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Economic Growth And Development

Economic Growth And Development

GROSS DOMESTIC PRODUCT

  • Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Though GDP is usually calculated on an annual basis, it can be calculated with reference to any time frame.

What Does GDP Indicate?

  • GDP is commonly used as an indicator of the economic health of a country, as well as a measure of country’s standard of living.
  • The higher the production of goods and services in an economy, the higher the consumption level of people. A higher consumption level indicates a higher standard of living of the people.

Criticism of GDP

  • Critics of GDP argue that it does not take into account the transactions that are illegal and not reported to the government in order to evade taxes.
  • Others criticize the tendency of GDP to be interpreted as an indicator of well-being, whereas in reality, it serves as a measure of a nation’s productivity. For example, people may not enjoy well-being on account of high pollution in their vicinity.

Calculation of GDP

  • There are three primary methods by which GDP can be determined. All, when correctly calculated, should yield the same figure. These three approaches are the expenditure approach, the output (or production) approach, and the income approach.
  • The expenditure approach measures the total value of all the products used in developing a finished product for sale. For instance, a finished car’s contribution to a nation’s GDP would be measured by the total cost of materials and services that went into the car’s construction.
  • The production approach is something like the reverse of the expenditure approach. Instead of exclusively measuring the input costs that feed the economic activity, the production approach estimates the total value of economic output and deducts the costs of goods that are consumed in the process, like those of materials and services.
  • The third approach, the income approach, is an intermediary between the two above-mentioned approaches. It measures GDP by totalling all the domestic income earned by the private as well as government sectors.

India’s Position (Jan 2020)

  • In India, GDP is estimated by the Central Statistics Office (CSO).
  • The Indian economy shrank 7.5% yoy in Q3 2020, less than expectations of an 8.8% drop, amid easing of lockdown restrictions from June, higher demand during festival season and a rebound in manufacturing and utilities.
  • However, even with a smaller rate of contraction, the Indian economy remains one of the worst performers among 24 major countries. Apart from India, the UK has shown a contraction of 9.6 per cent in the July-September period. China, on the other hand, is the only country that has shown growth at 4.9 per cent during the same period.

What Is  Purchasing Power Parity?

  • Purchasing power parity (PPP) is defined as the number of units of a country’s currency required to buy the same amount of goods and services in the domestic market as one dollar would buy in the US.
  • PPP is an attempt to work out how much currency will be needed to buy the same quantity of goods and services in different countries. It reflects the underlying exchange rate between the two different countries for buying goods and services, and a more accurate reflection of actual living standards in countries.
  • Often exchange rates do not actually reflect different living costs because some goods are not easily traded. For example, if you live in the United States, it is irrelevant if there is cheaper accommodation elsewhere in the world. What is relevant to you is the price of goods and services at which they are available to you locally.
  • For example, let us suppose that the market exchange rate between Dollar and Rupee is 66. One Dollar in the US buys 1 liter of milk. One dollar in terms of rupee, i.e., ₹66 can buy 3 liters of milk in India.
  • Suppose that India’s GDP is ₹660. If we consider the market exchange rate, then this amount is equal to $10. If milk is the only commodity produced in the world, one will think that India is producing 10 liters of milk considering India’s exchange rate ₹66 and GDP value of ₹660.
  • However, India produces 30 liters of milk. To overcome this defect, we use the purchasing power parity exchange rate. Under PPP, we measure the GDP of India by comparing the money required to purchase commodities in both the countries. One dollar in the US can purchase one liter of milk, whereas ‘ 21 can purchase one liter of milk in India.

$1 = ₹21

  • Thus, in our example, PPP exchange rate is ₹21/$. Using this exchange rate, India’s GDP of ₹660 is equal to $30. Thus, India’s GDP in terms of PPP is $30. On the other hand, India’s GDP in terms of market exchange rate is $10.
  • The World Bank (WB) calculates the PPP exchange rate. As per the WB estimate in the year 2014, ₹17.12 is equal to US$ 1.

Difference Between Nominal GDP and Real GDP

  • When the GDP is estimated at current prices, it exhibits Nominal GDP, whereas Real GDP is when the estimation is made at constant prices.

