomplished (4) Capable (3) Beginner (2)

Quality of Very Somewhat Gives some Gives no information

Writing informative and informative and information but and poorly organized
well organized organized poorly
organized

Grammar, Virtually no Few spelling & A number of So many spelling,

usage and spelling, punctuation spelling, punctuation and
mechanics punctuation, errors, minor punctuations grammatical errors
grammatical grammatical and that interferes with
errors errors grammatical the meaning
errors

IGNITE
 1. Please check the link below.
2. [Link]

Self-Assessment: (Students’ Sharing of Ideas 10-25 minutes)

What, indeed, is economic development?
• Is economic growth causes changes?

Activity and Class Presentation in slide shares/PPT (40 minutes)

1. Discuss
2. Read about different definitions of globalization from experts (20-30 minutes).
3. Please check the link - [Link]

Indicators of Economic Growth and Development

 Saving and Investment
 Diminishing Returns and Catch-Up Effect
 Investment From Abroad
 Education
 Health and Nutrition
 Property Rights and Political Stability
 Free Trade
 Research and Development
 Population Growth
 O-Ring Theory of Development
O-ring theory of economic development was proposed by economist Michael
Kremer in 1993 that explains a production is composed of a set of tasks and each task
must be carried out proficiently for each one of the tasks to have value.
Solow Model of Economic Growth
Where,

y = f ( K ); y = c + i
(in a closed economy)
y = GDP per worker
K = capital per worker
D = depreciation rate
s = national savings rate
c = consumption per worker
i = investment per worker
ΔK = i – dK
In a steady state (ss), ΔK = 0.
Therefore, i = dk, sy = dk.
If I = sy, c + i,
then y = c + sy, hence,
c = ( 1 – s ) y.
One of the most popular models that are used to understand long-term growth is with the
use of the Solow model.
The model was developed by Robert Solow, an American economist and a Nobel
Prize Winner in Economic Sciences (Nobel Prize, 1987) and in 1956, wherein, gross
domestic product per worker, capital per worker, depreciation rate, savings and
investment rates are factored in the analyzing growth.
We can use the Solow model on the following assumptions: that we are analyzing
with a closed economy in mind, where savings is equal to investment. Labor, L and
capital, k, are sustainable for each other, capital depreciates at a fixed rate, as well as
the population, it grows on a constant rate, there is full employment of labor there are
diminishing return to an individual output and the most notable is that there is no
technological progress going on.

REMEMBER

y = f ( K ); y = c + i

(in a closed economy)

y = GDP per worker

K = capital per worker

Economic Development in the Philippines
Economic Development in the Philippines
 The Philippines ranks 132nd out of estimated 211 countries or states in terms of per
capita GDP.

 Inflation of the country increased from 4% in July, 2021 to 4.9% in August, 2021
(PSA, 2021).

 Power breakdowns limit the room for development.

 Leftists and separatists, like the New People’s Army (NPA) and the Moro National
Liberation Front (MNLF), Moro Islamic Liberation Front (MILF), and of course, the
Abu Sayyaf

 The COVID-19 pandemic greatly affected the tourism industry, although this is true
not only in the country.

Economic Growth and the World

 The United Nations Department of Economic and Social Affairs (UN-
DESA) released the 17 Sustainable Development Goals (SDG) adopted
by all member countries of the UN, one of them, SDG 8, “promote
sustained, inclusive and sustainable economic growth, full and
productive employment and decent work for all.”
 There are many challenges that the world is facing right now, and one
major problem is the pandemic and its aftermath, an unprecedented
happening that is shaking the modern economy.
 We are now facing the worst economic recession since the great
depression: a decline of the GDP per capita by 4.2%, risk of losing
livelihoods of around 1.6 billion workers in the informal economy,
tourism slowed down and some even stopped, considering that some
countries’ GDP relies heavily on income coming from tourists.

Rule of 70
 The power of approximation to determine how fast a variable can double
compounded without really compounding.

 This technique may be used in the fast computation of savings, investments, GDP
per capita, population and so on.

 For example, rate of 5%, mathematically, we will use the formula, y*e^0.05t= 2y,
that is13.86 years with the rule of 70, 70/5 = 14 years, that is a very close
approximation. Hence, a growth rate of 10%, 70/10, it will double in around 7 years.

