PL 552 DEVELOPMENT
ECONOMICS AND POLICY
ANALYSIS
UNIT 1: THE CONCEPTS OF ECONOMIC
GROWTH AND ECONOMIC
DEVELOPMENT
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Lecturer: Charles Peprah, Ph.D., MGIP., CIHCM
Email: akwes2002@[Link]
Contact: 0200198245
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INTRODUCTION
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❑The concept of economic growth and economic development focus on one goal
i.e. HUMAN WELFARE. This is described as the human factor in development.
There can be growth but not development. Growth indicators does not
determine/conclude development. The essence of economic Growth and
Development is for the development and promotion of HUMAN WELFARE
❑A country’s economic health is measured by assessing that country’s economic
growth and economic development. Though there is significant difference
between the two concepts yet, they are used interchangeably
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ECONOMIC GROWTH
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❑ This is a narrower concept than economic development. It is an increase
in a country's real level of national income/ output OR
❑ It is the increase in nominal or real (inflation adjusted) market value of
goods and services produced by an economy over a period of time. This
value is referred to as GROSS DOMESTIC PRODUCT in a closed
economy
Note: A closed economy is the economy where activities outside are not
added to the economy
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ECONOMIC GROWTH CONTD.
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❑ Economic growth measures an increase in Real GDP (real output)
NB: GDP basically measures the total volume of goods and services produced
in an economy
❑ Economic growth can be caused by an increase in the quantity of resources
& improvements in technology or in another way an increase in the value of
goods and services produced by every sector of the economy. The informal
economy is also known as the black economy which is unrecorded
economic activity
❑ Economic growth is an important element in economic development process
for the reason that, without growth economic development cannot take place
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ECONOMIC GROWTH INDICATORS
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❑ Per capita income as indicator of growth is the GDP related to total
population. This is tricky indicator, as an economy might be
growing but as a result of fast population growth rate, per capita
income would decrease
❑ Other indicators used for assessing economic growth measuring
include:
• General indicators
• Indicators related to GDP
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INDICATORS FOR ECONOMIC
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GROWTH
❑ General Indicators include: ❑ GDP related indicators include:
1. Unemployment Rate 1. Annual GDP growth rate
2. Discount Rate 2. Gross fixed capital formation
3. Interest rate 3. GDP per capita
4. Balance of trade
5. Government indebtedness
6. Productivity
7. Saving ratio
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FACTORS AFFECTING ECONOMIC GROWTH
7 IN DEVELOPMENT COUNTRIES
❑Levels of infrastructure e.g. transport and communication
❑Levels of corruption e.g. percentage of tax rates that are actually
collected and spent on public services
❑Educational standards and labour productivity e.g. basic levels of
literacy and education can determine productivity of workforce
❑Levels of inward investment e.g. China has invested in many African
countries to help export raw materials, that its economy needs
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FACTORS AFFECTING ECONOMIC GROWTH
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IN DEVELOPMENT COUNTRIES
❑Labour mobility e.g. the ability of labour to move from relatively
unproductive agriculture to more productive manufacturing
❑Flow of foreign aid and investment e.g. targeted aid, can help
improve infrastructure and living standards
❑Level of savings and investment e.g. higher savings can fund more
investment, helping economic growth
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ECONOMIC DEVELOPMENT
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❑ Economic development is a normative concept i.e. it applies in the
context of people’s sense of morality. Economic development means an
improvement in quality of life and living standards. E.g. measures of
literacy, life expectancy and health care
Thus, a country’s economic development is indicated by an increase in
citizen’s quality of life (QOL). The definition of economic development
given by Michael Todaro is…
“…an increase in living standards, improvement in self- esteem needs and
freedom from oppression as well as a greater choice.”