Definition of nominal GDP

  • It is the monetary value of the economic output produced during the current year at current year prices. The point to be noted is that the prices of the current year are taken into consideration without adjusting for inflation.
  • Current production of goods and services x Current prices = Nominal GDP

Definition of real GDP

  • GDP measurement is done at fixed prices, i.e. at the prices which were prevalent at some point of time in the past, known as base year price or reference price. It reflects the economic output at constant prices. Real GDP is considered as a true indicator of country’s economic growth because it exclusively considers the rise in production of goods and services as the reason for increase in GDP.
  • Current Production of goods and services x Base Year Prices Nominal GDP
    Economists while calculating growth in GDP consider figures of real GDP.

GDP Growth

What is “economic growth rate”?

  • An economic growth rate is a measure of economic growth from one period to another in terms of percentage. In practice, it is a measure of the rate of change in a nation’s GDP from one year to another.
  • The economic growth rate provides insight into the general direction and magnitude of growth for the overall economy. It demonstrates the change in a nation’s or economy’s income over a specified period of time. Most commonly, this is examined on a quarterly basis, but economic growth rates can be observed across larger spans of time, such as year over year (YOY) or decade over decade.
  • Economic growth refers to positive change in economic output, but changes in economic output can be either positive or negative. If an economy experiences two consecutive quarters with falling growth rates, it can be said that the associated economy is falling into a recession. If the economy begins to shrink, the percentage rate can be expressed in negative to demonstrate the income lost over the time period being examined.

Real economic growth rate

  • The real economic growth rate measures the economic growth in relation to GDP, from one period to another, adjusted for inflation, in other words, expressed in real as opposed to nominal terms.
  • The real economic growth rate is expressed as a percentage that shows the rate of change of a country’s GDP from one period to another, typically from one year to the next.
  • The real economic growth rate, also referred to as the growth rate of real GDP, is a more useful measure than the nominal GDP growth rate due to the fact that it takes into account the growth only due to increase in output (and ignores the contribution of price rise to increase in value of output).

Calculating the real GDP growth rate

  • GDP is calculated as the sum of consumer spending, business spending, government spending, and the total of exports minus imports. In order to factor in inflation and arrive at the real GDP figure, the calculation is as follows:

GDP

Real GDP = GDP/ (1 + Inflation since base year)

Once real GDP is calculated, the real GDP growth rate is calculated as follows:

Real GDP growth rate = (Most recent year’s real GDP – Previous year’s real GDP) / Previous year’s real GDP x 100

 

Base Year

  • The base year, updated periodically by the government, is a designated year used as a comparison point for economic data such as the GDP. Presently, 2011-12 is used as the base year for calculating GDP in India.
  • GDP is calculated by taking into account the quantity of the present year and prices of the base year. Thus, when we talk about GDP growth, we talk about real GDP growth rate.

MARKET PRICE AND FACTOR COST | Economic Growth And Development

What Is Factor Cost?

  • A number of inputs are required in the production process. These inputs are commonly known as factors of production and include things such as land, labour, capital, and entrepreneurship. Producers of goods and services incur a cost for using these factors of production. Factor cost refers to the cost of factors of production that is incurred by a firm when producing goods and services. Examples of such production costs include the cost of renting machines, purchasing machinery and land, paying salaries and wages, cost of obtaining capital, and the profit margins that are added by the entrepreneur (profits are the cost of entrepreneur).
  • The factor cost does not include the taxes that are paid to the government since taxes are not directly involved in the production process and, therefore, are not a part of the direct production cost. However, subsidies received are included in the factor cost as subsidies are direct inputs into the production.

What Is Market Price?

  • Once goods and services are produced, they are sold at a market price. The market price is the price that consumers will pay for the product when they purchase it from the sellers. Taxes charged by the government will be added onto the factor price while subsidies provided will be reduced from the factor price to arrive at the market price.
  • Taxes are added because taxes are the costs that increase the price, and subsidies are reduced because subsidies compensate the factor cost or reduce the factor cost. For instance, money is required to run a business. Thus, money is a factor of production. The cost of money is interest. Interest here is a factor cost. If government gives subsidy on interest, then actual cost of money (interest cost) will reduce.

