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UNIT – I
BASIC ISSUES IN ECONOMIC
Prepared By: Charu Sarin
Concept and Measures of Development and Under-
Categorization of Economies
Economic Growth and Economic Development
Prof. Goulet Three Core Values of Development
Common features of Under developed Countries
Causes of Underdevelopment
Factors in Development
Human Development and its Components
Human Development Index (HDI)
Environmental Issues and Policy & Sustainable
The world today presents a picture of sharp contrasts b/w the
advanced and backward countries.
About 1/6th of world’s population lives in countries which are
classified as rich, advanced or developed economies.
Included among these developed countries are the USA,
Canada, countries of western Europe, Australia, New Zealand
and some countries of Asia such as Japan, Singapore, Hong
These developed countries together account for just about
16% of world population with over 73% share in world income,
thus enabling their people to have high living standards and
better quality of life.
On the other hand, the backward or underdeveloped
countries accounting for over 70% of world population have a
mere 14% share in world income.
DEVELOPED, UNDERDEVELOPED AND
THE DEVELOPING ECONOMIES
THE DEVELOPED ECONOMIES are the high income
countries such as . These countries have
strong and diversified economic structures, well
developed industrial, agriculture and service sectors,
efficient, skilled and well disciplined manpower, all of
which contribute to their higher national and per capita
income and ensure decent standard of living to their
It should be kept in mind that every high income
country is not necessarily a developed economy.
To be categorised as a developed economy, the
country must have ‘strong and diversified economic
DEVELOPED, UNDERDEVELOPED AND
THE DEVELOPING ECONOMIES
UNDERDEVELOPED ECONOMIES refers to that state of an
economy where levels of living of masses are extremely low
due to very low levels of per capita income resulting from low
levels of productivity and high growth rates of population.
In simple words, underdeveloped country is just another name
by which a poor backward country is known.
Acc to Jacob Viner, underdeveloped country is a one “which
has good potential for using more capital or more labour or
more available natural resources, or all of these, to support its
population on a higher level of living”
These countries have the capabilities for achieving higher
growth rates and need a big push through some strong
domestic efforts as well as some outside help. 5
DEVELOPED, UNDERDEVELOPED AND
THE DEVELOPING ECONOMIES
Underdeveloped countries are these days referred to as
the developing countries signifying that these poor
underdeveloped nations are capable of making
reasonable economic progress through organised
efforts, well conceived policies and with a measure of
economic assistance provided by the advanced
A developing economy is essentially an underdeveloped
economy on the march to progress and prosperity.
The underdeveloped or the developing countries are also
known as countries of the ‘Third World’ or the Third
COMMON FEATURES OF
Low Per Capita Income
The level of income as measured by per capita real GNI is very low in
underdeveloped countries. In 2010, per capita GNI as measured in USD
was $380 in Ethiopia, $640 in Bangladesh and $1340 in India as
compared to $47,140 for USA and $70,350 for Switzerland (based on the
prevailing exchange rates b/w USD and currencies of other countries).
Low Levels of Living
Since, about 3/4th of world’s population lives in underdeveloped countries
which have less than one-fifth share in world income. It is obvious that a
vast majority of people in these countries that must be living under
conditions of poverty, malnutrition, disease, illiteracy, etc. even basic
necessities of life are not available to them.
Highly Unequal Income Distribution
Apart from wide gap between income levels in advanced and
underdeveloped economies there also exist grave income inequalities
between the rich and poor people within the underdeveloped countries.#7
Low Levels of Productivity
High Rates of Population Growth
Low Rates of Capital Formation
Predominance of Agriculture in the Economy
Export of Primary Products
High levels of Unemployment and Underemployment
Low Social Indicators of Development
Dependence and Vulnerability in International Relations
Poor Quality of Human Capital 8
CAUSES OF UNDERDEVELOPMENT
Scarcity of Natural Resources
Shortage of Capital
Economic growth can be defined as a process whereby
country’s real national income increases over a long period
the concept of economic growth thus refers to (a) increase
in country’s real national and per capita income and that (b)
this increase is sustained over a long period of time. That is,
it is concerned with increase in national income.
