Course Code and Title : ACED1 – ECONOMIC DEVELOPMENT

Module : 2
Topic : Measurement of Economic Growth and Development
Professor : Prof. Virgie Valencia-Reyes

LEARNING OBJECTIVES:
At the end of the lesson, you should be able to:
1. Discuss the indicators of development – GNP, GDP AND GNI
2. Describe the concept of economic growth and development
3. Discuss the factors of economic growth and development
4. Discuss the economic development of the Philippines
PRE- ASSESSMENT:
Encircle the letter of the best answer from the choices given below:
1. Scarcity can best be defined as
A. A Shortage of a product
B. Where demand is greater than supply
C. Unlimited wants vs Limited resources
D. Limited wants vs unlimited resources
2. Which of the following is NOT a consumer good?
A. A bulldozer at a construction site
B. A happy meal at mc donalds
C. A pack of doritos in a vending machine
D. A television set for sale at an appliance store
3. Which of the following resources would economists classify as “capital”?
A. Raw Bauxite in a South African mine
B. A hammer used in framing a house
C. A worker hired to repair engines
D. Trees used to make paper

LESSON 2 – Measurement of Economic Growth and Development

 4. ________ is the most basic economic problem
A. Scarcity
B. Labor
C. Greed
D. Capital
5. When I choose one item over another because I can’t afford both, this is
called an ...
A. Scarcity
B. Opportunity cost
C. Choice
D. Incentive

INTRODUCTION:

One of the most important topics in economics is appreciating, comprehending, and

determinants of long-term growth. Fundamentally, the term "economic growth" refers to the
percentage change in a nation's per capita GDP-the money value of all goods and services
produced over a long period of time. We often associate economic growth with the standard
of living in a country for a relevant time horizon. Many economists would suggest that
economic growth is the key indicator of a country's power and accomplishment.

Various studies have been dedicated to the study of economic growth that clarified the ways,
programs, and situations that sustain growth. In this lesson, we are going to describe economic
growth, using the actual data on per capita real GDP, analyze the role of productivity and finally,
discuss economic development of the country

Economic growth boosts the national output, the total money value of all goods and services
produced by one country, whereas, economic development means advancement of the standard of
living, e.g., education, healthcare, innovation, environment, to name a few. Growth directly boosts
development; all other things remain constant, as higher GDP would mean more to spend on factors
that are considered development.

LESSON 2 – Measurement of Economic Growth and Development

LESSON:

According to the definition of the Philippines Statistics Authority (PSA), "standard of living" is the
level of consumption that people enjoy, on the average, and is measured by the average
income per person, while the "cost of living" is the amount of money it takes to buy goods
and services that a typical family consumes. A rising cost of living is called inflation and
deflation as otherwise.

ECONOMIC GROWTH
Governments around the world are faced with issues concerning productivity and living standards. In
2013, the World Bank Group adopted the twin goals to guide its work: ending extreme poverty and
boosting shared prosperity.

The following are the factors considered in building an economy:

1) SAVINGS AND INVESTMENT – In order to produce more, we have to invest in capital assets to
enable us to have the capacity to yield more goods and services. However, it is to be noted that
capital investment would mean sacrifice to consume more. There is a need for a country to promote
both domestic and foreign investments in order to reduce unemployment. Ideally, a reduction in
unemployment will reduce poverty levels, and hence, the government's social burden, which will
ultimately allow for increased public savings.

2) DIMINISHING RETURNS AND CATCH-UP EFFECT. As the stock of capital increases, the extra
output produced from an additional unit of capital decreases. Productivity is considerably affected
production minimally when the workers with a large quantity of capital they use in the process are
given extra units of capital. In the long run, a higher saving rate leads to a greater level of productivity
and income but not greater growth in these variables.

3) INVESTMENT DOMESTICALLY FROM ABROAD. An investment that is sponsored with foreign

money and of the foreign money is called foreign portfolio investment. It is expected that the use of
the foreign money would mean more opportunities to produce where the money is capitalized, but, of
course, a certain interest in that money is foreseen as well. The World Bank (WB) and the

LESSON 2 – Measurement of Economic Growth and Development

International Monetary Fund (IMF) were established to ensure that there is economic prosperity
around the world by financing public goods and services with funds accumulated from more
advanced economies like the United States of America (USA).

4) EDUCATION. Human capital theory attributes differential investments in human capital to

inequalities in income, such as those found to exist between women and men or minorities. This
theory emphasizes human capital as a set of economic assets. Education benefits human capital that
is important as physical capital. In fact, the largest chunk of the annual budget is dedicated to the
education sector. More quality educated people produced in a country would mean an opportunity to
generate more and better ideas to produce goods and services. However, in developing economies,
highly educated individuals may to in other countries with a higher standard of living, hence, brain
drain is happening, -emigration of most highly educated workers to rich countries. (In a recent
happening, there was a policy to limit the permission for registered nurses to work abroad for a given
period of time).