Relationship between GDP at Market Price and GDP at Factor Cost

GDP (MP) – Indirect Taxes + Subsidies = GDP (FC)

Note: In common parlance, when we use the term GDP, we refer to GDP at market prices.

GROSS VALUE ADDED OR GDP (FC)

Gross value added (GVA) is the measure of the value of goods and services produced in an area, industry, or sector of economy.

Relationship to GDP

GVA is linked to GDP, as both are measures of output. The relationship is defined as follows:

GVA + Taxes on products – Subsidies on products = GDP

Why GVA Is Calculated?

  • GVA and GDP give a picture of economic activity from producers’ (supply side) and consumers’ (demand side) perspective, respectively, because GVA is the net receipt of the producers and GDP is the expenditure incurred by the consumers.
  • Both these measures need not match and there could be a sharp divergence due to net indirect taxes (NIT = indirect taxes — subsidies), which are counted in GDP calculations (GDP is the sum of GVA and NIT).
  • GVA provides a better measure of economic activity because GDP can record a sharp increase just on account of increased tax collections due to better compliance/coverage and not necessarily due to increase in output.
  • GVA is a better reflection of the productivity of the producers as it excludes the indirect taxes, which could distort the production process.
  • A sector-wise breakdown provided by the GVA measure can better help policymakers to decide which sectors need incentives/stimulus or vice versa.

Introduction of GVA at Basic Prices in India

  • In the revision of the National Accounts Statistics in January 2015 by the CSO, it was decided that sector-wise estimates of GVA will now be given at basic prices along with the factor cost.
  • The basic price for any commodity is the amount receivable by the producer from the purchaser minus any tax on the product plus any subsidy on the product. However, GVA at basic prices will include production taxes and exclude production subsidies available on the commodity.
  • On the other hand, GVA at factor cost includes no taxes and excludes no subsidies and GDP at market prices includes both production and product taxes and excludes both production and product subsidies.
  • The relationship between GVA at factor cost, GVA at basic prices, and GDP at market prices is as follows:
    • GVA at factor cost + (Production taxes less production subsidies) = GVA at basic prices
    • GDP at market prices = GVA at basic prices + Product taxes — Product subsidies

What Are Production Taxes and Subsidies?

  • Production taxes or production subsidies are paid or received with relation to production and are independent of the volume of actual production. Production taxes or production subsidies are given even if the products are not produced.
  • Some examples of production taxes are land revenue, registration fees, property taxes, and tax on profession. Some production subsidies include subsidies on tractors, on interest for loan, to village and small industries.

GVA at Basic Price versus Factor Cost

  • The difference between the value of the intermediate inputs and the value of the outputs is GVA. Two kinds of prices to measure output, namely basic prices and factor cost, are:
  • The basic price is the amount receivable by the producer from the purchaser for a product or service minus any tax payable and plus any subsidy receivable by the producer as a consequence of its production or sale.
  • The GVA at factor cost is the amount receivable by the producer from the purchaser for sale of goods or services produced minus any production as well as product taxes paid by the producer and plus any production or product subsidies received by the producer.
  • The basic price measures the amount retained by the producer and is, therefore, the relevant price for the producer’s decision-taking.
  • GVA at factor cost is essentially a measure of income and not output. It represents the amount remaining for distribution out of GVA after the payment of all taxes and receipt of all subsidies.

GROSS NATIONAL PRODUCT | Economic Growth And Development

Gross national product (GNP) refers to goods and services produced by Indians whether in India or abroad.

How Is GNP Calculated?

GNP = GDP — Production by foreigners in India + Production by Indians outside India

or

GNP = GDP — Factor income paid to foreigners in India + Factor income paid to Indians abroad

i.e.,         GNP = GDP — Net factor income from abroad

GNP refers to the monetary value of all the finished goods and services produced by nationals (citizens) anywhere in the world in a specific time period.

Comparison with GDP

  • GDP is the monetary value of all the finished goods and services produced in a territory such as India, whereas GNP is the monetary value of all the finished goods and services produced by nationals such as Indians.
  • In India, the value of GDP is higher than that of GNP because India has received more investment from abroad compared to the investment made by Indians in abroad.