The concept of economic development, however, not only
concerns itself with increase in income, but with its
composition and distribution as well.
It is quite possible that national and per capita income may
increase, yet more and more people may become poor if
due to extremely unequal income distribution pattern, the
richer sections of society get all the increased income. 11
Hence, economic development covers the process
of achieving long-term increase in income, as well
as a more equitable income distribution along with
adopting some measures of poverty alleviation.
Economic growth is the process of sustained
increase in real national and per capita income over
a long period of time. Some important features of
associated with growth are:
1. Economic Growth Implies a Process of Increases
in National Income
2. Economic Growth is Measured by Increase in Real
3. Increase in Per Capita Income
4. Increase in Real Income should be over a long
5. Increase in Income should be based on increase in
productive capacity. 13
ECONOMIC DEVELOPMENT: A WIDER
FACTORS IN DEVELOPMENT
Economic Development is a complex phenomenon,
it involves changes in the level of structure and
production, as well as distribution of national
income, reduction in poverty and unemployment
along with sustained long-term increase in real
national and per-capita income. It involves
changes in social attitudes and behaviours of
A large no. of economic as well as non-economic
factors contributing to development of an economy.
1. NATURAL RESOURCES
Availability of natural resources in abundance is an
important factor in a country’s economic
development. The developed countries like the
USA, Canada, Australia, New Zealand, etc have
abundance of natural resources.
However it does not mean that all these countries
that have natural resources in abundance, are
among the advanced nations.
Countries which intend to initiate the process of
economic growth must direct their efforts to make
fuller use of their existing resources and exploration
of new resources 16
2. CAPITAL FORMATION
Adequate availability of capital is the most essential
requisite of economic development. In all the
advanced nations, high rate of capital formation or
steady increase in supply of capital has played the
most important role in the process of their
One of the most crucial factor in economic
Capital formation involves:-
ROLE OF CAPITAL IN ECONOMIC
National Technical Exploitation of Increase in
Income Progress Natural Resources Supply &
Per Capita Employment Labor
1. NATIONAL INCOME:
Growth rate of national income is determined, to the large
extent , by the rate of capital formation. The higher the
rate of capital formation, the greater is the addition to
productive capacity of a nation, i.e., a greater flow of
goods & services and higher national income.
2. PER CAPITA INCOME:
Since, the objective of economic development is to
achieve a substantial increase in PCI and improve living
standards of people, rate of capital formation must be
high in order to increase output and income levels of the
country in order to meet the demands of rapidly
increasing population. 19
3. TECHNICAL PROGRESS:
It means development and application of new techniques
of production. To incorporate new technology in the
production process or in order to modify the existing
plants, a larger investment to procure or produce new
equipment is required, hence a higher rate of capital
formation is necessary to support technological
With higher rate of capital formation, the productivity and
output levels can be increased and there will be a
generation of various employment opportunities in order
to meet the output and productivity level.
5. EXPLOITATION OF NATURAL RESOURCES:
To make use of the natural wealth, a necessary amount
of capital is needed so that they can be used to their
6. LABOUR EFFICIENCY:
Increase in stock of capital enables labour to work
with greater efficiency, because efficiency to the
large extent depends on the nature and type of the
equipment they are working with.
7. SUPPLY AND DEMAND FOR GOODS &
Capital formation increases productive capacity and
expands volume of goods and services produced,
and on the other hand it increases the rate of
investment, which in turn creates income for the
workers and increased income creates additional
demand for goods produced. 21
CAPITAL REQUIREMENTS FOR
It depends upon:
(i) The target of growth rate envisaged (that
depends upon the planning process of the nation,
its capacity to overcome problems and potential
resources available) and
(ii) The capital output ratio, i.e., how much capital is
used in producing a single unit of output.
