Economic Growth : Rich and Poor Countries!

Sometimes we all see these kind of news on social media or TV: “Our country broke a new record by growing by 8 percent last year...” When we see or hear such news, we first be happy, right 🙂 We say after that, “Hooray, long live our country’s economy has grown.” 🙂 Then we think for a moment and said, “Well, I have to be affected positively by this growth. Contrarily, my income has not grown much! ” we say 🙂 Unfortunately, this is the situation especially for people living in developing countries. At this point, it should be noted that economic growth news is one of the most important news for those who follow the agenda, especially for people living in developing countries.

Even if you live in a developed country and under high inflation, economic growth news is very important for everyone. In this context, the most important rates after inflation rates for retirees, civil servants and fixed-wage workers are growth rates. After all, politicians who achieve high growth will not forget about salary increases, right? So at least that’s what we expect 🙂

Sustainable Economy

In this context, we will discuss the relationship between economic growth and development in order to support your career management and personal development. It is clear that the topics of economic growth vs development will come up in private sector job interviews or public interviews. At this point, we recommend you read this article. On the other hand, we will try to present you the issue of in a way that ordinary people who have not studied economics can understand, as we always do.

When explaining financial terms or indicators such as growth, let’s first make the technical definitions in the academic literature, as we always do. Afterwards, in addition to the technical explanation, we will try to make definitions and explanations in a way that we can understand in daily life, that is, in a way that ordinary citizens in the grocery store or greengrocer can understand.

What is Economic Growth?

According to economics literature, economic growth means “an increase in the amount of goods and services produced in an economy at a certain time.” To put it in a language that everyone can understand, economic growth is simply “an increase in the amount of production“. If we look at it simply again; For example, let’s live in a place and era where there is no technology, no factories, no industry. Let’s assume we have only animals and we live by producing and selling milk. What will growth mean for us in such an environment? In line with that we could achieve growth by increasing the number of animals or the amount of milk we obtain from animals. In this conditions, our production increases which makes us more profitable and increases our welfare and growth for that period.

Measuring Economic Growth

We use a simple formula when calculating economic growth. Before talking about this simple formula, let’s make a brief definition of GDP that will lead us to that formula and represents production. When comparing the production of countries, we use the Gross Domestic Product (GDP) which also means domestic production. GDP briefly expresses the monetary value of final goods and services produced in a country in a certain period.

GDP= Production Quantity X Price

When calculating the economic growth announced by the statistical institutions of the countries, we subtract last year’s GDP from the current year’s GDP which represents this year’s production and divide it by last year’s GDP. We will give an example of economic growth calculation below. On the other hand, growth data in United States is calculated and announced on a quarterly basis.

The real growth rate which is adjusted for inflation, can be formulated as follows;

(GDPX+1 – GDPX) / GDPX

Here, X represents the year. So, to explain with an example, let’s assume that 100 loaves of bread were produced in year X in country A and each loaf was sold for 1 USD. If we consider that GDP formula is “production amount x price“, the A country’s output of year X will be 100 USD. Then let’s assume that next year (X+1 year), let 110 loaves of bread be produced.

Let’s assume that bread prices have not increased in order to avoid inflation impact on growth. So in this case, production in year X+1 will be 110 USD. In line with that GDP of year X+1 will be 110 USD. ( 110 X 1 USD ). At this point, if we calculate growth rate of the year (X+1) is =   (110-100)/100= %10)

Sustainable Economic Growth!

The economic growth rate is actually calculated as the real increase in Gross Domestic Product on a quarterly basis. The logic of the word “real” at this point is that the relevant rate is adjusted for inflation increases. In other words, the nominal growth rate is not important in international measurements and standards. Nominal GDP growth is high in developing countries because the inflation rate is high generally in those countries. For this reason, the growth used and respected in international norms are real economic growth rates adjusted for inflation.

Inflation deflator is used for calculating inflation-adjusted growth. At this point, we do not define the deflator in order not to go into technical terms or excessive details 🙂 It will be enough to know that; we eliminate inflation to make growth rates real. Inflation deflator is used for this disinflation process.