NET DOMESTIC PRODUCT (AT MARKET PRICE)

Whenever there is production of goods and services, there is consumption or reduction in value of assets used to produce goods and services; this consumption or reduction in value of assets is called depreciation.

How Do We Calculate NDP?

Whenever we calculate the net value from gross value, we subtract depreciation out of gross value.

Net Domestic Product (NDP) = GDP — Depreciation

 

NATIONAL INCOME OR NET NATIONAL PRODUCT AT FACTOR COST

Net national product at factor cost (NNPfc) or national income is the income earned by nationals (such as Indians) in a given time period.

In other words, it is the collective income of nationals in a given time period. It is calculated as follows:

NNPfc = GNPmp – Depreciation – Indirect taxes + Subsidies

or

NNPfc = GDPmp – Net factor income abroad – Depreciation – Indirect taxes + Subsidies

PER CAPITA INCOME | Economic Growth And Development

  • Per capita income or average income measures the average income earned per person in a given area (city, region, country, etc.) in a specified year. It is calculated by dividing the area’s total income by its total population.
  • In other words, per capita income refers to national income divided by the population of a country.

Per capita income = National income/ Population

India’s per capita income in 2015-16 at the current prices was ₹93,293 in 2015-16, compared to ₹86,879 in the preceding year.

  • In real terms, the per capita income (at 2011-12 prices) during 2015-16 is estimated to have attained a level of ₹77,435, up 6.2% from ₹72,889 for 2014-15.
  • Real per capita income is obtained after adjusting nominal per capita income for inflation.
  • Real per capita income = Nominal per capita income / (1 + Inflation rate)

Let us understand the above concepts with actual figures given in the following table:

Year Consumption of

fixed cap.

(depreciation)

Indirect

taxes less

subsides

GDP

at market

prices

NDP

at market

prices

Net factor

income

from
abroad

NNP at

factor cost

or net
national
income

Per capita

income (₹)

2015-16 1278 923 11,350 10,072 -137 9012 77,435
2014-15 1193 825 10,552 9359 -124 8410 72,889
2013-14 1102 755 9839 8737 -122 7860 68,867

 

NDP at market prices = GDP at market prices – Depreciation

NNP at basic prices = NDP at market prices – Indirect taxes less subsidies – Net factor income abroad

Per capita income = Net national product at factor cost / Population

WHICH IS A BETTER MEASURE OF ECONOMIC GROWTH: GDP OR PER CAPITA INCOME?

  • Economic growth is measured on the basis of expansion of GDP. However, there are instances when the rate of population growth is higher than the rate of increase in GDP. In such instances, GDP increases while per capita income decreases. Therefore, per capita income is considered a better indicator of economic growth.

Can India Grow at 8-9% per annum?

  • The Indian economy is currently passing through a phase of relatively slow growth. However, over the 9-year period beginning 2005-06, the average annual growth rate was 7.7%. Against this background, the relevant question is whether India has the capability to grow at 8-9% in a sustained way.

Past Performance

  • India achieved a growth rate of 9.5% in 2005-06, followed by 9.6% and 9.3% in the subsequent 2 years. After declining a bit in the wake of international financial crisis, the growth rate went back to 8.9% in 2010-11. The domestic savings rate during this period averaged 34.9% of GDP. Similarly, the gross capital formation rate averaged 36.2%.

Reasons for Reduction in Growth Rate: Low Investment and High ICOR

  • An analysis of the data of the period since 2012-13 reveals two trends. First, there has been a decline in investment rate. Second, the decline in growth rate is greater than the decline in investment rate, indicating a rise in the incremental capital-output ratio (ICOR). In 2007-08, India’s investment rate was 38% of GDP. It declined steadily to touch 34.8% in 2012-13. The declining trend continued in 2015-16.
  • With an ICOR of 4, only a return to higher level of savings and investments can take us back to 8-9% growth seen earlier. Thus, what is needed to achieve the “higher growth rate” is to raise the investment rate and improve the productivity (or use) of capital.