3. HUMAN CAPITAL
HRD or Human Capital formation means creation of
capabilities and capacities in people to work
efficiently and competently in various economic
Investment on human beings in the form of education,
training and health facilities that contribute to
increased productivity is called ‘human capital
formation’. In developed nations the health and
education levels are much higher, and with better
health and education, these countries produced larger
output and higher incomes.
The role of human capital formation in economic
development can be stated in the terms of increase in
output, in productive capacity, improved quality of life
and increase in inventions and innovations. 23
4. TECHNICAL PROGRESS
It implies discovery of new production methods and
their application in various fields of activity to
increase output and productivity.
Use of modern technology has revolutionized all
spheres of economic activity be it agriculture or any
LDC’s lack in the development and creation of new
technology, however they can purchase those from
other nations but still they require huge amount of
capital for the purchase, installation, and operation
of the new equipment.
5. INSTITUTIONAL FRAMEWORK
These are the rules and conventions that govern
human behaviour and interactions.
Development requires that these institutions are
reformed and modernized to meet the requirements
of progressive socio-economic structure through
spread of education, awareness and change in the
mindset of people.
Entrepreneurial activity is regarded as the vehicle of
economic development in the capitalist economies.
To boost the pace of economic development, it is
very necessary to expand the supply of
entrepreneurship by creating a favorable social and
7. POPULATION GROWTH
Growth of population is not always a curse for the
society but sometimes it can be a boon as well,
increasing population provides opportunity for
expanding market base in the terms of demand and
supply of goods and services, and more work force
for producing such output.
However this may not be true every time.
a) Spread of Education
b) Desire for Material Betterment
c) Social Institutions
d) Political Conditions
SEN’s CAPABILTIES APPROACH
Given by Nobel laureate in Economics, Amartya Sen in
Acc to Sen, poverty cannot be measured properly by
income or even the goods and services available to the
people or even by utility. What matters is not the things
that a person has but what a person can do or does with
It is the capability to function that defines welfare or
happiness that is the core of economic development.
What a person does with the commodities ultimately
determines his well-being, richness or poverty.
The concept of “functionings” is central to Sen’s
“capabilities” approach of economic development.
A country with high levels of income but poor health and
low educational standards is a case of “growth without
Gender Related Development
It is one of the disaggregated measures of HDI
which seeks to reflect the extent of equality or
inequality in the development of women in the
overall scheme of human development.
Thus, while HDI measures the achievements in
respect of human well-being, GDI measures the
equality or inequality of these achievements
between men or women, i.e., gender differences in
Higher HDI and lower GDI indicates Gender
Human Poverty Index (HPI)
Introduced by UNDP in 1997 with the view to measure the
extent of deprivation and the degree of poverty in an
Same parameters are used that are used in HDI and HPI is
the average of these three components.
Scale of measurement of deprivation is from 1 to 100,
countries with high HDI have low HPI.
Gross Well-Being Index (GWI)
The main emphasis of GWI is on the fact that people may
be poor, yet they are very happy.
People can not be poor in happiness but poor in food
security, that’s why international assessment of human
conditions need to be graded finely. 31
AND POLICY &
Environment means the surroundings or conditions of life,
may be social, political, economic, cultural, natural etc.
Natural resources are used with other man made resources
in order to produce goods in agriculture, industry or other
spheres of economic activity.
With continuous use of these natural resources some get
depleted, some may get degraded (lose their quality) or
some may get polluted, as such on account of these, the
future generation will not get enough of such resources for
their use and that will adversely affect their output, income,
and living standards.
Therefore, we should preserve environment by minimizing
harm to it through depletion and pollution.
FUNCTIONS OF ENVIRONMENT
The rapid Industrialization in past years, rising income,
higher consumption levels of the people and rapidly
increasing population in the under-developed countries
have created a huge burden on environment, this has lead
to environmental crisis in the form of depletion of ground
water resources, dried river, barren lands, polluted
Reasons for such crisis are:-
1. SUPPLY-DEMAND REVERSAL OF ENVIRONMENT:
Earlier supply of environmental resources was in excess to
their demand and so there was no crisis. But now the
situation has changed, supply has fallen short of demand.
