FUNDAMENTALS OF ECONOMIC DEVELOPMENT

I. Development Concepts & Principles

Learning Outcomes:
 Be able to define economic development and growth
 Learn the ideas and theories of economic development and growth
 Be able to identify the factors affecting economic development

Subtopics:
* Concepts of Development
* Ideas and theories of Economic Development
* Determinants of Economic Development
* Measures of Economic Development and Growth
* Characteristics of modern Economic Growth

Group 1 Members:
ARGUEZA, QUIA MARIEL – Topic 5
BACALANDO, RAFAEL – Topic 1
BAGACAY, ANGLE JEAN – Topic 3
CHAN, JEAN – Topic 5
CIMENE, CLAIR ANGELA – Topic 2
DESCUATAN, JOHN MICHAEL – Topic 3
NAMION, NOVIE AMBRIELLE – Topic 3
YASAÑA, RAINOLD JR. – Topic 4

I.1 Concepts of Development

Gross national income per capita 2019, Atlas method
 World Development Indicators database, World Bank, 12 February 2021

Development – The process of improving the quality of all human lives and capabilities
by raising people’s levels of living, self-esteem, and freedom.
Traditional Economics – An approach to economics that emphasizes utility, profit
maximization, market efficiency, and determination of equilibrium.
Political Economy - The attempt to merge economic analysis with practical politics—to
view economic activity in its political context.
Development Economics - The study of how economies are transformed from
stagnation to growth and from low-income to high-income status, and overcome
problems of absolute poverty.

The New Economic View of Development

Development Economics: 1950s
 In economic terms, development is the capacity of a nation to generate and sustain
an annual increase in its GNP of 5% or more.
 Traditional economic measures: GDP, GNP, Per capita GNP, PPP Measure.

Development Economics: 1970s

  Increasing emphasis on non-economic social indicators
 Economic development consists of the reduction or elimination of poverty,
inequality and unemployment within the context of a growing economy.
 “Redistribution from growth” became a common slogan.

Amartya Sen’s “Capability” Approach

Amartya Sen, the 1998 Nobel laureate in economics, argues
that the “capability to function” is what really matters for status as a
poor or nonpoor person.
As Sen put it, “Economic growth cannot be sensibly treated as
an end in itself. Development has to be more concerned with
enhancing the lives we lead and the freedoms we enjoy.”
 Economic Development vs. Economic Growth

Development Complex and

multidimensional.
One-dimentional
concept
Measure of welfare, a Economists usually
measure of the well- measure economic

Growth
being of a country. growth in terms of
Measure not just in GDP, GNP, GNI.
terms of money, but Does not tell very
also in terms of other much about the
indicators. actual welfare of the
people in a country.

Does growth lead to development?

- Not necessarily

How do the two works in relation to one another?

Positive change in economic development can lead to economic growth, which
leads to a direct relationship between the two.
Economic growth can be viewed as an overarching goal of economic development,
though development has a number of specific stepping stones to get to first.

Three Core Values of Development

1. Sustenance: The Ability to Meet Basic Needs - The basic goods and services, such
as food, clothing, and shelter, that are necessary to sustain an average human being at
the bare minimum level of living.

2. Self-Esteem: To Be a Person - The feeling of worthiness that a society enjoys when

its social, political, and economic systems and institutions promote human values such as
respect, dignity, integrity, and self-determination.

3. Freedom from Servitude: To Be Able to Choose - A situation in which a society has

at its disposal a variety of alternatives from which to satisfy its wants and individuals enjoy
real choices according to their preferences.