Incremental Capital-Output Ratio

  • ICOR refers to addition in capital required to raise output by ₹1. The higher the ICOR, the lower the productivity of capital. Thus, a high ICOR can be thought of as a measure of the inefficiency with which capital is used. In most countries, the ICOR is near 3. ICOR, thus, determines efficiency in use of capital. In India, ICOR is slightly high at 4. ICOR is low in service industry than in the manufacturing sector.
  • It is influenced by a number of factors such as technology, skill of the labour force, which in turn depends on the quality of the education system and ease of doing business, etc. Bureaucratic hurdles, which impede speedy execution of projects, need to be removed. Thus, improving the productivity of capital requires steps at several fronts.

What is “Savings Rate”?

  • A savings rate is the amount of money, expressed as a percentage or ratio, that a person deducts from his or her income to set aside as savings. The accumulated savings are invested in various forms.

Global Trends in “Savings Rate”

  • For years, the savings rate in the United States has declined. In the 1970s and 1980s, personal savings rates were in the range of 5-7% but decreased to the range of 1-3% in the 21st century. In sharp contrast, the Chinese and Indian savings rate is above 30%.

What Affects the Savings Rate?

  • The national average savings rate is often determined by how a particular culture views debt (loan), values possessions, etc. Economies oriented towards consumption have lower savings rates; in the United States, consumption constitutes around 75% of the economy. Economies such as India, which is oriented more towards investment, have higher savings rates. Savings rate tends to fall lower as the average age of the population increases. Savings rates are also affected by rise in income levels.

Calculating Savings Rate

  • The savings rate is the ratio of personal savings to income and can be calculated for an economy as a whole or at the personal level.

Savings

Saving rate =                                  x 100

Income

Investment Rate

  • The investment rate refers to the proportion of GDP invested into economy. High savings rate leads to high investment rate in the economy. Economic growth depends on investment rate and ICOR. In other words, Economic growth = Investment rate x ICOR.
  • Let us presume that investment rate is 32% and ICOR is 4. Economic growth = 32% x (1/4) = 8%

DEFINITION OF ECONOMIC DEVELOPMENT

  • This approach emerged because overemphasis on quantitative goals such as increase in GDP levels often made nations ignore the equally essential non-economic parameters such as health, education, life expectancy, and quality of life.
  • Economic development is defined as the process of increase in volume of production along with the improvement in technology, a rise in the standards of living, health, education, overall quality of life, etc.
  • To understand the two terms “economic growth” and “economic development”, we will take an example of a human being. The term “growth of human beings” simply means increase in their height and weight, which is purely physical. But if you talk about “human development”, it will take into account both the physical and abstract aspects such as maturity level, attitudes, habits, behaviour, feelings, intelligence, and so on.
  • Similarly, the growth of an economy can be measured through the increase in its size in the current year in comparison to previous years, but economic development includes not only physical but also non-physical aspects that can only be experienced, such as improvement in the lifestyle of inhabitants, increase in individual income, improvement in technology and infrastructure, etc.
  • Therefore, we can say that economic development is a much bigger concept than economic growth. In other words, economic development includes economic growth. In context of India, we can say that India is witnessing a period of fast economic growth but slow economic development.

Key Differences between Economic Growth and Economic Development

The fundamental differences between economic growth and development are explained in the following points:

  • Economic growth is the positive change in the real output of the country in a particular span of time. Economic development involves a rise in the level of production in an economy along with the advancement of technology, improvement in living standards, and so on.
  • Economic growth is one of the essential prerequisites of economic development. However, it is not the only requirement for economic development.
  • Economic growth enables an increase in the indicators such as GDP, per capita income, etc. On the other hand, economic development enables improvement in the life expectancy rate, infant mortality rate, literacy rate, and poverty rates.
  • Economic growth results in quantitative changes, but economic development brings both quantitative and qualitative changes.
  • Economic growth can be measured in a particular period. On the other hand, economic development is a continuous process, which can be seen in the long run.

INCLUSIVE GROWTH | Economic Growth And Development

  • Inclusive growth is that economic growth which benefits all the sections of society.
  • Inclusive growth basically means making sure everyone is included in growth, regardless of their economic class, gender, sex, disability, and religion.
  • The inclusive growth approach takes on long-term perspective, and the focus is on productive employment rather than a mere income redistribution among poor people.
  • With liberalization, the benefits of economic growth have been cornered by a few sections such as rich and middle class. The impact of economic growth on poor has been little. As a result, the emphasis on inclusive growth is necessary.

