CHAPTER 1

ECONOMIC GROWTH AND DEVELOPMENT

Learning Objectives:
1. Outline the ideas behind economic development and growth.
2. Examine the connection between public policy, development, and economic growth.
3. Discuss the factors that affect productivity, a crucial component of economic
development and progress.
4. Evaluate the O-Ring hypothesis of production and development
5. Analyze the Solow Model of Sustainable Growth
6. Describe the Philippines's economic progress.
7. Describe the global economic growth and development goals.

LOOKING BACK
In basic economics, we learned about the foundation of social science, which is
concerned with the effective management of scarce or limited resources.2 Economics is heavily
reliant on the notion of human nature, including the behaviors, motivations, and meanings of
individuals as well as their interactions with other individuals, groups, and various institutions. It
emphasized the fundamental economic queries of: (1) What products must be produced and in
what quantities? (2) How are they going to produce? 3. For whom are the products?
Additionally, macroeconomics and

Basic Microeconomic Questions: The study of supply, demand,

1. What products are to be produced equilibrium, declining marginal utility, and the
and their quantities? variables influencing the supply and demand of
2. How are they going to produce goods is known as microeconomics, sometimes
3. For whom are the products? known as the economics of individual actions
and entities.

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 Due to substitution and income effects in "demand," the ideas of complementary and
substitute commodities are also used in addition to the marginal propensities to consume and
conserve.

The ideas of elasticity, equilibrium, shortage, excess, imposition of a price ceiling and
floor, and government interventions in market equilibrium, such as subsidies and taxes, are
some of those related to "supply."

Moreover, each market model has its Basic Macroeconomics Questions:

own production and cost characteristics as 1. What determines the standard of living
well as its own short- and long-term 2. What determines the cost of living?
economies of scale and diseconomies of scale. 3. Why does our economy fluctuate?
and consistent scale-back returns.

In Macroeconomics, economics of the entire nation, there are three basic questions: (1)
What determines the standard of living? (2) What determines the cost of living? and (3) Why
does our economy fluctuate (Business Cycle)?

The Production Possibility Frontier (PPF), which is the fundamental indicator of a

country's income and is represented by the GDP, places constraints on how much may be
produced. The Phillips Curve, fiscal and monetary policies, the functions of money, different
economic theories, as well as the market value of all a nation's finished goods, relationships
between inflation and unemployment, and an increase in real GDP are all crucial to economic
growth. Economic growth also happens when the PPF shifts outward.

INTRODUCTION
Understanding, quantifying, and taking into account economic growth and development
in relation to the functions and drivers of long-term growth is one of the most crucial problems
in economics. Fundamentally, "economic growth" refers to the change in a country's per capita
GDP, which is the monetary worth of all products and services produced over a considerable
amount of time. We frequently equate a country's level of life over a certain time span with
economic growth. Many economists contend that the most important metric of a nation's
strength and success is its rate of economic growth.
Various studies on economic growth have defined the processes, policies, and
circumstances that support growth. In this lesson, we will examine the function of productivity,
explore the economic development of the nation, and then characterize economic growth using
actual statistics on per capita real GDP.

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 Economic growth boosts the national Diminishing Returns
Savings and Invetsments from
output, the total monetary value of all goods and the Catch-up
Investments Abroad
and services produced by one country, Effect
whereas, economic development means
advancement of the standard of living, e.g., Property Rights and
Education Health and Nutrition
education, healthcare, innovation; Political Stability
environment, to name a few. Growth
directly boosts development; all other things
Research and
remain constant, as higher GDP would mean Free Trade Population Growth
Development
more spending on factors that are
considered development. Figure 1.1. Economic Growth and National Economic Policy

According to the definition of the Philippines Statistics Authority (PSA), "standard of

living" is the level of consumption that people enjoy, on average, and is measured by the
average income per person, while the "cost of living" is the amount of money it takes to buy
goods and services that a typical family consumes. A rising cost of living is called inflation and
deflation as otherwise.
Productivity and living standards are concerns for governments all across the world. The
World Bank Group selected two aims to govern its activities in 2013: eliminating extreme
poverty and increasing shared prosperity.