This situation of demand exceeding supply is called
supply demand reversal, which is the main cause of
environmental crisis. 35
2. OPPORTUNITY COST OF NEGATIVE
The exhaustion of some natural resources has lead
to extensive efforts and expenditure on research,
development and discovery of some alternative
supply of such resources. Huge amount are now
being spent on improving environment.
All these financial expenditure are the
opportunity costs of the negative environmental
impact of past and present industrial development
ROLE OF ENVIRONMENT IN ECO
The productivity of an economic system depends,
to a large extent, on the supply and quality of
natural & environmental resources.
Environmental degradation causes depletion of
natural assets and losses in human efficiency and
there by reducing productivity and hampering
E.g.- air and water pollution, soil degradation, etc.
SOME BASIC ISSUES…
It is the process of economic development wherein a
balance is maintained between economic growth
and economic preservation. Sustainable
development ensures that resources are used in such
a way so that future generation should have at least
same, if not more, access to those resources.
POPULATION, RESOURCES AND ENVIRONMENT:
Rise in population leads to the consumption of more
resources and as such their exhaustion which leads
to degradation of environment.
POVERTY AND ENVIRONMENT:
Poor people with not much access to other resources,
directly depend on the exploitation of natural resources
such as forest produce, wood cutting, etc.
GROWTH VS ENVIRONMENT:
Improving in the economic status of people(poor), will
result in less damage to environment. However it is not
easy to bring rapid economic growth while keeping
environmental degradation at a minimum level.
THE GLOBAL ENVIRONMENT:
With the growing world population and rising global
income and consumption levels, global environmental
degradation is bound to worsen at a rapid pace.
GLOBAL WARMING AND CLIMATE CHANGE
Global warming refers to a slow but steady rise in the
average temp of earth’s surface, lower atmosphere
and seas and oceans.
It is mostly associated with the release of excessive
amounts of greenhouse gases (GHG), these include
CO2, CH4, water vapour, etc. These gases act as a
greenhouse around the earth.
Change in the water cycle
Rise in sea levels (0.5mm/yr)
Changes in profile of species and forests
Changes in productivity and crop output
Spread of diseases and epidemics
RESPONSES TO CLIMATE CHANGE
Reducing the amount or extent of future climate change
is called mitigation of climate change. It involves those
activities that reduce greenhouse gas emissions and
increasing use of renewable energy. In 1997, the
Kyoto protocol was adopted.
Since a substantial adverse change in climate appears
to unavoidable, the process of adaptation to climate
change must have priority. These are the measures that
have to be taken, given the very high likelihood that
climate change will occur and will have adverse effects.
The most important adaptation measure is
DEVELOPMENT itself. 41
STATE OF ENVIRONMENT IN INDIA
ECONOMIC DEVELOPMENT AND ENVIRONMENTAL
Environmental problems of India have grown substantially over
the past half a century due to the process of economic
development which did not integrate environmental
protection in its list of priorities till the Sixth Five-Year Plan
LAND AND SOIL DEGRADATION:
Most of the land area in the country shows evidence of
degradation, thus adversely affecting the productive resource
base of the country. Erosion by water and wind is the most
significant source of soil degradation.
The forest area is about 63 million hectares which is barely 19
per cent of the geographical area of the country and it is
declining over the years. 42
Air pollution has become an acute problem and a serious health
hazard in the country, more particularly in mega cities and
industrial townships. High concentration of SO2 and NO are the
most common and highly dangerous air pollutants, giving rise
to various diseases.
Water quality in India is not of a very safe standard and is full of
It is in the form of garbage, have become a major source of
pollution in urban areas and mega cities. It consist of
heterogeneous mixture of paper, plastic, cloth, metal, glass,
organic matter generated from households, and commercial
CAUSES OF ENVIRONMENTAL
Rapidly growing population needs more food and thus
more land to be put under cultivation and more land
for building their residence through clearing of land
Growing pressure of population along with lack of
opportunities for employment has led to increasing
movement of people from the villages to cities, the
migration has led to unplanned growth of cities,
expansion of slums, thus causing unbearable strain
on infrastructural services such as water, housing,
The poor people particularly do not have access to other
sources for their livelihood, thus they are directly or
indirectly dependent on natural resources, this causes
not only loss of natural assets and environmental
degradation but also perpetuates poverty by transmitting
lesser amount of resources to the next generation.
