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What is Economic Development?

  • Utsav Mishra
  • Jan 10, 2022
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You are visiting your favorite tea stall to enjoy your evening tea. Or maybe, you are at the bus stand waiting to board a bus to go somewhere. You must have overheard heated discussions among the folks in these places regarding where our nation is heading in terms of development on a regular basis.


Whenever someone in a country starts to talk about ‘development’, he or she is bound to arrive at the topic of economics. Needless to say, the ‘development’ of any nation or community has become synonymous with economic development. 


While those heated debates that I mentioned above may contain more individual opinions, this blog offers you a detailed insight into economic development supported by facts and figures. 


Economic Development


Economic development is the process of creating wealth for the benefit of the community. It is more than a job-creation initiative; it's an investment in the growth of your economic condition and the prosperity and quality of life of all citizens.


Rising earnings and concomitant increases in consumption, savings, and investment are frequently connected with a country's or society's economic development or progress.


In reality, economic development essentially concerns much more than household income or living standards. For example, if income distribution is extremely unequal, growth may not be accompanied by much progress toward the goals that are normally associated with it.


Local economic development, from a public perspective, entails allocating finite resources — land, labor, capital, and new venture creation – in a way that boosts business activity, employment, income distribution patterns, and economic sustainability.


Also read: Understanding the Economy of Switzerland


Qualitative Measures To Measure Economic Development 


Economic growth represents an improvement in a country's standard of living. Growth of human capital, reductions in inequality, and structural improvements that improve the population's quality of life are all examples of economic development. 


There are certain qualitative measures to measure the economic development of a region or nation. They are as follows:


  1. GDP (Gross Domestic Product)


GDP is calculated as the total gross value contributed by all resident producers in the economy, plus any product taxes, minus any subsidies not included in the product value.   It is estimated without taking into account depreciation of manufactured assets or natural resource depletion and deterioration. Gross domestic product divided by the mid-year population equals GDP per capita.


GDP = private consumption + government investment + gross private investment + government spending + (exports – imports)


The ultimate monetary worth of products and services generated inside a nation within a specific period of time, usually a year, is known as the Gross Domestic Product (GDP). In basic words, GDP is a metric that measures a country's annual economic production.


A shift in the composition of GDP is referred to as structural transformation. Agricultural activity and jobs form the foundation of the economy at first. Agriculture's percentage of GDP declines over time as economic activity and employment migrate to the industrial sector, particularly manufacturing. (Source)


  1. GNP or Gross National Product 


Gross national product (GNP) is the total market value of the final products and services generated by a nation's economy during a given time period (typically a year), calculated before depletion or consumption of capital utilized in the manufacturing process is taken into account. 


The Gross National Product (GNP) estimates the entire income (or economic activity) of a country's population, whereas GDP measures economic activity inside its borders. The real GDP per capita is frequently used as a measure of a country's standard of living or economic development level.


  1. Purchasing Power Parity


PPPs (Purchasing Power Parities) are currency conversion rates that endeavor to equalize the buying power of diverse currencies. This is done by removing price discrepancies across several nations and is one of the crucial measuring factors when it comes to economic development.


When comparing GDP between countries, economists frequently use purchasing power parity (PPP) dollars. These are dollars that have had their buying power modified to account for variances in purchasing power between nations.


  1. Human Development Index (HDI)


In order to measure economic development, some additional metrics have been developed. The human development index (HDI), which is issued on a regular basis by the United Nations Development Programme (UNDP) in its Human Development Report, is the most well-known of them. The HDI is a composite indicator that ranks nations based on how well they do overall in three areas as follows:


  • Per capita GDP (using PPP dollars)

  • life expectancy

  • education


  1. Human Poverty Index (HPI)


In contrast to the traditional headcount measure focusing on low incomes, the Human Poverty Indicator (HPI) is a composite index of poverty that focuses on deprivations in human lives, aiming to evaluate poverty as a failure in multiple aspects. Any measuring indicator of economic development is incomplete without the Human Poverty Index (HPI).


  1. Infant Mortality


The number of deaths per 1,000 live births of infants under the age of one year is known as the infant mortality rate. The rate for a specific region is calculated by dividing the number of children under the age of one by the number of live births during the year and multiplying by 1,000.


Several studies show that there is a significant link between infant mortality and economic development. That is, the higher the GDP of a country, the lower is its infant mortality rate. (Here)


  1. Literacy Rate


Literacy has long been seen to have an important role in the development of a country. Literacy aids in raising public understanding of people's rights. Individuals with superior literacy skills have a higher quality of life, greater employment possibilities, and the ability to continue learning new skills that will benefit them in the workplace. 


A country with a high literacy rate is more likely to attract a big number of investors and entrepreneurs, as well as money, which has a significant influence on the economy. The economic success and literacy of a society have a significant impact on one another as they grow together.


Also read: A Guide to Experimental Economics


Difference between Economic Growth and Economic Growth


Although consistent economic growth is often associated with economic development, most development economists use these two terms differently. Economic development usually refers to a structural transformation, generally of the economy, whereas economic growth usually refers to a rise in the gross domestic product (GDP).


Economic growth is a very specific word. Economic development entails a rise in production in quantitative terms, but it also includes qualitative changes such as social attitudes and customs, in addition to the quantitative growth of output or national wealth. 


Economic growth may be influenced by positive changes in economic development, resulting in a direct correlation between the two. You can catch more differences from the link, economic growth vs economic development.


Why is economic development important?


Any nation must have job possibilities for its residents, and its government must be able to earn cash in order to offer amenities. Economic development, when done correctly, helps a community maintain and expand employment and investment. 


The local governments leverage the tax base established by this development and investment to support public services like police, fire, plowing, elder services, parks/recreation, library services, and so on.


If a segment of the population is living in extreme poverty, economic development allows individuals to earn more money and therefore afford the basic requirements of life like food and shelter. Hence, economic development is extremely important for a nation and its citizens. 


(Suggested reading: Economic Effects of Social Security)





Economic development boosts state capacity and public-goods supply. As observed by several economists, it ‘raises the standard of living for individuals or a community as a whole. 


Economic development is a coordinated effort on the part of a city's or county's accountable governing body to steer private sector investment toward possibilities that can lead to long-term economic growth. Sustained economic development can offer enough income for the local workforce, successful business possibilities for employers, and tax revenues to keep the infrastructure in place to facilitate this expansion.


In conclusion, I leave you with a quote by Peter Drucker which says, 


The ultimate resource in economic development is people. It is people, not capital or raw materials that develop an economy.  

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