The following are the factors considered in building an economy:

Saving and Investment. We must invest in capital assets to provide us the ability to
manufacture more goods and services if we want to increase our output. It should be
highlighted, nevertheless, that investing in capital would require more sacrifice in terms of
consumption. In order to lower unemployment, a nation must encourage both local and
international investment. Ideally, a decline in unemployment will lower poverty rates and,
consequently, the social burden placed on the government, allowing for higher public savings in
the long run.
Diminishing Returns and Catch-up Effect. The additional production provided by an
additional unit of capital diminishes as the stock of capital rises. When workers who consume a
lot of capital in the manufacturing process are given more capital units, productivity is only little
affected. In the long run, a higher saving rate results in better income and productivity levels,
but not increased growth in these factors.
Investment from Abroad. Foreign portfolio investment is a term used to describe an
investment that is domestically operated and supported by foreign capital. More chances to
create where the money is capitalized are anticipated as a result of the utilization of foreign

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capital, but there will also undoubtedly be some interest in that cash. By using money acquired
from more developed economies like the United States of America (USA), the World Bank (WB),
and the International Monetary Fund (IMF) were created to ensure that there is economic
prosperity across the world.
Education. According to the notion of human capital, economic gaps between
minorities and whites or between men and women can be attributed to differences in
investments in human capital. According to this view, human capital is a collection of economic
assets. Human capital, which is just as vital as physical capital, is benefited by education. In
actuality, the education sector receives the lion's share of the annual budget. A nation would
have the chance to invent more and better ideas for producing products and services if it
generated more highly educated individuals. However, highly educated people in emerging
economies may choose to work in other nations with a higher standard of life, leading to a brain
drain—the departure of the majority of highly educated employees to wealthy nations. We
recently instituted a regulation limiting registered nurses' ability to work overseas for a specific
amount of time.
Health and Nutrition. In the same way that education and human capital go hand in
hand, a healthy population may also create more products and services since they can employ
more people than an ill one. Other factors stay constant; healthy people are more productive.
Healthy employees would be taken into account by policies that support economic growth in
order to encourage higher productivity.
Property Rights and Political Stability. Property rights guarantee the exercise of one's
property rights, which in turn ensures increased production of products and services.
Additionally, when government choices and regulations are less ambiguous, particularly in
terms of market trading, there is a chance to enhance manufacturing methods and product
distribution across the nation. Effective executive, legislative, and judicial institutions are
thought to exist in a stable political climate and operate in tandem to promote the economic
growth of the nation.
Free Trade. Increased access to more goods for use as production inputs results in
economic growth in a competitive economy that lowers or removes trade constraints. By
allowing developing nations to freely communicate and trade with other nations, outward-
focused policies open up additional opportunities to boost productivity.
Research and Development. New concepts, products, and services that are consumed
by people are the results of research and development (R&D). Governmental organizations set
aside a portion of their annual budget for research in an effort to keep finding better, more
effective, or wholly original ways to do things. To encourage more researchers to make useful
discoveries, an inventor is given a patent to protect the concept for a certain period of time.
R&D essentially converts funding into knowledge, and innovation is the process of converting
this information into a business.

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 Population Growth. Regarding population increase, there are two schools of thinking. A
relatively big population on the one hand implies more individuals working and contributing to
the nation's output, but on the other, it also means that there are more people consuming
those products and services. However, it should be noted that several nations, such as Germany
and Singapore, which had annual population growth rates of 0.2% and -0.3% respectively in the
World Bank's 2020 research, are deemed developed despite having small populations and
moderate rates of population increase.

PRODUCTIVITY
In production, we consider factors such
as quantity of labor (L), quantity of physical
capital (K), quantity of human capital (H),
quantity of natural resources (N), technological
advances, and if we are to summarize the
output of production (Y), we say, Y = Tf{L, H, N}.
In the advent of technology, as it develops, so is
the production of goods and services. The
production function shows that all other things
remain constant; output increases as physical
capital, human capital, labor, and natural
resources increase,

Productivity refers to how much is produced for each unit of work in terms of products
and services. The increases in production are clearly the most important element in
determining the level of life. Keep in mind that the GDP may be interpreted in two different
ways: as the total amount spent by a nation on goods and services, as well as the production of
the economy, or as the income.
Remember the factors of production: land, labor, capital, and entrepreneurship. These are the
factors to consider in productivity as well.
Physical Capital. These are resources that are used to create products and services. We
can produce more as we use more capital. A carpenter, for instance, will be able to create more
furniture to sell if they have access to more wood, cutters, machines, and other tools to
manufacture it. This is known as higher production.
Human Capital. It is indisputable that human capital, which consists of knowledge, skills,
and abilities (KSA), although less tangible than capital resources, has a significant impact on the
creation of products and services. A person with education, training, years of experience, more

