Economic Growth

a) Explain 3 institutional factors that may contribute to potential economic growth in developing countries?

Economic growth refers to an increase in a country’s total output of goods and services. It is measured by changes in real GDP (i.e. the increase in GDP after inflation has been removed).

Banking system : With a strong banking system, the country can have a higher savings rate thus overcome the poverty cycle

Political stability: If there is political instability, then it is difficult for economies to grow and develop. If businesses are to expand or foreign investment is to come in, then they need predictability and a strong political structure.

Education: This is essential for there to be a productive work force. Training, and basic education can greatly contribute to economic growth as this would mean labor is being used at its most efficient.

Infrastructure: A good quality social infrastructure is vital for economic development, but in the developing world the infrastructure is often very poor. Developing infrastructure can also produce jobs for those who are unemployed.

Taxation structure: Sometimes the government is corrupt and doesn’t take money from the rich. It could also be a physical problem which means that it is hard to reach the communities in the rural area.

b) Evaluate the view that economic growth will lead to economic development.

Economic growth refers to an increase in a country’s total output of goods and services. It is measured by changes in real GDP (i.e. the increase in GDP after inflation has been removed).

Development is an increase in the ability of a country to produce goods and services thereby offering the opportunity for a higher material standard of living. Development is not the same as economic growth as development is an increase in the potential for an economy to grow, not growth.

- Income distribution may not be equal as measured by Gini coefficient and the Lorenz curve. This means that though the country is getting richer, it is only represented in the small proportion of the population.
-Economic development indicates an increase in income per capita as this would mean that each person is benefiting from the improved economy.
-Economic development brings qualitative and quantitative changes in teh economy where as economic growth only increases the quantitative values of an economy.
-Economic development relates to using previously unused or underused capital in an economy where as economic growth relates to allocative efficiency.
-Economic growth does not take into the black market which may b ethe reason for a family’s welfare. Economic growth also doesn’t take into account sustainable development, diseases and birth/literacy rate.
-While economic growth may lead to eventual economic development the outcome is not guaranteed.

This is because the wealth may be unequally distributed which means the majority of the citizens are not benefiting. However, normally economic growth leads to an increase in tax revenue. Assuming that the government is not corrupt, the government could provide merit goods and public goods. This includes infrastructure and education which in the long run should pay off as better economic development and have a positive feedback loop for more economic growth.