Sustainability has become very important especially after 1990s’ with emerging internet and technology. In this concept if you provide reel growth in long period, it will mean “sustainable growth” at the same time. Accordingly with sustainable growth, the country will be named a “developed country” from now on.

Factors of Economic Growth

Due to fact that economic growth is so important and has a vital value especially for politicians, the factors affecting economic growth also become equally important.

The main factors affecting economic growth, which will answer the question, can be listed as follows;

• The productivity level in the country, (measured by capacity utilization rates.)
• Technological development of the country,
• The country’s level of natural resources, especially energy,
• Foreign investments into the country (direct investments are more valuable)
• Increasing the level of “exports”, which is the product or service that a country sells to foreign countries,
• Accumulation of capital.

Economic Development and Growth

Here we come to perhaps the most important topic of our article 🙂 Since economic growth is a short-term indicator, it is an indicator that is taken into consideration and talked about a lot by politicians. On the other hand, when it comes to real economy, the most important indicator is the level of “economic development“.

In other words, although politicians generally provide artificial growth in the short term for populist purposes, it is not that easy to achieve development or progress. In this regard, it should be clearly stated that economic growth and development are different concepts. At its most basic, one can say; while growth is a short-term phenomenon, development represents both a more demanding and longer-term phenomenon.

The main point we want to point out here is that these concepts are different from each other. If we do not make this distinction well, the concepts will get mixed up and it will be very difficult to understand the subject.

What is Economic Development?

Economic development is a concept that expresses the level of development of a country in economic, social, cultural and political terms. As we can understand from this statement, even if a country is at a very good level economically, if it is far behind in political or social terms, we cannot call that country a developed country. Let’s take the oil-rich countries in the Middle East as an example. In these countries, which are economically at a good level due to oil revenues, the level of development in matters such as democracy, rule of law or judicial independence is not at a high level. In this sense, even if such countries have achieved economic growth, they are not in the status of developed countries.

Just as economic growth is measured by inter-annual GDP increases, the level of economic development also has some measurement standards. Essentially, national income per capita is an important measure for development. However, it is not the only and sufficient measure. In this sense, the most important indicator of development in the international literature is the “Human Development Index” indicator published by the United Nations.

This index measures the development status of countries in many aspects by considering development from a multidimensional and holistic perspective. This index is divided into subheadings: health, economy and education. According to the 2022 United Nations Human Development Index, the top five countries are:

1. Switzerland
2. Norway
3. Iceland
4. Hong Kong
5. Australia

On the other hand, the last three countries in the list of 191 countries in total are Niger, Chad and South Sudan. (Please click for all the ranking list.)

Indicators of Development

In this sense, the following items can be considered as economic development indicators;

• Average life expectancy,
• Literacy rate,
• Gender equality,
• Tax Justice,
• Rule of law,
• Judicial independence,
• Financial depth,
• Infant mortality rates,
• Income distribution justice (Gini index)
• Accumulation of capital,
• The prevalence of democracy,
• Freedom of the press,
• Technology level,
• Amount of clean drinkable water

What should done for Development?

The answer to this question is actually hidden in the items above. In other words, countries that make improvements in the headings listed in the articles automatically make positive progress in terms of economic development and climb to the top of the development index.

Accordingly, improvements in the economy, health, administrative, legal and social aspects will increase the development level of the country. In this context, increasing the national income per capita, establishing the rule of law, tax justice, ensuring that the judiciary is completely independent of politics, equality between genders, and ensuring income justice will enable that country to enter the category of developed countries.

Scientific research indicates that there is a connection or positive correlation between economic growth and election results. Moreover, if the ruling party in a country achieves growth during election periods, it usually increases its voting rates. Accordingly it comes to power again. Knowing this, politicians pay careful attention to the concept of growth, especially during election periods.

Consequently, it is very clear that the phenomenon of economic growth is a short-term and narrow-scope indicator. It is different from the concepts of development. For this reason, we cannot say that every country that achieves economic growth is a developed country. Finally, governments have to look the topic from a multifaceted and holistic perspective thinking about the long term. By the way if you are interested, you can read our “inflation monster” article also 🙂 Please do not forget this subject and inflation phenomenon are very inter-related topics.Additionally, in order to understand the Great Depression and Recession probability for 2024, you can also read out related article.