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ECONOMIC DEVELOPMENT
10 CONT’D
❑ QOL is measured by using human development index (HDI) which
is an economic model which considers intrinsic personal factors not
considered in economic growth such as:
• Leisure time
• Literacy rates
• Life expectancy and poverty rates
• Equity
• Freedom from oppression
Although economic growth leads to economic development, the
economic growth index does not include HDI
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ECONOMIC DEVELOPMENT
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CONT’D
❑ Measures of economic development will look at:
• Real income per head – GDP per capita
• Levels of literacy and education standards
• Levels of health care
• Quality and availability of housing
• Levels of environmental standards
• Life expectancy
❑ Measuring economic development is not as precise as measuring GDP,
because it depends on what factors are included in the measure
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ECONOMIC DEVELOPMENT
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CONT’D
❑The Human Development Index is a summary of human development around
the world and implies whether a country is developed, still developing, or
underdeveloped based on factors such as life expectancy, education, literacy,
gross domestic product per capita
❑According to the UNDP human development is…
“…about creating an environment in which people can develop their full
potential and lead productive, creative lives in accord with their needs and
interests. People are the real wealth of nations. Development is thus about
expanding the choices people have to lead lives that they value”
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HUMAN DEVELOPMENT INDEX
❑ It takes into account the literacy rates & life expectancy which affect
productivity and could lead to Economic Growth.
❑ It also leads to the creation of more opportunities in the sectors of
education, healthcare, employment and the conservation of the
environment. It implies an increase in the per capita income of every
citizen.
HUMAN DEVELOPMENT
INDEX (HDI)
ECONOMIC GROWTH WITHOUT
DEVELOPMENT
❑ It is possible to have economic growth without development. i.e. an
increase in GDP, but most people don’t see any actual improvements
in living standards.
❑ Let’s go through the following 6 examples for proper elucidation
1. BENEFITING SMALL % OF
POPULATION
❑ Economic growth may only benefit a small % of the population.
For example, if a country produces more oil, it will see an
increase in GDP.
❑ However, it is possible, that this oil is only owned by one firm,
and therefore, the average worker doesn’t really benefit.
2. CORRUPTION
❑ A country may see higher GDP, but the benefits of growth may be
siphoned into the bank accounts of politicians
3. ENVIRONMENT PROBLEMS
❑ Producing toxic chemicals will lead to an increase in real GDP.
❑ However, without proper regulation it can also lead to environmental
and health problems.
❑ This is an example of where growth leads to a decline in living
standards for many.
4. CONGESTION
❑ Economic growth can cause an increase in congestion. This means people will
spend longer in traffic jams.
❑ GDP may increase but they have lower living standards because they spend
more time in traffic jams
5. PRODUCTION NOT CONSUMED
❑ If a state owned industry increases output, this is reflected in an
increase in GDP.
❑ However, if the output is not used by anyone then it causes no actual
increase in living standards.
6. MILITARY SPENDING
❑ A country may increase GDP through spending more on military
goods.
❑ However, if this is at the expense of health care and education it
can lead to lower living standards.
ECONOMIC GROWTH & DEVELOPMENT:
COMPARISON CHART
Economic Development Economic Growth
Implications Economic development implies an upward movement Economic growth refers to an
of the entire social system in terms of income, savings increase over time in a country`s
and investment along with progressive changes in real output of goods and services
socioeconomic structure of country (institutional and (GNP) or real output per capita
technological changes). income.
Factors Development relates to growth of human capital Growth relates to a gradual increase
indexes, a decrease in inequality figures, and structural in one of the components of Gross
changes that improve the general population's quality of Domestic Product: consumption,
life. government spending, investment,
net exports.
Measurement [Link] (Human Development Index), Quantitative. Increases in real GDP.
gender- related index (GDI), Human poverty index
(HPI), infant mortality, literacy rate etc.
ECONOMIC GROWTH & DEVELOPMENT:
COMPARISON CHART
Economic Development Economic Growth
Effect Brings qualitative and quantitative changes in the Brings quantitative changes in the
economy economy
Relevance Economic development is more relevant to measure Economic growth is a more relevant
progress and quality of life in developing nations. metric for progress in developed
countries. But it's widely used in all
countries because growth is a
necessary condition for
development.
Scope Concerned with structural changes in the economy Growth is concerned with increase
in the economy's output
CONCLUSION
❑ Development alleviates people from low standards of living into proper employment
with suitable shelter.
❑ Economic Growth does not take into account the depletion of natural resources which
might lead to pollution, congestion & disease.
❑ Development however is concerned with sustainability which means meeting the
needs of the present without compromising future needs.
❑ These environmental effects are becoming more of a problem for Governments now
that the pressure has increased on them due to Global warming.
❑ Economic growth is a necessary but not sufficient condition of economic
development.
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