4. Level and Pattern of Economic Development:
India’s development plans have been guided by the major
objective of achieving a high rate of growth with
substantial growth in industrial production, the
production technology adopted in the field of industry
has been energy intensive that has led to environmental
5. Transport Development:
Development of transport system based on intensive
use of petroleum products has immensely
increased air pollution.
6. Agricultural Development:
Increase in farm activities have also effected
environment, by causing soil erosion, land
salinisation and loss of fertility. High use of
chemicals, pesticides and fertilizers have affected
MEASURES FOR ENVIRONMENTAL
1. Proper Resource Pricing:
The natural resources must be properly priced.
Subsidies are given on water, electricity, etc but
they are invaluably cornered by the better off
sections of the society and thus the intended
beneficiaries do not gain.
2. People’s Participation- Green Movement:
Public participation is an essential ingredient of
environmental management along with the use of
legal and economic instruments. The scheme of
3. Poverty Alleviation:
If the poverty groups are provided means and resource
for gainful economic vacations, this would go a long
way to preserve ecological system
4. Reduction in Pollution Levels:
5. Raising the Economic Status of Women:
Educating women and making them aware of the
environmental issues, would be of a great help in
preservation and restoration of environment.
Sustainable development attempts to strike a balance
between the demands of economic development and
the need for protection of natural and environmental
This process emphasize on “intergenerational equity”.
WHAT MAKES THE DEVELOPMENT
Economic dev Increase in national Y (GNP)
For Increased output Greater use of resources
Excessive use of these limited resources depletion,
degradation and even exhaustion. 49
The production process may involve:
(i) Use of some resources which are non-renewable.
(ii) Use of resources which may be renewable but whose
supplies can not be replenished at the rate at which
their depletion takes place.
(iii) Use of technology that pollutes atmosphere and
In the race of development, output is sought to be
increased through rapid depletion of resources under
unhealthy environmental conditions by the present
generation and handing down less to the future
The rate of development which cannot be sustain at
present rate is “unsustainable development”. 50
ENVIRONMENTAL A/CING & SUSTAINABLE
Environmental accounting means giving due
consideration to environmental costs while formulating
programmes and projects for economic development.
The nation must keep account of its natural resources, its
uses in its current economic activity and make suitable
provisions in its laws and policies to replenish and
hand over to the next generation an equal quantum of
these natural resources for use in future.
NNP* = GNP - Dm - Dn
MEASURES FOR ENVIRONMENT PROTECTION
1. Use of Non-Conventional Energy Sources:
To minimize pollution, the conventional sources of energy
should be replaced by non-polluting renewable energy
sources like solar power, wind energy, etc.
2. Organic Farming:
The organic farming method that use compost manure and
biopest control should be encouraged as it is eco friendly.
They in fact help in improving the soil quality.
3. Setting up Wind Power Projects:
In the areas where wind flow is substantially higher, wind
turbines should be set-up to generate electricity, and mini-
hydroprojects should be produced.
4. Use of Solar Power:
Solar energy has now emerged as a good means of meeting
energy requirements and it is a very good alternative to
supplement traditional power sources.
5. Imposing Fee on Use of Natural Resources:
The proposal to tax on use of ground water in Delhi is one such
step. It will prevent overexploitation of these resources.
6. Replenishment of Natural Resources:
Efforts at afforestation and harvesting of rain water for raising
water level are the steps that can be taken.
7. Reduction in Pollution Levels:
• Pollution levels with in the safe limits and standards.
• Moving out of polluting industries from mega cities.
• Cleaner fuels to be introduced, Vehicular emission norms to
• Use of Clean technologies to be promoted.
Indian Economy Performance and Policies by B.K.
Bhargava and Vandana Sethi