Approaches to Attain Inclusive Growth

Trickle down approach

  • The trickle down approach is a term used to describe the belief that if high income earners gain an increase in their income, their increased income and wealth benefits various sections of the society. For instance, if a person earns more, then he spends more. His expenses are income of other persons.

Direct attack on poverty through government schemes

  • Trickle down approach has not been completely successful in attainment of inclusive growth. Benefits of economic growth have overlooked poor sections of the society. The government has launched various schemes for the welfare of particularly the poor section of the society. This approach is more effective to bring inclusive growth because it is specifically targeted towards poor people.

LORENZ CURVE | Economic Growth And Development

  • The Lorenz curve is a graphical representation of wealth distribution developed by American economist Max Lorenz in 1905. On the graph, the straight diagonal line represents perfect equality of wealth distribution; the Lorenz curve lies beneath it, showing the reality of wealth distribution. The difference between the straight line and the curved line is the amount of inequality of wealth distribution.

Gini Coefficient 

The Gini coefficient is calculated as follows:

Area between Line of Equality and Lorenz Curve

Gini coefficient =

Area under Line of Equality

  • The value of Gini coefficient ranges from 0 to 1. Tracking the Gini coefficient can demonstrate wealth trends in particular nations over time.

Lorenz Curve, Gini Coefficient, and Measuring Inequality

  • In an economy with perfect equality, 20% of the population would hold 20% of the wealth. As the percentage of the population in consideration rises, so does their cumulative wealth.
  • In a perfect inequality curve, the Gini coefficient is 1, and the curve represents 100% of a nation’s wealth being held by one single person or entity.
  • The greater the disparity within a nation, the closer the Gini coefficient will be towards 1. The Gini coefficient of India for 2011 was 0.35.

TERMS DENOTING LEVEL OF ECONOMIC ACTIVITY

  • Slow down: Refers to reduction in the growth rate of the economy. For instance, let us suppose that the growth rate of the economy has reduced from 8% to 5%. In the case of slowdown, economy continues to grow but at a low rate.
  • Recession: Refers that the economy is reducing in size. Economists all over the world agree that recession means negative growth rate for a minimum of two consecutive quarters.
  • Expansion of the economy: Refers to increase in the size of the economy. In other words, expansion refers to a positive growth rate of economy. Expansion of economy and slowdown may occur at the same time.
  • Boom: Refers to increase in the growth rate of the economy. For instance, let us suppose that the growth rate of the economy has increased from 5% to 8%. In the case of boom, economy grows at a faster rate than the rate at which it grew previously.
  • Meltdown: A situation in which the economy of a country experiences a sudden downturn. An economy facing meltdown will most likely experience a falling GDP, drying up of liquidity, and rising/ falling prices.

POVERTY ESTIMATES IN INDIA | Economic Growth And Development

In 1993, the Planning Commission constituted a task force for the calculation of poverty estimates in India, chaired by Lakdawala. The committee made the following suggestions:

  • Consumption expenditure to be calculated based on calorie consumption, i.e. 2400 in rural areas and 2100 in urban areas.
  • State-specific poverty lines should be constructed and updated using the Consumer Price Index of industrial workers in urban areas and Consumer Price Index of agricultural labourers in rural areas.

Tendulkar Committee, 2005 (Headed by Suresh Tendulkar)

  • The Tendulkar Committee was constituted by the Planning Commission to address three shortcomings in the previous methods of calculating poverty:
  • Consumption expenditure was linked to the consumption patterns of 1973-74. However, there have been significant changes in consumption patterns since 1973-74. Therefore, the Tendulkar Committee used the recent patterns of consumption to determine consumption expenditure.
  • Earlier, the expenditure on health and education was ignored. The Tendulkar Committee considers expenditure on education as incurred by the state, but it considers health expenditure of ₹30 per annum to seek health cover of ₹30,000.
  • Earlier, poverty estimates were based on uniform reference period, i.e. respondents were asked to detail the consumption made by them over the past 30 days. Whereas under the mixed reference period method, five low-frequency items such as clothing, footwear, durables, education expenditure, and health expenditure are surveyed over 365 days and all other items for previous 30 days.
  • The below poverty line population on the basis of the Tendulkar Committee report for 2011-12 was 25.7% rural population, 13.7% urban population, and 21.9% overall population.