5) HEALTH AND NUTRITION. A healthy population would also mean human capital, just like
education, hence, are capable to produce more goods and services because they can maximize
employment as compared to an unhealthy population. Other things remain fixed, healthier individuals
are more productive. Policies that lead to economic growth would consider having healthy workers to
promote greater productivity.

6) PROPERTY RIGHTS AND POLITICAL STABILITY. Property rights ensure the exercise of rights
over one's property and these guarantee more production of goods and services. In addition, when
there is less uncertainty in government decisions and policies, especially in terms of market trading,
there is an opportunity to improve production process and distribute products in the country. A stable
political environment is considered to have efficient executive, legislative and judiciary systems,
working together for the country’s economic development.

7) FREE TRADE. A competitive economy that reduces or eliminates trade restrictions experiences
economic growth after benefiting from more products to be used as input to production. Outward-

LESSON 2 – Measurement of Economic Growth and Development

oriented policies give way to developing countries' opportunity to interact with other countries and
trade freely, thus creating more prospects to improve production.

8) RESEARCH AND DEVELOPMENT. The products of research and development (R&D) are new
ideas, goods, and services that people consume. Government institutions allocate a part of their
yearly budget to research to continue improving the ways things are done, in a more efficient or totally
distinctive way. To protect the idea, a patent is awarded to an innovator for a certain number of years
to encourage more researchers to discover beneficial things. Essentially, R&D turning money into
knowledge and innovation is a process of creating a business out of this knowledge.

9) Population Growth. There are two schools of thought regarding population growth. On one hand,
a relàtively large population means more human resources working and contributing to the production
of the country, but on the other hand, it also means more people to consume those goods and
services. It is to be noted, however, that there are countries with a few population and slow population
growth rate but are considered developed like Germany, having an annual growth rate of 0.2%, and
Singapore, -0.3% in the 2020 study of the World Bank.

GROSS DOMESTIC PRODUCT (GDP) "

“Peso Value" - monetary value
"Final Goods and Services” - Finished goods do not include intermediate goods
"within the country" - domestically produced
“in one year” – does not include goods and services that were included in another year.

The market is composed of buyers and sellers who may be the government, firm, or
household, and the interaction of the two creates income and expense that may be used to measure
the goods and services that flow within the economy or the circular flow of national income. For
example, Rafael sells buko pie to Ella for P280 a box. When Ella buys the pie, it becomes an
expense on her part and obviously an income for Rafael. The transaction shows that there is an equal
monetary value that is involved, that is P280, and both contributed to the, economy as described in

LESSON 2 – Measurement of Economic Growth and Development

the circular flow of income. This is a simple instance of money flowing in and out of the markets of
goods and services and the markets for factors of production.

Thus, this can be used to measure the gross domestic product, which is considered by
economists as a major measurement of a nation's income, of course, at a given time and 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. Every economy wants a le term economic growth; this is an
indication of development. There is a need to know if economy is growing or contracting, and GDP is
able to estimate such.
GDP is the peso value of all final goods and services that are produced in one country in a
year.

USES OF GROSS DOMESTIC PRODUCT

1) To compare the economic performance on an annual basis by determining the growth rate to help

us understand where the economy stands.

For example, we want to know the percentage increase or decrease of GDP before the

pandemic in 2019 and during the pandemic in 2020. Using the data provided by the World Bank, we

can compute:

Percentage Change Increase/Decrease in GDP = GDP Current- GDP Previous/GDP Previous

= $362.24B – $376.88B/$376.88B

= 3.86% (decrease)

LESSON 2 – Measurement of Economic Growth and Development

2) To 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.

3) To compare the GDP with that of other countries. A higher GDP growth means a better quality of

life and a higher standard of living. In general, we determine the superpowers, tigers, rising tigers,

etc. boosting the economic reputation and enhancing more business transactions with them.

OTHER MEASUREMENTS OF A NATION'S INCOME/WEALTH

Net National Product Gross National Product National Revenue

Personal Revenue Disposable Personal Revenue

Gross National Happiness Genuine Progress Indicator

 Gross National Product -This is the sum of all the finished goods and services produced by
the citizens of a country overseas and domestically.

 Net National Product - This is the sum of all the finished goods and services produced
by the citizens of a country overseas and domestically less depreciation.

 National revenue - This is part of the national budget of a country that is composed of all
revenue sources to be used in national expenditures.

 Personal revenue - This is the sum of an individual's or citizen's earnings from salary, wages,
and investment during a period of time.

LESSON 2 – Measurement of Economic Growth and Development

  Disposable personal revenue - This is the sum of an individual's or citizen's earnings from
salary, wages, and investment during a period of time less current individual taxes.