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knowledge, skill, and ability, as well as the KSA, produces more than someone without these
things.
Natural resources. An economy produces products and services due to the availability of
natural resources including trees, water, minerals, metals, fruits, root crops, and oil. Resources
are not all abundant in every country. Consider the USA, which has vast arable territory for
agricultural output, or the Middle Eastern nations of Qatar, Kuwait, and Bahrain, which have
massive oil reserves and are referred to as having "black gold." They either trade these natural
resources to nations that lack these resources or use them to manufacture additional products
and services. However, this does not imply that a nation cannot be regarded as productive if it
lacks a variety of natural resources. For instance, Japan has more sophisticated technology than
other nations, allowing them to manufacture and export more.
Technology. This is strongly tied to research and development since it speaks to the
results of innovation and the never-ending hunt for new products and methods that will speed
up production and use less input. Because humans develop these technological advancements
in industries like agriculture, pharmaceuticals, and industry, it is tied to human capital.
It goes without saying that in order to produce goods and services, we all require these four
productivity factors. Because the amounts of these components vary among nations, we may
argue that there is a clear difference between productivity and gross domestic product.

O-RING THEORY OF DEVELOPMENT

According to the O-Ring theory of economic growth, which was put out by economist
Michael Kremer in 1993, production is made up of a variety of activities, each of which needs to
be completed skillfully in order for it to be valuable. This theory of development explains the
disparity between developed and underdeveloped countries in terms of the complexity of their
production, the complexity of their products, and the level of skilled workers that they have.
The name "O-Ring" was derived from the devastating destruction of the Challenger space
shuttle in 1986, which was caused by a defective little gasket or O-Ring.
According to the theory, a weak point in the manufacturing chain may result in an
unavoidable quality failure of the finished product. Input quality is valued more highly than
input quantity. For instance, a great opera singer cannot be replaced by ten people who sing the
videoke, a music system used in singing with lyrics on a monitor by those who typically do not
have proper training in opera and are done at home or at other social gatherings. A highly
skilled chef of a restaurant also cannot be replaced by two or three cooks.
Assume that each task in a production process has a single worker. Using the variable W,
the quality level can vary from 0 to 10, with 10 being the best quality and 0 representing no
quality. A task's quality of 0.9 can be interpreted as either a 90% chance that it will be

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completed flawlessly or a 10% chance that it will be a total disaster. The alternative perspective
is that there is a 50/50 probability of successfully completing the work, with the remaining half
being by a lowered value of 20%, or 0.5(1) + 0.5(0.8) 0.9. Output, O= WX(Q1 X Q2) is the
formula for the O-Ring manufacturing function.
The O-Ring theory describes how output and
quality relate to one another on the graph.
Keep in mind that a level of production of 10
is equivalent to a level of quality of 100%; as
the level of output decreases, so does the
quality. We can explain why wages decrease
as input quality rises by substituting salaries
for output. The model goes into further
detail. why less capital-intensive
manufacturing operations like agriculture use
employees from underdeveloped nations.
They often employ basic agricultural
techniques that require less chores.
Figure 1.3. O-Ring Model of Output and Quality
https://images.app.goo.gl/LuRPP7mTXnLG6KAE8

With the aid of the theory, we may evaluate the degree to which the production
procedures are complex and ascertain how much the task quality affects overall output. In
addition, we may examine the elements that contribute to failures, such as a lack of worker
training, a lack of technology, or even institutional corruption.

SOLOW MODEL
In neoclassical economics, one of the most popular models that is used to understand long-term
growth is the use of the Solow Model. The model was developed by Robert Solow, an American
economist and a Nobel Prize winner in Economic Sciences and in 1956, wherein gross domestic
product per worker, capital per worker, depreciation rate, savings, and investment rates are
factored in analyzing growth. Out of the factors of production, the Solow Model focuses on
capital and labor, where technology is exogenously
included. In the equation, y = Aƒ (K, L), where y is GDP
growth rate, A is the total factor productivity, in this
case, technology; f is a function, K is capital, and L is
labor, y = f (K, AL), technology augments labor, and in
y = f (AK, L) technology augments capital. In the
equation, y= AF (K, L), effect of A to y is called Solow
residual. It works independently of capital and labor.