Activity/Exercise
1. Read the article ‘East Asian Miracle’ Through Industrial Production and Trade Lenses,
focus on industrial production for Asian economic development.
2. Reflect on the article. Why is the title, ‘East Asian Miracle’ Through Industrial
Production and Trade Lenses? What are the crucial lessons for developing countries on
export-oriented manufacturing growth?

Conclusion on Lesson 1

 Economic growth and development

 Productivity in relation to economic growth and development
 O-ring theory
 Solow model of long-term growth
 Economic development in the Philippines and the world
 Rule of 70

Lesson 2
TARGET
On successfully completing the section, students will be able to:
1. Differentiate absolute and relative poverty or inequality.
2. Discuss poverty and inequality in the world.
3. Understand the measurement of poverty, some issues, and variables.

Absolute and Relative Poverty

Absolute poverty incidence as those level of incomes and expenditures falls below a
level, popularly known as the “poverty line,” nominal value of which is adjusted to hold
fixed value of its purchasing power
Relative poverty or sometimes called inequality, is the comparison of the incomes and
expenditures of the poor with reference to the rich or of some other groups (Fritzell et
al., 2013).

Global Poverty and Inequality

Poverty is relative to the standard of living in one country. A threshold is set to
determine who are below this line and may be considered impoverished or extremely
impoverished.
Extreme poverty is characterized as those disadvantaged to basic living conditions, like
food, clean water, sanitation, housing, good health, and even to information.

 Poverty is relative to the standard of living in one country. A threshold is set to

determine who are below this line and may be considered impoverished or
extremely impoverished.

 Extreme poverty is characterized as those disadvantaged to basic living conditions,

like food, clean water, sanitation, housing, good health, and even to information.

Measuring Poverty
In most countries, poverty line is set by the government as the threshold to which the
absolute value of income and expenses are compared to consider a family to be in
poverty.
The proportion of the population that is below the poverty line is the poverty rate.

For example, ₱100 is distributed in a population with a percentile of the richest, rich,
poor, poorer and the poorest. The richest receives ₱80, the rich ₱12, the poor at an
estimate of ₱5, the poorer at ₱2, and the poorest will have a relatively low share of ₱1
out of the ₱100.

Poverty Incidence and Lorenz Curve

Poverty incidence (PI) is the percentage of families or individuals with per capita income
or expenditure less than the per capita poverty threshold to the total number of families
or individuals, hence, P=(Q⁄n)X 100.
The Lorenz Curve is a curve showing the relationship of the population in percentile
ranking to the national income.

The Lorenz Curve was developed by American Economist Max O. Lorenz in 1905, in his
undergraduate essay and doctoral paper in Economic Theory of Railroad Rates. It is a
curve showing the relationship of the population in percentile ranking to the national
income.

Poverty Trap
The existence of the poverty trap is seen to be inevitable where there is a system of
means-tested social security benefits, the situation where a slight increase earnings
leads to an individual or family being worse off overall as a consequence of losing
entitlement to other benefits (Poverty Trap, 2006).
While governments and NGOs are working hand-in-hand in solving this issue, programs
in place are deemed ineffective at reducing poverty at its very core.

Earnings at Different Combinations of Work and

Government Support (An Example)
Work (Hours) Earnings Government Support Total Earnings

0 ₱0 ₱ 120,000 ₱ 120,000
500 ₱ 25,000 ₱ 95,000 ₱ 120,000
1,000 ₱ 50,000 ₱ 70,000 ₱ 120,000
1,500 ₱ 75,000 ₱ 45,000 ₱ 120,000
2,000 ₱ 100,000 ₱ 20,000 ₱ 120,000
2,500 ₱ 125,000 ₱0 ₱ 125,000

For a regular Filipino who is earning ₱50 an hour, balancing leisure and work hours is
depicted on the budget constraint line without government assistance. Working for
2,500 work hours for ₱50 would mean, no leisure hour and earning ₱125,000 in a year,
given that there are 50 weeks in a year. If we limit it to 40 hours weekly, 2,000 labor
hours in a year at ₱50 is earning ₱100,000. See point X in the graph. Therefore, as we
increase leisure time, hours for work would decrease and would diminish our
opportunity to earn.
Poverty Reduction

Poverty and the World

The UN Social Development Goals includes these priority actions to be taken as
addressed in the Johannesburg Plan of Implementation in 2002, prioritizing poverty as
top global challenge that we are currently facing, specifically for developing countries:
 Improving access to sustainable livelihoods, entrepreneurial opportunities, and
productive resources

