Economic Development & Economic Growth

Economic Growth is a narrower concept than economic development. It is an increase in a country's real level of national output which can be caused by an increase in the quality of resources (by education etc.), increase in the quantity of resources & improvements in technology or in another way an increase in the value of goods and services produced by every sector of the economy. Economic Growth can be measured by an increase in a country's GDP (gross domestic product). Economic development is a normative concept i.e. it applies in the context of people's sense of morality (right and wrong, good and bad). The definition of economic development given by Michael Todaro is an increase in living standards, improvement in selfesteem needs and freedom from oppression as well as a greater choice. The most accurate method of measuring development is the Human Development Index which takes into account the literacy rates & life expectancy which affect productivity and could lead to Economic Growth. It also leads to the creation of more opportunities in the sectors of education, healthcare, employment and the conservation of the environment.It implies an increase in the per capita income of every citizen. Economic Growth does not take into account the size of the informal economy. The informal economy is also known as the black economy which is unrecorded economic activity. Development alleviates people from low standards of living into proper employment with suitable shelter. Economic Growth does not take into account the depletion of natural resources which might lead to pollution, congestion & disease. Development however is concerned with sustainability which means meeting the needs of the present without compromising future needs. These environmental effects are becoming more of a problem for Governments now that the pressure has increased on them due to Global warming. Economic growth is a necessary but not sufficient condition of economic development.

Comparison chart
Economic Growth Growth is concerned Concerned with structural Scope: with increases in the changes in the economy economy's output Development relates to Growth relates to a growth of human capital gradual increase in one indexes, a decrease in of the components of Growth: inequality figures, and Gross Domestic structural changes that Product: consumption, improve the general government spending, population's quality of life investment, net exports It implies changes in It refers to an increase income,saving and in the real output of investment along with goods and services in Implication: progressive changes in socio- the country like economic structure of increase the income in country(institutional and savings,in investment technological changes) etc. Qualitative.HDI (Human Development Index), gender- Quantitative. Increase Measurement: related index (GDI), Human in real GDP. Shown by poverty index (HPI), infant PPF. mortality, literacy rate etc. Brings qualitative and Brings quantitative Effect: quantitative changes in the changes in the economy economy Narrower concept than Concept: Normative concept economic development Economic growth is a more relevant metric for progress in Economic development is developed countries. more relevant to measure Relevance: But it's widely used in progress and quality of life in all countries because developing nations. growth is a necessary condition for development. Economic Development

Factors Affecting Economic Growth

1. Capital
o

The amount of labor and equipment is an indicator of the country's supply of capital. The amount of capital in the economy is one factor that determines its rate of economic growth. For example, Belize is limited in its economic growth because of the country's small population, whereas China's large population enables a larger economic output by virtue of its sheer size. The standard hours in the work week also affects output: Populations that value long work weeks, such as the United States, tend to yield a greater output than nations with fewer hours in the work week, such as France.

Technological Progress
o

The quantity of people working in a company or living in a country does not guarantee large economic growth. Even if a country is abundant in natural resources and a strong labor population, if the country is lacking the basic infrastructure for specific technology, such as electric towers for cell phone transmissions, they will be limited in their economic growth. The technological innovation in the county is a decisive factor of economic progress.

Investment
o

Governments are similar to businesses in the way that both need investment to grow. Just as a company gets investments from venture capitalists or shareholders to buy new equipment, governments sell shares of debt in the form of bonds to other nations as a means of raising revenue. An article in the "Concise Encyclopedia of Economics" explains foreign direct investment increases GDP in the short-run, though too much debt may be problematic in the long-run if the nation struggles to pay its debt.

Health
o

Sickness, disease, high infant mortality rates and other health-related problems can detract from the population's ability to produce goods and services. Therefore, the country's standard of living is one factor of its economic output.

Interest Rates
o Interest rates can impact the growth of an industry in several ways. In large-ticket industries such as vehicle manufacturers or cruise companies, an increase in interest rates can prevent customers from borrowing to finance the purchase of these types of products and services. High interest rates also deter companies from investing in new capital and expansion. On the other hand, falling interest rates can stimulate industries to grow, which can lead to innovation and higher employment levels.

Environmental Impact
o Economic growth in an industry can be impacted not only by the environmental effect the products or services have but also by consumers' perceptions of that impact.. If the public views an industry's products or services as being harmful or unsafe, most companies within the sector can experience a marked decline in sales quickly.

Overall Economic Health

o The economic state of the country and consumer confidence can also spur growth and development or harm it. In recessionary times, consumers begin limiting their purchases to the essentials, foregoing luxury or big-ticket items. Companies also scale back production, hiring and the development of new products and services to ensure that their finances can weather the storm. In periods of overall economic growth, these companies once again expand.

multinational Definition of MULTINATIONAL

: of or relating to more than two nationalities <a multinational society> a : of, relating to, or involving more than two nations <a multinational alliance> o b : having divisions in more than two countries <a multinational corporation>

Definition of 'Multinational Corporation MNC'

A corporation that has its facilities and other assets in at least one country other than its home country. Such companies have offices and/or factories in different countries and usually have a centralized head office where they co-ordinate global management. Very large multinationals have budgets that exceed those of many small countries.

