Distinction Between Economic Growth and Economic Development
Distinction Between Economic Growth and Economic Development Economic Growth is when an increased output of a nation of goods and services available to satisfy the material wants of the people, but not the welfare of a nation (health cover, housing, schooling). Economic growth is associated with the well being of a nation, through increasing incomes. However, the welfare of a nation is not included in economic growth. Economic growth focuses on the quality. Economic growth may be a result of all idle resources being employed as resulted from an increase in aggregate demand. Economic growth can easily become uneven because some industries may grow much quicker than others; so more resources will the allocated towards these industries. In addition to that, the industries that are not growing at such a rapid rate relative to others will have a chance of being neglected. Economic growth is usually associated with negative externalities, eg. Environmental damage, an inequality in the distribution of income. Economic Development is a more comprehensive measure than economic growth. Economic development is an increase in the real GDP per capita as well as the welfare of the nation (improving material and non-material standards of living). Economic development focuses on the quality. Economic development occurs when the costs of growth are minimised, and the
What determines the rate of interest?
What determines the rate of interest? In the UK interest rates, the base rate, gets set once a month by the Monetary Policy Committee at the Bank of England. Its sole remit is to achieve 2.5% inflation +/- 1%. Classical economics argue that simple supply and demand determines the rate of interest. They came up with the loanable funds theory. The diagram below shows the loanable funds theory. The rate of interest moves to bring demand for loanable funds into equilibrium with supply of savings. Supply for loanable funds represents accumulated savings. Demand for loanable funds on the other hand, is the demand for debt because firms have to borrow money to invest and thus will have accumulated a stock of debt. The demand curve for loanable funds slopes downwards for the following reasons. Firstly, households will borrow more money at lower rates on interest and secondly it reflects the falling rate of return on investment as investment increases. The market will adjust to changes in supply and demand. If there is a rise in demand for capital equipment because of an improvement in technology that increases the productivity of capital, the demand for loanable funds to purchase this equipment will rise. The demand curve will shift to the right. The resulting shortage of funds will cause the rate of interest to rise. This in turn will encourage more saving, the end result of which