 Providing universal access to basic social services

 Progressively developing social protection systems to support those who cannot

support themselves

 Empowering people living in poverty and their organizations

 Addressing the disproportionate impact of poverty on women

 Working with interested donors and recipients to allocate increased shares of ODA
to poverty reduction

 Intensifying international cooperation for poverty eradication

Activity/Exercise
In this activity, students are to work in teams to create a short film or documentary on
poverty. A task is assigned to each member of the team specifically in the role of film
making. The expected deliverable is a short documentary. In the process of creating
this project, students will be able to enhance their skills in the use of software,
hardware, story-telling, connecting the issue on poverty to economic development of
the country, and teamwork - set of skills that are expected from a university graduate.
Lesson 2 Conclusion
 Absolute and relative poverty

 Poverty and inequality

 Poverty measures, issues, and variables

 Poverty incidence and the Lorenz curve

 Poverty trap

 Poverty alleviation

 Poverty and the world

Lesson 3
TARGET

The students shall be able to:

1. Expound on GDP as a metric for economic growth and development.

2. Contrast the two approaches of computing the GDP.
3. Evaluate the uses of GDP and its implications on economic growth and
development.

GDP as a Metric to Economic Growth and

Development
 GDP is the peso value of all final goods and services produced in one
country in a year.
 It is considered by economists as a major measurement of a nation’s income,
of course, at a given time and at a given place or region.
 It is important to note that the income should always be the same as the
expense, although the case is not true all the time.
Expenditure Approach
GDP = C + I + G + (X – M)
Where:

 GDP = Gross Domestic Product

 C = Total spending on Consumption goods and services

 I = Total investment or purchase of plants, equipment, buildings, etc.

 G = Government spending on goods and services

 (X – M) = Net exports or exports less the imports

Income Approach
GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income
Where:

 Total National Income is the sum of all wages, rent, interest, and profits

 Sales Taxes is the tax imposed on consumers for the sale of goods and services

 Depreciation is the cost allocated to capital assets over an estimate useful life

 Net Foreign Factor Income is the income that citizens make while abroad less the
income generated by foreigners in the country

Use of Gross Domestic Product (GDP)

 Compare the economic performance on an annual basis by determining the growth
rate to help us understand where the economy stands.

 Assess the efficiency and effectiveness of government policies, GDP is an indication

of a positive or negative effect of the policy as an indicator of its success or failure
and the extent of how the economy is helped or hurt by this policy.

 Compare the country’s GDP with that of other countries.

GDP Deflator
 Implicit price deflator or GDP deflator is a metric used by economists to understand
the changes in prices of products that is produced in one country.

 Some economists believe that this measurement is more reliable than the
Consumer Price Index (CPI) that only relies with the basket of goods and services
when it comes to the gross effect of inflation.

GDP per Capita

 GDP of a country divided by its total population
 GDP per capita is a metric used to measure the overall production of goods and
services in a country translated to the value per person.

 Economists agree that this is a better measure than the total GDP, whether real or
nominal as it can be comparable to other countries and realistically understand the
standard of living of their respective citizens.

Case: Gross National Happiness

 Bhutan believes that the GNH is more important tool to use than GDP. They believe
that happiness is living in harmony with nature while serving the people including
economic inputs.

 There are nine domains and out of these are around two to four indicators for each
one, for a total of 33 indicators to measure the GNH.

 They have learned from the mistakes of the western capitalist and pursued
development without compromising the values of the country.

Nine Domains of GNH

Psychological Well-being Health
Education
Time Use
Cultural Diversity and Resilience
Good Governance
Community Vitality
Ecological Diversity and Resilience
Living Standards

Activity/Exercise
Search and watch the video titled, “How Vietnam Became an Economic Miracle.”

Discussion Question
What are the lessons that we can derive from this case video on ‘How Vietnam
Became an Economic Miracle’ to emulate and apply to our own country to achieve
economic prosperity?

Lesson 3 Conclusion
 GDP as a Metric for Economic Growth and Development

 Two Approaches of Computing GDP

 Uses of GDP

 Real and Nominal GDP

 Other Measurements of a Nation’s Income or Wealth

References:
Anderson, Anthony B., ed. Alternatives to [Link] York: Columbia University Press,
1990.
Fields, Gary. Poverty Inequality and Development. New York: Cambridge University Press. 1980.

Todaro, Michael P. and Stephen C. Smith. An Introduction to Economic Development. Pearson

Education, Inc. 2019.