Rangarajan Committee

  • In 2012, the Rangarajan Committee was established by the Planning Commission to review the Tendulkar Committee report. The new committee suggested further improvements in the poverty estimation methodology.

 

Tendulkar Rangarajan
Only counts expenditure on food, health, education, 1 clothing Food + non-food items such as education, healthcare, clothing, transport (conveyance), rent
Urban poverty increased at a faster rate (40%) than rural poverty (19%).

This is obvious, because Rangarajan included nonfood items like rent, education, etc.

These items/services are more expensive in cities than in villages.

Rangarajan recommended that at any given point of time, the bottom 35% rural people and the bottom 25% urban people would always be considered poor.
Poverty ratios should be disengaged from
entitlements under government schemes.

For example, cheap foodgrain quota under the Food Security Act should not be based on BPL-criteria, but social-caste census.

UNEMPLOYMENT | Economic Growth And Development

  • Unemployment is a phenomenon that occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. The most frequently used measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labour force.
  • While the definition of unemployment is clear, economists divide unemployment into many different categories.

Types of Unemployment

  • Disequilibrium unemployment: At the equilibrium level, the wage rate is such that the demand for labour matches with the supply of labour.
    • When the wage rates are pushed above the equilibrium levels due to the government-imposed minimum wage requirements or interference of trade unions, the demand for labour reduces and the supply for labour increases. This leads to a state of disequilibrium or mismatch between the demand and supply of labour.
    • This type of unemployment is also called classical or real wage unemployment.
  • Frictional unemployment or search unemployment: Frictional unemployment is the unemployment that results from the time spent between jobs when a worker is searching for or transitioning from one job to another. It is also called search unemployment.
  • Structural unemployment: Structural unemployment is a long-lasting form of unemployment caused by fundamental shifts in an economy and exacerbated by extraneous factors such as technology, competition, and government policy. Reasons why structural unemployment occurs include workers’ lack of requisite job skills or that workers live too far from regions where jobs are available and cannot move closer. Jobs are available, but there is a serious mismatch between what employers need and what workers can offer.
  • Cyclical unemployment: Cyclical unemployment comes around due to the business cycle itself. Cyclical unemployment rises during recessionary periods and declines during periods of economic growth.
  • Seasonal unemployment: It is a type of unemployment that is expected to occur at certain parts of the year. For instance, amusement parks may experience seasonal unemployment because during months of summer less people visit these parks.
  • Disguised unemployment: Disguised unemployment exists where part of the labour force is either left without work or is working in a redundant manner, where worker productivity is essentially zero. In other words, disguised unemployment is a kind of unemployment in which some people look like being employed but are actually not employed fully. Disguised unemployment is high in Indian agriculture.
  • Underemployment: A situation in which a worker is employed but not in the desired capacity, whether in terms of compensation, hours, or level of skill and experience. The underemployed are often unsatisfied and continue to look for suitable jobs.

PHILLIPS CURVE

  • The Phillips curve is an economic concept developed by A. W. Phillips. This curve shows that inflation and unemployment have a stable and inverse relationship. The theory states that inflation comes with economic growth, which in turn should lead to more jobs and less unemployment.
  • However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation, when there is high levels of both inflation and unemployment.

 

HUMAN RESOURCE DEVELOPMENT | Economic Growth And Development

  • Human resource development refers to improvement in the quality of life, increase in the number of opportunities, and in the freedom people enjoy.
  • The concept of human development, as understood today, was introduced by Dr. Mahbub ul Haq, a Pakistani economist. According to him, human development refers to an enlargement of people’s choices. Indian economist Prof. Amartya Sen has also adopted this view of human development.
  • The choices of people can be increased either by skill development of people (by granting vocational education), improving their health, or increasing their income level.
  • Education enhances choices with people as it confers them freedom to think and choose out of various career options. Health enlarges choices of people as a healthy person can undertake various types of activities in comparison to an unhealthy person. Increase in income level enlarges the options as it enables the people to buy various kinds of goods and services.

