economic development (bba).docx

7/28/2019 Economic Development (bba).docx

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Economic Development &

Economic GrowthEconomic Growth is a narrower concept than economicdevelopment. 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 ofpeople's sense ofmorality (right and wrong, good andbad). The definition of economic development given by Michael

Todaro is an increase in living standards, improvement in self-

esteem needs and freedom from oppression as well as a greaterchoice. The most accurate method of measuring development is the

Human Development Index which takes into account the literacy

rates & life expectancy which affectproductivity and could lead to

Economic Growth. It also leads to the creation of more opportunitiesin the sectors of education, healthcare, employment and the

conservation of the environment.It implies an increase in the percapita 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 blackeconomy which is unrecorded economic activity. Development

alleviates people from low standards of living into proper

employment with suitable shelter. Economic Growth does not takeinto 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 arebecoming 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.
http://www.diffen.com/difference/Category:Educationhttp://www.diffen.com/difference/Science_vs_Technologyhttp://www.diffen.com/difference/GDP_vs_GNPhttp://www.diffen.com/difference/Category:Peoplehttp://www.diffen.com/difference/Ethics_vs_Moralshttp://en.wikipedia.org/wiki/Human_development_indexhttp://www.diffen.com/difference/Affect_vs_Effecthttp://www.diffen.com/difference/Income_vs_Revenuehttp://www.diffen.com/difference/Activity_vs_Taskhttp://www.diffen.com/difference/Activity_vs_Taskhttp://www.diffen.com/difference/Income_vs_Revenuehttp://www.diffen.com/difference/Affect_vs_Effecthttp://en.wikipedia.org/wiki/Human_development_indexhttp://www.diffen.com/difference/Ethics_vs_Moralshttp://www.diffen.com/difference/Category:Peoplehttp://www.diffen.com/difference/GDP_vs_GNPhttp://www.diffen.com/difference/Science_vs_Technologyhttp://www.diffen.com/difference/Category:Education


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Comparison chart

Economic Development Economic Growth

Scope:Concerned with structural

changes in the economy

Growth is concerned

with increases in theeconomy's output

Growth:

Development relates to

growth of human capitalindexes, a decrease in

inequality figures, and

structural changes that

improve the generalpopulation's quality of life

Growth relates to a

gradual increase in oneof the components of

Gross Domestic

Product: consumption,

government spending,investment, net exports

Implication:

It implies changes in

income,saving and

investment along withprogressive changes in socio-

economic structure of

country(institutional andtechnological changes)

It refers to an increase

in the real output of

goods and services inthe country like

increase the income in

savings,in investmentetc.

Measurement:

Qualitative.HDI (Human

Development Index), gender-related index (GDI), Human

poverty index (HPI), infant

mortality, literacy rate etc.

Quantitative. Increasein real GDP. Shown by

PPF.

Effect:

Brings qualitative and

quantitative changes in theeconomy

Brings quantitativechanges in the economy

Concept: Normative conceptNarrower concept than

economic development

Relevance:

Economic development is

more relevant to measure

progress and quality of life in

developing nations.

Economic growth is amore relevant metric

for progress in

developed countries.But it's widely used in

all countries because

growth is a necessary

condition fordevelopment.


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Factors Affecting Economic

Growth

1.Capitalo The amount of labor and equipment is an indicator ofthe 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 smallpopulation, 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, suchas the United States, tend to yield a greater output

than nations with fewer hours in the work week, suchas France.

Technological Progress

o The quantity of people working in a company orliving 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 countryis lacking the basic infrastructure for specific

technology, such as electric towers for cell phonetransmissions, they will be limited in their economicgrowth. The technological innovation in the county is

a decisive factor of economic progress.

Investment

o Governments are similar to businesses in the way thatboth 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 meansof raising revenue. An article in the "ConciseEncyclopedia of Economics" explains foreign direct

investment increases GDP in the short-run, though

too much debt may be problematic in the long-run ifthe nation struggles to pay its debt.


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Health

oSickness, disease, high infant mortality rates andother health-related problems can detract from the

population's ability to produce goods and services.

Therefore, the country's standard of living is onefactor of its economic output.

Interest Rates

o Interest rates can impact the growth of an industry in severalways. 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 thesetypes of products and services. High interest rates also deter

companies from investing in new capital and expansion. Onthe 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 bythe environmental effect the products or services have butalso by consumers' perceptions of that impact.. If the public

views an industry's products or services as being harmful orunsafe, 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 confidencecan 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 theirfinances can weather the storm. In periods of overalleconomic growth, these companies once again expand.


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multinational

Definition ofMULTINATIONAL

: of or relating to more than two nationalities

a: of, relating to, or involving more than two nations

o b: having divisions in more than two countries

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 companieshave 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 inforeign nations. It is the result of conscious

planning by corporate managers.

Investment flows from regions oflowanticipated profits to those ofhigh returns.

1 Growth

motive

A company may have reached a plateau

satisfying domestic demand, which is not

growing. Looking for new markets.

2 Bypass

protection

inimporting

Foreign direct investment is one way toexpand. FDI is a means to bypassing

protective instruments in the importing

country.


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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 avoidhigh

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 savetransportation 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 theexporting firms that utilize the New

Orleans port to ship and distribute products

through New Orleans.

4 avoid

ExchangeRate

fluctuations

Toyota is behind GM and Volkswagen in

China, and plans to expand its productionin China and has no plans to build more

plants in North America. (China's autoparts

are cheaper.) It may have been a mistakefor Toyota to overexpand its plants in the

US. GM and Volkswagen have expanded

their production plants in Shanghai.

5competition

The most certain method of preventingactual or potential competition is to acquire

foreign businesses.


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6 reducecosts

A foreign country may have cheap laboror land. United Fruit has established

banana-producing facilities in Honduras.

Due to high transportation costs, FPE does

not hold.Cheap foreign labor. Laborcosts tend to differ among nations. MNCs

can hold down costs by locating part of all

their productive facilities abroad.

The Advantages ofMultinational 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 orservice 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 andcontrol 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 withgold 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.

TaxationHaving operations in multiple countries may allow the company totake 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


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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 productioncosts 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 arehotly debated. However, the two main arguments for benefits are

that it increases tax revenues for the country and that it increasesemployment. In the latter case, the multinational may attract staff bypaying 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 profitmaximization and not purely for meeting the needs of developing

countries. The technologies supplied may be costly and may beoutdated 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 developingcountries.

3) Charge heavy fees:MNCs charge heavy fees and servicecharges 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.


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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 thehost 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 aresult, 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 indirectlypressures for the formulation of policies that are favorable to them.

They even topple the government in the host countries if its policiesare against the MNCs and their operations.

9) Avoid tax liabilities: - transfer pricing enables multinationalcorporations 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 fora 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.

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