The Three Objectives of Development

1. To increase the availability and widen the distribution of basic life-sustaining goods
such as food, shelter, health, and protection
2. To raise levels of living, including, in addition to higher incomes, the provision of more
jobs, better education, and greater attention to cultural and 22 PART ONE Principles and
Concepts human values, all of which will serve not only to enhance material wellbeing but
also to generate greater individual and national self-esteem
3. To expand the range of economic and social choices available to individuals and
nations by freeing them from servitude and dependence not only in relation to other
people and nation-states but also to the forces of ignorance and human misery

Example of Development Goals

The Sustainable Development Goals (SDGs), also known as the Global Goals,
were adopted by the United Nations in 2015 as a universal call to action to end poverty,
protect the planet, and ensure that by 2030 all people enjoy peace and prosperity.
Sources:
Todaro, M. and Smith, S. (2012), Economic Development 11 th Edition. Economics and
Development Studies, 7-13. doi: HD82.T552 2012 338.9009172'4--dc22

Economic Development VS Economic Growth. (2011).

https://hardeebusiness.com/resources/economic-development-vs-economic-
growth

1.3 Determinants of Economic Development

The determinants of economic growth are inter-related factors influencing the growth
rate of an economy. 
Economic growth measured by GDP means the increase of the growth rate of GDP,
but what determines the increase of each component is very different. Public expenditure,
capital formation, private or public investment, employment rates, exchange rates etc.
have different impacts on economic growth and we should take into account that these
determinants have different implications if the states are developed or not.
Economic Factors are the factors that affect the economy and include interest rates,
tax rates, law, policies, wages, and governmental activities. These factors are not in direct
relation with the business but it influences the investment value in the future. An economic
factor is a factor that can affect and influence an individuals' financial status. They include
education, employment status and income.

ECONOMIC FACTORS
1. Capital Formation
The strategic role of capital in raising the level of production has traditionally been
acknowledged in economics. It is now universally admitted that a country which wants to
accelerate the pace of growth, has m choice but to save a high ratio-of its income, with
the objective of raising the level of investment. Great reliance on foreign aid is highly
risky, and thus has to be avoided. Economists rightly assert that lack of capital is the
principal obstacle to growth.
Capital formation increases investment which affects economic development in two
ways. Firstly, it increases the per capita income and enhances the purchasing power
which, in turn, creates more effective demand. Secondly, investment leads to an increase
in production.
Explanation: Capital formation improves the conditions and methods for the production of
a country. Hence, there is much increase in national income and per capital income. This
leads to increase in quantity of production which leads to again rise in national income.
 2. Natural Resources
The principal factor affecting the development of an economy is the natural
resources. Among the natural resources, the land area and the quality of the soil, forest
wealth, good river system, minerals and oil-resources, good and bracing climate, etc., are
included. For economic growth, the existence of natural resources in abundance is
essential. A country deficient in natural resources may not be in a position to develop
rapidly.
Explanation: Natural resource is a key input in the production process that stimulates
economic growth. ... Natural resources have limited direct economic use in satisfying
human needs but transforming them into goods and services enhances their economic
value to the society

3. Marketable Surplus of Agriculture.

Increase in agricultural production accompanied by a rise in productivity is
important from the point of view of the development of a country. But what is more
important is that the marketable surplus of agriculture increases. The term ‘marketable
surplus’ refers to the excess of output in the agricultural sector over and above what is
required to allow the rural population to subsist.
Explanation: In agriculture, marketable surplus represents the surplus of a harvest that
can be sold for profit after a farmer sells their crop to cover the costs of maintaining and
operating their farm. The farmer has set expenses, including maintenance on machinery,
labor costs, fertilizer and the mortgage payment on their land. Surplus means “excess or
leftover”

4. Conditions in Foreign Trade 

The classical theory of trade has been used by economists for a long time to argue
that trade between nations is always beneficial to them. In the existing context, the theory
suggests that the presently less developed countries should specialize in production of
primary products as they have comparative cost advantage in their production. The
developed countries, on the contrary, have a comparative cost advantage in
manufactures including machines and equipment and should accordingly specialize in
them.
Explanation: Foreign trade enlarges the market for a country’s output. Exports may lead
to increase in national output and may become an engine of growth. Expansion of a
country’s foreign trade may energize an otherwise stagnant economy and may lead it
onto the path of economic growth and prosperity.
Increased foreign demand may lead to large production and economies of scale with
lower unit costs. Increased exports may also lead to greater utilization of existing
capacities and thus reduce costs, which may lead to a further increase in exports.
Expanding exports may provide greater employment opportunities. The possibilities of
increasing exports may also reveal the underlying investment in a particular country and
thus assist in its economic growth.
Comparative advantage is what you do best while also giving up the least. For example, if
you're a great plumber and a great babysitter, your comparative advantage is plumbing.
That's because you'll make more money as a plumber.

