Lecture 2
GROWTH AND DEVELOPMENT

1. Distinction between growth and development

• Growth: Increase in per-capita income or output (GDP)
• Development: Better standard of living for the masses

2. Is economic growth desirable?

• Pollution
• Depletion of natural resources
• Crass materialism

3. Is development desirable?

• People always strive for it
• They give people more control over their lives (greater choice of leisure activities: sports, music)
• Particularly beneficial for women in LDCs

3.1 Caution

• Do not confuse growth or development with "happiness"
• Measuring changes in "happiness" over time--big problem

4. Measure of country's welfare: GDP

4.2 Problems with using GDP

• Need to adjust for population (per-capita GDP)
  • Census data may be unreliable
• Nature and usefulness of goods produced
  • Excessive spending on the military?
• Quality of goods
  • Generally low quality of LDC's manufactured products
• Environmental damage
  • Pollution
  • Depletion of natural resources
• Ignores contribution of leisure to welfare
• Housework does not show up in GDP figures
• Psychic costs
  • Working conditions such as tropical climate

• Need to account for inflation
  
• Problems with measurement of price indexes (like the CPI or GDP Deflator)

5. Country comparisons of GDP

• Need to use common currency (usually, dollar)

• Fluctuations in exchange rates
• Official vs "free market" exchange rate
• Even free-market exchange rate may not measure purchasing power:
  • Many goods and services in LDCs are not traded
  • Services are cheaper in LDCs than in DCs (why?)
  • Result: $1 in domestic currency will buy more in LDC than $1 in the US

• Purchasing power conversion instead of official exchange rate
• Results may differ significantly