Motives
New MNCs do not pop up randomly in foreign nations. It is the result of conscious planning by corporate managers. Investment flows from regions of low anticipated profits to those of high returns.

1 Growth motive 2 Bypass protection in importing

A company may have reached a plateau satisfying domestic demand, which is not growing. Looking for new markets. Foreign direct investment is one way to expand. FDI is a means to bypassing protective instruments in the importing country.

countries

Examples: (i) European Community: imposed common external tariff against outsiders. US companies circumvented these barriers by setting up subsidiaries. (ii) Japanese corporations located auto assembly plants in the US, to bypass VERs.

3 avoid high transport costs

Transportation costs are like tariffs in that they are barriers which raise consumer prices. When transportation costs are high, multinational firms want to build production plants close to either the input source or to the market in order to save transportation costs. Multinational firms (e.g. Toyota) that invest and build production plants in the United States are better off selling products directly to American consumers than the exporting firms that utilize the New Orleans port to ship and distribute products through New Orleans.

4 avoid Exchange Rate fluctuations

Toyota is behind GM and Volkswagen in China, and plans to expand its production in China and has no plans to build more plants in North America. (China's autoparts are cheaper.) It may have been a mistake for Toyota to overexpand its plants in the US. GM and Volkswagen have expanded their production plants in Shanghai. The most certain method of preventing actual or potential competition is to acquire foreign businesses.

5 competition

A foreign country may have cheap labor or land. United Fruit has established banana-producing facilities in Honduras.

6 reduce costs

Due to high transportation costs, FPE does not hold. Cheap foreign labor. Labor costs tend to differ among nations. MNCs can hold down costs by locating part of all their productive facilities abroad.

The Advantages of Multinational Organizations

A multinational corporation is one that has a presence in more than one country. The precise definition is debatable, but commonly it involves having management in one country and production or service provision in at least one other country. While there are drawbacks to such a set-up, there are also several key benefits.

Cost Controls
Operating overseas can take advantage of lower labor costs in the same way as outsourcing, while allowing greater supervision and control to ensure quality. A multinational corporation can also benefit from reduced transportation costs. For example, a jewelry company could save money by setting up a branch in a country with gold mines, making rings locally, then shipping them to the home country for retail, rather than shipping the gold to the home country for local manufacture.

Taxation
Having operations in multiple countries may allow the company to take advantage of tax variations. The company could place its business officially in the country with the lowest tax rates, even if management is elsewhere. Running a multinational corporation can help the business benefit from the tax systems of countries that

require the company to have a physical presence to benefit from low rates, rather than simply operate a "shell" or "paper" company.

Consumer Benefits
A multinational corporation that benefits from both low production costs and low taxes should be able to make increased profits while reducing prices, which benefits consumers. The company may also have access to knowledge and skills in multiple countries that could help it produce better products.

Benefits to Countries
The benefits of multinational corporations to foreign countries are hotly debated. However, the two main arguments for benefits are that it increases tax revenues for the country and that it increases employment. In the latter case, the multinational may attract staff by paying higher wages than local counterparts. The employment may also have a knock-on benefit for the local economy, with employees spending their wages on products and services from local firms, Demerits Of Multinational Companies: 1) Provide outdated technologies: MNCs design the technologies, which can be used in different countries. They dont supply technology to poor countries for industrial development but for profit maximization. The technologies designed for profit maximization and not purely for meeting the needs of developing countries. The technologies supplied may be costly and may be outdated and obsolete or may not be suitable for the needs of developing countries. 2) Harm the national interests: - the activities of MNCs in the host countries may be harmful to the national interests as MNCs are solely guided by the profit maximization. They ignore the interests of host countries. MNCs even make profits at the cost of developing countries. 3) Charge heavy fees: MNCs charge heavy fees and service charges from the enterprises in the host countries. They repatriate profits of their subsidiaries to their home countries. This leads the outflow of countries. 4) Develop monopolies: MNCs restrict competition and acquire monopoly power in certain areas in the host countries.

5) Use resources recklessly: -MNCs use the resources in the host countries in a very reckless manner, which leads to fast reduction of non-renewable natural resources. 6) Dominate domestic policies: -MNCs use their money power for political purposes. They take undue interest in political matters in the host countries. MNCs are being openly termed as an extension of the imperialistic forces. 7) Adverse effects on life style/culture in the host countries: MNCs create demand for goods and services in developing countries through advertising and sales promotion techniques. As a result, people purchase costly/ luxury goods which are not really useful nor within their capacity to purchase. MNCs create adverse effects on the cultural background of many developing countries. 8) Interfere in economic and political systems: they put indirectly pressures for the formulation of policies that are favorable to them. They even topple the government in the host countries if its policies are against the MNCs and their operations. 9) Avoid tax liabilities: - transfer pricing enables multinational corporations to avoid taxes by manipulating prices in the case of intra company transactions. 10) Lead to brain drain in developing countries: multinationals are now entering in countries like India in a bigger way. They hire qualified technocrats and managerial experts. These people work for a few years in India, acquire experience and relocated as experts in Singapore, Korea or the United States for managing the activities of MNCs. This leads to brain drain in developing countries.