NON-ECONOMIC FACTORS
Non-economic determinants of economic development refer to those factors that do
not directly affect the economy, but rather influence other economic factors. Non-
economic factors include human resources, technical know-how, political freedom, social
organization, corruption, and desire for development.

1. Human Resources
Human resources include all that is needed for labor to produce goods and
services such as skills, knowledge, and experience.
If there is a shortage on the skillful part of humans, then productivity will be
affected and a country's economic growth may be stunted.
The productivity of illiterate, unskilled, and disease-ridden people is also generally
low; thus, they do not provide any hope to economic development.
Conversely, if a country has efficient and skilled labor that is being unutilized
effectively, then its capacity to contribute to economic growth and development will be
high.

2. Technical Know-How and General Education

It has never been doubted that the level of technical know-how has a direct bearing
on the pace of development. As the scientific and technological knowledge advances,
man discovers or innovates more and more sophisticated techniques of production
which steadily raise the productivity levels. Joseph Schumpeter, an Australian
economist, claims that entrepreneurial innovation is the major cause for capitalist
development.

3. Political Freedom
Looking to the world history of modern times one learns that the processes of
development and underdevelopment are interlinked and it is wrong to view them in
isolation. We all know that the under-development of India, Pakistan, Bangladesh, Sri
Lanka, Malaysia, Kenya and a few other countries, which were in the past British
colonies, was linked with the development of England. England recklessly exploited
them and appropriated a large portion of their economic surplus.
Dadabhai Naoroji has also candidly explained in his classic work ‘Poverty and Un-
British Rule in India’ that the drain of wealth from India under the British was the
major cause of the increase in poverty in India during that period, which in turn
arrested the economic development of the country.
 4. Social Organization
Mass participation in development programs is a pre-condition for accelerating the
growth process. However, people show interest in the development activity only when
they feel that the fruits of growth will be fairly distributed. Experiences from a number
of countries suggest that whenever the defective social organization allows some elite
groups to appropriate the benefits of growth, the general mass of people develop
apathy towards State’s development programs. Under the circumstances, it is futile to
hope that masses will participate in the development projects undertaken by the State.
India’s experience during the whole period of development planning is a case in
point. Growth of monopolies in industries and concentration of economic power in the
modern sector is now an undisputed fact. Furthermore, the new agricultural strategy
has given rise to a class of rich peasantry creating widespread disparities in the
countryside.

5. Corruption
Corruption, or political corruption, refers to the use of power by government
officials for illegitimate private gain. It is rampant in developing countries at various
levels and it operates as a negative factor in the process of their economic
development. Until and unless these countries root-out corruption in their
administrative system, it is most natural that the capitalists, traders and other powerful
economic classes will continue to exploit national resources in their personal interests.
The regulatory system is also often misused and the licenses are not always
granted on merit. The art of tax evasion has been perfected in the less developed
countries by certain sections of the society and often taxes are evaded with the
connivance of the government officials.

6. Desire to Develop
Development activity is not a mechanical process. The pace of economic growth in
any country depends to a great extent on people’s desire to develop. If in some
country level of consciousness is low and the general mass of people has accepted
poverty as its fate, then there will be little hope for development. According to Richard
T. Gill, “The point is that economic development is not a mechanical process; it is not
a simple adding- up of assorted factors. Ultimately, it is a human enterprise. And like
all human enterprises, its outcome will depend finally on the skill, quality and attitudes
of the men who undertake”

References:
https://www.slideshare.net/ProfMKGhadoliya/determinants-of-economic-development
https://www.yourarticlelibrary.com/economics/factors-that-influence-the-economic-
development-of-a-country/5942
https://www.brainkart.com/article/Economic-and-Non-Economic-Factors_37157/

1.2. Ideas and Theories of Economic Development

What is Economic Development?

-Economic development is the creation of wealth from which community benefits are
realized. It is more than a job program; it is an investment in growing your economy and
enhancing the prosperity and quality of life for all residents.

