Economic growth has a close relationship with economic development. We need economic growth to support economic development because it contributes to increased output and income in the economy, which in turn contributes to prosperity. Increased output is important for welfare because more goods and services are available to meet daily needs. Meanwhile, our income sustains our lives because we have to buy goods and services to satisfy our needs and wants.
However, economic growth and economic development have significant differences. Economic growth has narrower dimensions than economic development. While economic growth focuses on increasing output and income, economic development focuses on quality and prosperity. In this case, development has a broader dimension than economic growth, which is not only related to people’s income but also related to their health and education aspects. The social aspect is also a concern in economic development.
Before going into more detail, let’s briefly review what is economic growth and economic development?
What is economic growth?
Economic growth refers to the increase in output produced by an economy. We measure it by real GDP. If real GDP increases, the economy grows and produces more output. Conversely, if real GDP falls, the economy contracts and has less output than in the previous period.
Economic growth can also be seen in another way, namely aggregate income. In macroeconomics, the aggregate output will equal aggregate income, as economists explain. Thus, an increase in real GDP from time to time can be seen as an increase in income created in the economy.
Then, if we divide real GDP by population, we get real GDP per capita. It is a single number to describe income per resident. The population’s income rises when the real GDP per capita increases.
Real GDP per capita and its increase are important to see economic prosperity. However, that does not describe quality. It doesn’t explain how income is distributed among the population. Thus, the increase may not mean an increase in all individuals’ income, i.e., because wealth is concentrated mainly in a few individuals. We need other indicators, such as the Gini ratio, to examine the income distribution.
What is economic development?
Economic development refers to the process of an increased living standard. Unlike economic growth, economic development pays attention to various aspects, not only economic factors such as increasing income. But it also emphasizes quality and well-being, such as access to health and education.
Previously, I explained that an increase in real GDP per capita indicates an increase in income in the economy. However, these indicators cannot answer whether everyone is enjoying an increase in income? Is income evenly distributed?
An increase in living standards requires more than just an increase in income. It also requires us to assess aspects such as access to health and education. For example, poor people may earn higher wages for their work. But, it is not enough to support them to get proper education for their families. Their salaries are just enough to meet their basic needs. Thus, they find it challenging to access better education for a better life for their children in the future. For this reason, an increase in income does not always lead to a rise in living standards.
While we use GDP to measure economic growth, the Human Development Index (HDI) is among the indicators of economic development. HDI measures three main dimensions:
- Long and healthy life, measured by life expectancy at birth
- Knowledge, measured by expected years of schooling and mean years of schooling
- Decent standard of living, measured by gross national income (GNI) per capita
Apart from the HDI, economic structure, urbanization, and the life quality index are other indicators to measure economic development.
What is the relationship between economic growth and economic development?
Economic growth supports economic development. Economic growth creates more goods and services in the economy. It also contributes to increased employment and income. Therefore, economic growth allows people to better meet their needs and wants. Apart from that, it also supports increasing living standards by creating more income.
However, economic growth does not always create a more prosperous society. And therefore, it doesn’t guarantee development in the economy. For example, increasing poverty and inequality in income and education are examples where economic growth does not always produce the desired development.
In short, economic growth is important for economic development, although it is not a sufficient condition. Economic development requires quality growth, contributing to increased welfare and a better quality of life.
What are the main differences between economic growth and economic development?
Economic growth differs from economic development in several aspects, including:
- Measured dimensions
- Indicators to measure
- How to read and assess progress
Economic growth focuses only on economic aspects. We only look at changes in output and income in the economy. As previously explained, it is essential for economic development. But, it does not answer all questions about economic development.
Meanwhile, economic development includes more than just economic aspects. It also considers the social aspect. Economic development leads to increased welfare and living standard. So, it doesn’t just require an increase in income and output. But, it also requires other aspects like:
- Poverty reduction
- Income redistribution
- Inequality reduction
- Unemployment decline
- Better access to education, health, and sanitation
Indicators to measure
Real GDP is the primary indicator for measuring economic growth. Economic growth occurs when real GDP increases compared to the previous period. Otherwise, the economy contracts. Then, we also use real GDP per capita to see trends in increasing income per person.
Meanwhile, measuring economic development is more complex. It requires some indicators like:
- Human development index
- Income per capita
- Quality of life index
- Net economic welfare
- Health standards
- Poverty rate
- Inequality rate
- Pollution level
How to read and assess progress
Measuring and reading whether the economy is growing is easy. We can immediately see it from changes in real GDP. If real GDP increases, the economy grows. Conversely, if real GDP falls, the economy contracts.
Meanwhile, measuring and assessing progress in economic development is more complex. First, we need some indicators to judge. Second, improvement in one indicator does not always lead to economic development. For example, poverty and inequality levels fell. These data may infer improvements in economic development. However, if other indicators show otherwise, for example, the human development index decreases, this conclusion can be misleading.
Then, economic growth is short-term. We can see whether the economy is growing from quarterly or yearly data.
In contrast, economic development is a long-term process. So, looking at its progress is not enough to look at the data in one or two years.
What to read next
- Economic Development: Meaning, Goals, and Stages
- Economic Growth: Factors, Importance, Impacts, How to Measure It
- Income Distribution: How to Measure and Overcome Inequality
- Human Development Index: Indicators, Ranking, Benefits, Limitations
- Gini Coefficient: Meaning, Calculation Method, Data, Pros, and Cons
- Economic Growth and Economic Development: Their Differences and Relationships