Goal and basic concept of Economic development.

Q1. Goal and basic concept of Economic development.

Ans: Economic development is the development of economic wealth of countries or regions for the well-being of their inhabitants. It is the process by which a nation improves the economic, political, and social well being of its people. From a policy perspective, economic development can be defined as efforts that seek to improve the economic well-being and quality of life for a community by creating and/or retaining jobs and supporting or growing incomes and the tax base.

The main parts of Economic Development are

1. Economic Growth.

2. full Employment.

3. Price stability.

4. Terms of Trade.

Economic growth: The term "economic growth" refers to the increase (or growth) of a specific measure such as real national income, gross domestic product, or per capita income. National income or product is commonly expressed in terms of a measure of the aggregate value-added output of the domestic economy called gross domestic product (GDP). When the GDP of a nation rises economists refer to it as economic growth. A satisfactory rate of economic growth is one where positive per capita rates of growth in real GDP take place. That is, the economy grows faster than the population, increasing standards of living for individuals in an economy. In practical terms, per capita economic growth should be around 1 to 1.5% for a satisfactory growth rate, most economists would say. In many cases, population growth is ignored to some extent. In those cases, a satisfactory rate of growth might be around 3% - a rate of growth that the United States has remarkably averaged for over 200 years.

economic growth depends on increases in labor (quantity and quality, but especially quality), stock of capital, availability of natural resources and technology.

Full Employment: This goal can be described conceptually as a situation where anyone who wishes to work can find a job, anyone that owns a piece of capital can put it to work at a “fair” return and anyone who owns land can put it to use and receive a fair return.

Goal 1 is associated with the aggregative or macro performance of the economy. It is a goal which can only be satisfied by a condition in the whole economy rather than a single region or market in a country. Hence, it is a goal that is considered to be the responsibility of the federal government of a country. The measure used to assess compliance with this economic goal for labor is the unemployment rate. The unemployment rate is a ratio with the numerator being the number of people seeking work, but not finding it (unsuccessful job seekers). The denominator is the total labor force comprised of the total population less those under 16 years of age, less the institutionalized population (prisoners, etc.), less those not in the labor force such as house spouses, and less those unable to work such as senior citizens, etc. Full employment does not means 0% unemployment . It means 4%-5% unemployment

Price Stability: Price stability is defined as the absence of “excessive” inflation. Let us define inflation first. Inflation is defined as an increase in average prices in an economy. The actual measure of inflation is the inflation rate as determined by a price index. In the United States and most other countries, a Consumer Price Index (CPI) is used as a measure of inflation. The CPI in any given period shows the average prices of a “typical” set of goods bought by consumers relative to some base period. The rate of change of the CPI from period to period is used to measure the rate of inflation. Changes may be positive (the typical case) or zero or negative. Any inflation may also cause income redistribution effects. Some groups usually gain during inflationary periods. This means that some groups must lose out in real purchasing power during inflationary periods. Such income redistribution effects can cause political unrest as well. Generally, “excessive” or high inflation will cause political changes in a country.

Some countries have specifically stated targets for inflation. Two countries are New Zealand and Germany. Their target as indicated by legislation is a zero inflation rate. The United States has an implied target from the Federal Reserve Board of Governors for monetary policy. It is also a 1 to 2 % zero rate of inflation – assuming that the CPI slightly overstates the actual rate of inflation. Economists are very interested in determining the causes of inflation and governmental policies to stop and control inflation.

Terms of Trade: Freer trade with other nations refers to increases in exports of goods and services from a home country to the rest of the world and also refers to increases in imports of goods and services from the rest of the world. Why is increased trade desirable to a country? Increased trade is desirable because it benefits consumers. With increased trade, more goods are available to consumers or existing goods are available at lower prices or some combination of the two occurs. In examining free trade, we need to consider exchange rates. An exchange rate is the price of the currency in one country compared to the price of a currency of another country. An exchange rate for a home country to another country is always the inverse of the exchange rate of the other country for the home country. Basically, exchange rates are flexible in world money markets. They depend upon market forces, except where governments intervene and influence exchange rates. Given that exchange rates are flexible, then prices of goods should be equally priced across countries adjusting for exchange rates if the goods are freely traded between counties.