THEORIES OF ECONOMIC DEVELOPMENT

1. Schumpeter’s Theory of Economic Development

It is well known that Joseph Alois Schumpeter always explained that “analyzing
business cycles means neither more nor less than analyzing the economic process of
the capitalist era” (Schumpeter, 1939). Schumpeter strived continuously to understand
the fundamental elements in the explanation of economic fluctuations. From his Theory
of Economic Development (1911) until his monumental two volumes on Business
Cycles (1939) and Capitalism, Socialism and Democracy (1942), he mainly investigated
the ways growth and cycle dynamics communicate. He calls his theory “The Theory of
Creative Destruction'', where he argues that capitalism is never stationary and always
evolving, with new markets and new products entering the sphere. He is perhaps most
known for coining the phrase “creative destruction," which describes the process that
sees new innovations replacing existing ones that are rendered obsolete over time. As
an example, in the late 1800s and early 1900s incremental improvements to horse and
buggy transportation continued to be valuable, and innovations in the buggy and buggy
whip could fetch a considerable price in the market. There are four main features of
Schumpeter’s Theory of Economic Development, these are;

● Circular Flow - a circular flow, from which we always start, the same products
are produced every year in the same way. For every supply there awaits
somewhere in the economic activities are repetitive”. It means that the supply
and demand are in equilibrium at each point in time and the economy is in its
stationary state. The circular flow is based upon a state of perfect competitive
 economy which is in a stationary state and there is perfect competitive
equilibrium (Schumpeter, 1961).
● The Roles of Entrepreneur - The entrepreneur is the key figure in Schumpeter’s
analysis of the process of development. Schumpeter’s model starts with the
breaking of circular flow with innovation in the form of a new product. He
occupies the central place in the development process because he initiates
development in a society and carries it forward. Entrepreneurship is different
from the functions of a manager. A manager simply manages the affairs of an
enterprise whereas the entrepreneur also takes a high degree of risk. The role of
an entrepreneur has been glorified by Schumpeter based on functional abilities.
● Cyclical Process or Business Cycles - The next component of development
according to Schumpeter is the business cycle. To analyze the business cycle is
to analyze the economic process under capitalism. Schumpeter’s approach to
the business cycle or crisis is historical, statistical, and analytical. He believes
that business cycles are not merely the result of economic factors but also of
non-economic factors. Schumpeter concludes that crisis is the “process by which
economic life adapts itself to the new economic conditions” (Schumpeter, 1961).
● End of Capitalism - Like Karl Marx, Schumpeter also believes that capitalism is
self-destructive. He stated,” there is inherent in the capitalist system a tendency
towards self-destruction, those factors make not only for the destruction of the
capitalist system but for the emergence of socialist civilization” (Schumpeter,
1961).

2. The Classical Theory of Economic Stagnation

The classical theory, based on the work of the 19th-century English economist David
Ricardo, Principles of Political Economy and Taxation (1817), was pessimistic about the
possibility of sustained economic growth. For Ricardo, who assumed little continuing
technical progress, growth was limited by land scarcity. The classical economists had
explained the growth process in terms of the rate of technological progress and
population growth. In their opinion, technological progress remains in the lead for some
time but finally it disappears when the falling rate of profit prevents further accumulation
of capital. It is at this stage that the economy slumps down into stagnation.
 3. Marx’s Historical Materialism
Karl Marx’s views were shaped by radical changes in Western Europe: the French
Revolution; the rise of industrial, capitalist production; political and labor revolts; and a
growing secular rationalism. Marx (1818–83) opposed the prevailing philosophy and
political economy, especially the views of utopian socialists and classical economists, in
favor of a worldview called historical materialism. Marx wanted to replace the
unhistorical approach of the classicists with a historical dialectic. Marxists consider
classical and later orthodox economic analysis as a still photograph, which describes
reality at a certain time. In contrast, the dialectical approach, analogous to a moving
picture, looks at a social phenomenon by examining where it was and is going and its
process of change.