HUMAN DEVELOPMENT INDEX

  • Based on the above view, Human Development Index (HDI) was developed by Mahbub ul Haq along with Amartya Sen and was launched by the United Nations Development Programme (UNDP).

New Method for Calculating HDI

  • In its 2010 Human Development Report, the UNDP began using a new method for calculating the HDI. The following three indices are used:
  • A long and healthy life: Life expectancy at birth
  • Education index: Mean years of schooling and expected years of schooling
  • A decent standard of living: per capita income (PPP in US$)

Life Expectancy Index

  • Life Expectancy Index (LEI) is 1 when life expectancy at birth is 85 and 0 when life expectancy at birth is 20.

LE — 20

LEI =

85 — 20

 

LE: Life expectancy at birth in a given country

Education Index

MYSI + EYSI

Education Index (EI) =

2

 

MYS

Mean Years of Schooling Index (MYSI) =
15

Fifteen is the maximum years of schooling.

MYS: Mean years of schooling (i.e., years that a person aged 25 or older has spent in formal education)

 

EYS

Expected Years of Schooling Index (EYSI) =
18

Eighteen is equivalent to achieving a master’s degree in most countries.

EYS: Expected years of schooling (i.e., total expected years of schooling for children under 18 years of age)

Income Index

Income Index (II) is 1 when GNI per capita is $75,000 per year and 0 when GNI per capita is $100 per year.

GNI per capita — 100

II =

75000 —100

Value of HDI

The maximum value of HDI can be 1. Finally, the HDI is the geometric mean of Life Expectancy Index, Education Index, and Income Index.

 

Characteristics of nations with different levels of human development

 

Level of human

development

High (0.7 and above) Medium (035 to 0.699) Low (0 to 0.549)
Nations North America,

Northern and Western Europe

South America and

Asia

Africa
State of economic

development

Developed Developing Underdeveloped
Political condition Political

stability

History of past instability

but presently stable

nations

Going through civil

wars

 

MULTIDIMENSIONAL POVERTY INDEX | Economic Growth And Development

  • The global Multidimensional Poverty Index (MPI) was developed in 2010 by the Oxford Poverty and Human Development Initiative (OPHI) and the UNDP. It replaced the previous Human Poverty Index.
  • The global MPI is an international measure of acute poverty covering over 100 developing countries. It complements traditional income-based poverty measures by capturing the severe deprivations that each person faces at the same time with respect to education, health, and living standards.
  • The index uses the same three dimensions as the HDI: health, education, and standard of living. These are measured using 10 indicators.

 

Dimension

 

Indicators

 

Health Child mortality

Nutrition

 

Education Years of schooling
School attendance
Living standards Cooking fuel

Toilet

Water

Electricity

Floor

Assets

 

Indicators  | Economic Growth And Development

The following 10 indicators are used to calculate the MPI:

  • Education (each indicator is weighted equally at 1/6)
  • Years of schooling: deprived if no household member has completed 6 years of schooling
  • Child school attendance: deprived if any school-aged child is not attending school up to class 8
  • Health (each indicator is weighted equally at 1/6)
  • Child mortality: deprived if any child has died in the family in the past 5 years
  • Nutrition: deprived if any adult or child for whom there is nutritional information is stunted
  • Standard of living (each indicator is weighted equally at 1/18)
  • Electricity: deprived if the household has no electricity
  • Sanitation: deprived if the household’s sanitation facility is not improved (according to Millennium Development Goals (MDG) guidelines), or it is improved but shared with other households
  • Drinking water: deprived if the household does not have access to safe drinking water (according to MDG guidelines) or safe drinking water is more than a 30-minute walk (roundtrip) from home
  • Floor: deprived if the household has a dirt, sand, or dung floor
  • Cooking fuel: deprived if the household cooks with dung, wood, or charcoal
  • Assets ownership: deprived if the household does not own more than one out of radio, TV, telephone, bike, motorbike, or refrigerator and does not own a car or truck

A person is considered poor if they are deprived in at least a third of the weighted indicators. The intensity of poverty denotes the proportion of indicators in which they are deprived.

Calculation of the Index

The MPI is calculated as follows:

MPI=H x A

H: Percentage of people who are MPI poor (incidence of poverty)

A: Average intensity of MPI

 

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