 GROSS NATIONAL HAPPINESS

The Kingdom of Bhutan is known for its application
DOMAINS OF GNH
of a unique metric for the nation's wealth and well-
1. Psychological Well-being
being---the Gross National Happiness (GNH). It
2. Health
attracted the attention of the world recently, and in
2012, the United Nations asked it to develop the 3. Education

guiding principles for happiness in the world. 4. Time use

Bhutan believes that the GNH is a more important 5. Cultural Diversity and
Resilience
tool to use than GDP. They believe that happiness
is living in harmony with nature while serving the 6. Good Governance

people, including economic inputs. There are nine 7. Community Vitality

domains; and out of these are around two to four 8. Ecological diversity and
indicators for each one, for a total of 33 indicators resilience

to measure the GNH. They have learned from the 9. Living standards

mistakes of the western capitalist and pursued

development without compromising the values of the country.

Economically, GNH is founded on the basics that

GNH SCORE CHART as per
happy people live longer and thus will need less
INDICATOR
public health funding. They can achieve more in
Unhappy: < 50% of the indicators
terms of the productivity of goods and services.
Narrowly happy: 50-65% of the
Happy people are more generous, and they are
indicators
more likely to conserve natural resources, thereby
Extensively happy: 66-76% of the
promoting sustainability. GNH reflects the normative
indicators
Deeply happy: more than 77% of the
LESSON 2 – Measurement of Economic Growth and Development
indicators
 values of culture and traditions. It should be statistically sound, reflecting happiness correctly,
relevant for the action of the government, and of course, understandable to the people as they
are the ones doing a self-reflective survey for themselves.

Bhutan held periodic surveys of the population, like in 2006, 2008, and 2010, and then came up with
the GNH. It is only relatively recent that Bhutan utilized the GNH in their policy-making. For now, they
use it as a tool to identify what aspects to focus on that are considered cause or causes of
unhappiness. For example, they have recognized that in urban areas, they need to focus on
insufficient community vitality, culture, and psychological wellbeing. In rural Bhutan, they should focus
on living standards and balanced use of time.

Not everyone is impressed with the GNH as a metric for the nation’s wealth. Some argue that the
measurement is relative and that the factors used are subjective, like in the standard of living and
work-life balance, which is based on perception and self- assessment. There is question on the
proper identification of what to measure; is it measured the right way and at the right time? They say
it is only academic and proves nothing because of the weak evidence that is shows. Still, Bhutan
admittedly pronounces that happiness is still a hope for the country.

GENUINE PROGRESS INDICATOR

Some economists believe in the deficiency of GDP as a measure of the performance of the economy.
Hence, they suggest an alternative metric called the genuine progress indicator (GPI). This is
founded on the index of sustainable economic welfare and growth. If we are to make an analogy of
GDP and GPI, the former is the gross revenue and the GPI is said to be the net revenue when all
negative impacts of environmental and social externalities are considered. As such, GPI uses the
data that is derived from the GDP, just adding the good and bad effects of production and
consumption like pollution and social impacts like poverty and the attempts to internalize those
externalities, like the costs repair and control poverty and pollution.

Both the GDP and the GPI are measured in terms of monetary value; hence, it becomes easy to
compare with other forms of metrics in understanding economic stability and performance. However,
GPI includes non-material aspects such as environmental damage, depletion of non-renewable

LESSON 2 – Measurement of Economic Growth and Development

resources, dependence on foreign aid, and crime rate, among others. In GDP, capital is included just
once, but in the computation of the GPI, it takes into onsideration the ongoing effect of the use of
capital. Some economists argue that the GPI uses quite subjective data, as the value given by the
respondents of the survey for the GPI can be biased and may not represent the entire economy (Pais
et al, 2019). Besides, It is more expensive to derive the GPI and time consuming as compared to the
GDP. It needs to survey households, firms, and governments and their view on how much are the
costs of externalities like pollution and poverty and how much is the internalization applied to them.

GENERALIZATION:

We have discussed the definition of “economic growth" which refers to the

percentage change in a nation's per capita GDP-the money value of all goods and
services produced over a long period of time. We often associate economic growth with
the standard of living in a country for a relevant time horizon. Many economists would
suggest that economic growth is the key indicator of a country's power and
accomplishment.

We also defined the concept of “standard of living" as the level of consumption that people enjoy,
on the average, and is measured by the average income per person, while the "cost of living" is the
amount of money it takes to buy goods and services that a typical family consumes. A rising cost of
living is called inflation and deflation as otherwise.

The following are the factors considered in building an economy:

1) Saving and investment

2) Diminishing Returns and catch -up effect
3) Investment from abroad
4) Education
5) Health and Nutrition
6) Property rights and political stability
7) Free trade
8) Research and development
9) Population growth

LESSON 2 – Measurement of Economic Growth and Development

We also discussed the concept of Gross national happiness and Genuine Progress
Indicator

.
ACTIVITY/EVALUATION:
On a sheet of paper, please answer the following:
1. .

REFERENCES:

Dabucol, Emerson G., DBA, Economic Development, Rex Bookstore, 2022

Todaro, Michael P . Economic Development, Pearson Publishing, 2020

LESSON 2 – Measurement of Economic Growth and Development