4. Rostow’s Stages of Economic Growth

People existed for centuries with little change in their economic life. When major
changes occurred, as in the last 500 years or so, they often took place abruptly. In The
Stages of Economic Growth (1961), Walter W. Rostow, an eminent economic historian,
sets forth a new historical synthesis about the beginnings of modern economic growth
on six continents. There are five stages of Economic Growth, according to Rostow,
These are;

● The Traditional Society

-Traditional societies focus on the most basic of economic activities, such as farming
and extraction industries like mining and harvesting of timber.
● The Precondition Stage
-Rostow’s preconditions stage for sustained industrialization includes radical changes in
three nonindustrial sectors: (1) increased transport investment to enlarge the market
and production specialization; (2) a revolution in agriculture, so that a growing urban
population can be fed; and (3) an expansion of imports, including capital, financed
perhaps by exporting some natural resources. These changes, including increased
capital formation, require a political elite interested in economic development. This
interest may be instigated by a nationalist reaction against foreign domination or the
desire to have a higher standard of living.
● The Takeoff
-During this stage, barriers to steady growth are finally overcome, while forces making
for widespread economic progress dominate the society, so that growth becomes the
normal condition.
● Drive to Maturity
-The drive to maturity, a period of growth that is regular, expected, and self-sustained,
follows takeoff. A labor force that is predominantly urban, increasingly skilled, less
individualistic, and more bureaucratic and looks increasingly to the state to provide
economic security characterizes this stage.
● Age of High Consumption
-The symbols of this last stage, reached in the United States in the 1920s and in
Western Europe in the 1950s, are the automobile, suburbanization, and innumerable
durable consumer goods and gadgets. In Rostow’s view, other societies may choose a
welfare state or international military and political power.

5. Vicious Circle Theory

The vicious circle theory indicates that poverty perpetuates itself in mutually reinforcing
vicious circles on both the supply and demand sides.

● SUPPLY SIDE
-Because incomes are low, consumption cannot be diverted to saving for capital
formation. Lack of capital results in low productivity per person, which perpetuates low
levels of income. Thus, the circle is complete. A country is poor because it was
previously too poor to save and invest. Or as Jeffrey Sachs (2005:56) explains the
poverty trap: “Poverty itself [is the] cause of economic stagnation.”
● DEMAND SIDE
-Furthermore, because incomes are low, market size (for consumer goods such as
shoes, electric bulbs, and textiles) is too small to encourage potential investors. Lack of
investment means low productivity and continued low income. A country is poor
because it was previously too poor to provide the market to spur investment.

OTHER THEORIES OF ECONOMIC DEVELOPMENT

● Balanced Versus Unbalanced Growth
● The O-Ring Theory of Economic Development
● Dependency Theory
● The Neoclassical Growth Theory
● The New (Endogenous) Growth Theory

What is Development Economics?

-Development economics is a branch of economics that focuses on improving fiscal,
economic, and social conditions in developing countries. Development economics
considers factors such as health, education, working conditions, domestic and
international policies, and market conditions with a focus on improving conditions in the
world's poorest countries.
FOUR THEORIES OF DEVELOPMENT ECONOMICS

1. Mercantilism
- is thought to be one of the earliest forms of development economics that created
practices to promote the success of a nation. It was a dominant economic theory
practiced in Europe from the 16th to the 18th centuries. The theory promoted
augmenting state power by lowering exposure to rival national powers.

Like political absolutism and absolute monarchies, mercantilism promoted government

regulation by prohibiting colonies from transacting with other nations.

Mercantilism monopolized markets with staple ports and banned gold and silver
exports. It believed the higher the supply of gold and silver, the wealthier it would be. In
general, it sought a trade surplus (exports greater than imports), did not allow the use of
foreign ships for trade, and it optimized the use of domestic resources.

2. Economic Nationalism
-Economic nationalism reflects policies that focus on domestic control of capital
formation, the economy, and labor, using tariffs or other barriers. It restricts the
movement of capital, goods, and labor.
Economic nationalists do not generally agree with the benefits of globalization and
unlimited free trade. They focus on a policy that is isolationist so that the industries
within a nation are able to grow without the threat of competition from established
companies in other countries.

The economy of the early United States is a prime example of economic nationalism. As
a new nation, it sought to develop itself without relying so much on outside influences. It
enacted measures, such as high tariffs, so its own industries would grow unimpeded.

3. Linear Stages of Growth Model

-The linear stages of growth model was used to revitalize the European economy after
World War II.
This model states that economic growth can only stem from industrialization. The model
also agrees that local institutions and social attitudes can restrict growth if these factors
influence people's savings rate and investments.
The linear stages of growth model portrays an appropriately designed addition of capital
partnered with public intervention. This injection of capital and restrictions from the
public sector leads to economic development and industrialization.

4. Structural-Change Theory
-The structural-change theory focuses on changing the overall economic structure of a
nation, which aims to shift society from being a primarily agrarian one to a primarily
industrial one.

For example, Russia before the communist revolution was an agrarian society. When
the communists overthrew the royal family and took power, they rapidly industrialized
the nation, allowing it to eventually become a superpower
REFERENCES:

● https://www.researchgate.net/publication/324918904_Schumpeter's_Theor
y
_of_Economic_Development_A_Study_of_the_Creative_Destruction_an
d_ Entrepreneurship_Effects_on_the_Economic_Growth
● https://www.cmu.edu/epp/irle/irle-blog-pages/schumpeters-theory-of-
creati
ve-destruction.html
● https://ugess3.files.wordpress.com/2015/08/economic-development.pdf?
fb
clid=IwAR11XqdXNrmlHCR6GGrfRYzNfjqu_AS36EcobYD8gNpiyZm2pwb
7H
_Ud3II
● https://www.economicsdiscussion.net/economic-growth/classical-theory-
of
-economic-development-described/4534
● https://caled.org/economic-development-basics/
● https://www.investopedia.com/terms/d/development-economics.asp
1.4 Measures of Economic Development
*Economic growth
 The increase of the economic output of a country. Economic output is the total
value of all goods and services produced by a country.
 It demonstrates how a country's economy is progressing.

Ways to measure economic growth.

1. National Prodcut (GNP)
 Indicates the total value of all goods (products and services) produced by
residents of a country, regardless of national borders, including their international
or foreign assets.

2. Domestic Product (GDP)

 Measures the total economic worth of all finished goods and services produced
inside a country's borders over a given time period.

3. Per Capita Income (PCI)

 Is a measure of the amount of money earned per person in a nation or
geographic region.

Real Indicators of Economic Growth

1. Reduction or elimination of poverty
 A better approach in determining economic growth of a country is to measure the
condition of poverty.
 A government program should not only be stressed on industrialization or
balanced agricultural-industrial development. It should not only be interested in
increasing exports or constructing more superhighways.
 Government should direct its main resources in improving the quality of life of the
poorest of the poor.
2. Eradication of Inequality
 To remove inequalities, there should be institutional reforms in economic, social,
and political areas.
 Programs for the poor, if properly implemented, will give the poor the chances to
improve their economic condition through their own effort.

3. Minimizing Unemployment
 The problems of unemployment and underemployment are critical in less
developed countries.
 According to Myrdal, the problems of unemployment and underemployment have
been the principal cause of poverty in Southeast Asia.
 Employment is a major source of income among the poor. Without it, it creates
many serious implications.
 Some poor countries have wrong priorities in their economic development
programs.

Real products of Economic Growth

 The real products of development are the people.
 It is most important to focus development programs on the development of
people or human resources.
 People are the true key factors in improving the conditions of their own nation.
 Development is not only an improvement in materials condition.
 There are higher needs which people naturally crave for as human beings—
freedom and dignity.

1.Freedom of Choice
 Freedom of choice refers to an individual's ability and autonomy to carry out a
desired action without being restrained by others.
 It is inherent for people to yearn for freedom of choice.
 There are some countries which have attained very impressive economic
growths. However, the development strategies which they used where based on
force or command.

2.Freedom from Poverty

 Freedom of choice can exist in a democracy. But in a democratic society where
there is an absolute poverty, freedom of choice is useless.
3.The existence of Human Dignity
 Human dignity is the recognition that human beings have a unique value inherent
in their humanity and are hence deserving of respect simply because they are
human beings. As a result, every human being should be treated with respect,
regardless of age, ability, status, gender, ethnicity, or other factors.
 Human dignity is inherent to man and a priceless gift.
 A man whether he is rich or poor, has an alienable right to human dignity.

Sources:
https://courses.lumenlearning.com/boundless-economics/chapter/assessing-growth/
https://www.masterclass.com/articles/economics-101-what-is-the-difference-between-
gdp-and-gnp#how-is-gnp-calculated
https://www.investopedia.com/terms/i/income-per-capita.asp
https://youtu.be/UVpNhJBiwf
https://en.wikipedia.org/wiki/Freedom_of_choice
https://cbhd.org/category/issues/human-dignity
1.5 Characteristic of Modern Economic Growth
Modern Economic Growth
 A long-term rise in capacity to supply increasingly diverse economic goods to its
population, this growing capacity based on advancing technology and the
institutional and ideological adjustments
 Economists Jane Humphries and Jacob Weisdorf have uncovered new evidence
to show that modern economic growth started in the late 16th Century – 200
years earlier than previously thought.
Kuznet's Six Characteristics of Modern Economic Growth
Professor Simon Kuznets Nobel prize winner in 1971 in economics for his
pioneering work in the measurement and analysis of economic growth has given six
characteristics of modern economic growth. These are,
• High rates of per capita output and population growth
• High rates of total factor productivity increase (TFP)
• High rates of structural transformation
• High rates of social and ideological transformation
• International economic outreach
• Limited spread of economic growth
High rates of growth of PC and population
 Growth rate of per capita output is about 10 times, population growth 4 to 5 times
and the GNP growth rate have been 40 or 50 times
Modern economic growth results in an increase of the production and consumption
of goods and services. There is a benefit for businesses in an increase in an output of
resources. During economic expansion, more resources are consumed and businesses
typically experience profitable periods.
High rates of total factor productivity increase (TFP)
 The second aggregate economic characteristic of modern growth is relatively
high rate of rise in TFP, the output per unit of all inputs.
 Rate of increase in TFP account for about 50 to 75% per capita output in
developed countries, is due to technological progress.
TFP shows the efficiency with which all inputs are used in a production. Kuznets
found substantial rise in TFP in modern era. William Easterly has found that the growth
of countries is not due to factor accumulation but due to TFP.
High rate of structural and sectorial change.
This structural change includes
 gradual shift from agriculture to non-agriculture and more recently towards
services
 a significant change in the scale or average size of productive units (from
personnel and family enterprises to impersonal of national and international
MNC’s)
 share of labor in non-agriculture activities.
For example, in US labor engaged in agriculture was 53% in 1870 and now about 2%.
A major thrust of Modern Economic Growth is that massive structural changes in
the economy and society are a necessary and integral part of the process of economic
growth. This is because the economy-wide adoption of modern technology, in the
context of similarly-structured human wants in all societies, engenders common
patterns of change. These encompass the shift from agriculture to industry and
services, a replacement in many industries of small-scale by large-scale productive
units, and related shifts from personal enterprise to impersonal organization of
economic firms, and from blue-collar to white-collar occupations.
High rates of social and ideological transformation
Changes in attitudes, institutions and ideologies are also an integral part of economic
development.
According to Myrdal these include
 Rationality
 Economic planning
 Social and economic equalization
 Improved institutions and attitudes
International economic outreach
 By means of the increased power of technology, particularly in transport and
communication (both peaceful and warlike), have the propensity to reach out to
the rest of the world.
Modern economic growth of countries relates to the historical and ongoing propensity to
reach to the rest of the world for primary products and raw material, cheap labor and
lucrative markets for their manufactured products. With increase in transport and
communication globalization has occurred.
Limited spread of economic growth
 the spread of sustained modern economic growth is still largely limited to less
than one third of world population (about 15%).
Unequal international power relationships between developed and underdeveloped
countries may have a tendency to worsen the gap between rich and poor.

Reference:
https://www.slideserve.com/darice/kuznets-s-six-characteristics-of-modern-economic-
growth
https://www.infobloom.com/what-are-the-characteristics-of-modern-economic-
growth.htm