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The standard Solow Model is used to estimate that in the long run, economies converge to the
steady-state equilibrium. Consider the graph on the right:

In this graph, we can see the relationship of the depreciation, capital, d, and output
lines. The depreciation curve is a straight line, in a 45-degree angle, depreciation is proportional
to capital. When k increases, d increases, and vice versa. In the production function, output per
worker is increasing at a diminishing rate. With an increase in K/n, there is an increase in Y/n. In
the investment function, we multiply it by savings-what we save is normally what we use to
invest. Initially, investment is greater than depreciation. It means that the capital is growing until
such a point when the investment becomes less than depreciation. In this case, the capital, k, is
shrinking. We call this point the steady state (ss), key in understanding the Solow Model.

We can use the Solow Model on the following

assumption: that we are analyzing with a closed
economy in mind, where savings are equal to
investment. Labor, L, and capital, k, are sustainable
for each other. Capital depreciates at a fixed rate, as
well as the population, it grows at a constant rate,
there is full employment of labor there is a
diminishing return to an individual output and the
most notable is that there is no technological
progress going on.

Let us have an example of the application of the Solow Model in numbers. Remember the
following:

Problem:

y = k1/2, d = 0.07, s = 14%

Solve:
1. Capital labor ration, k, at steady state
2. Output at steady state
3. Consumption at a steady state
4. Investment at steady state

Proposed Solution:

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 1. k = I – dk, sy = dk, sk1/2 = dk, 0.14k1/2 = 0.07k, 2 = kk/1/2, multiply by 2, therefore, k = 4
2. y = k1/2, y = 41/2, therefore y = 2
3. c = (1 – s) y, c = (1 – 0.14) 2, therefore, c = 1.72
4. I = sy = 0.12 (2) = 0.24.

ECONOMIC DEVELOPMENT IN THE PHILIPPINES

According to the World Fact Book 2020 of the

Central Intelligence Agency) (CIA) of the USA, the
Philippines ranks 132nd out of an estimated 211
countries or states with a per capita GDP (on a
purchasing power parity basis) of Telecommunications
$8,400 annually in 2017. Top 3, were Liechtenstein (1 st -
$139,100 pa), Qatar (2nd - $124,100 pa), and Macau (3rd
$122,000 pa), while the bottom 3 were, Democratic
Republic of Congo (180th- $100 pa), and tied for the
last two places are Central African Republic (181st
$700) and Burundi (181st - $700).
Figure 1.5. Major Businesses in the Philippines

The nation's annual rate of inflation is 5.7%. (1995-2004). The country's inflation climbed from
4% in July 2021 to 4.9% in August 2021, according to the book's writing.13 Inflation is a term
used to describe the quantitative measure of the rate at which the price of goods and services
increases over time. Strong export industries for bananas, pineapples, and coconuts as well as
remittances from overseas Filipino workers (OFWs) have made the country completely
accessible to foreign investment and the creation of business process outsourcing centers.

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 When Gloria Macapagal-Arroyo was
president, the country's standing with the
International Monetary Fund and the rest of the
world was restored. During the administration of
former president Joseph Estrada, a budget deficit,
declining investor confidence, and outrageous
political scandals were on the horizon. Despite a 5%
yearly growth rate, the Asian Financial Crisis of 2008
caused the nation's exports to drastically decline. In
spite of this, Benigno Aquino Jr.'s leadership in 2010
prevented a recession and even strengthened the
nation. The country's geographical setup of
economic activities is considered a drawback,
intensifying underemployment, instability, and even
corruption. Power breakdowns limit the room for
development.

According to a report by the Philippine Coop,

the government's relations with leftists and separatist groups like the New People's Army (NPA),
the Moro National Liberation Front (MNLF), the Moro Islamic Liberation Front (MILF), and of
course the Abu Sayyaf are also taken into account when determining the economic
development of the nation. The MNLF signed a peace deal in 1996, and the MILF joined in the
peace negotiations in 2001. However, the Abu Sayyaf persisted in fighting in Mindanao, the so-
called homeland of the Muslims, as well as in some areas of Luzon and Visayas because they
said they had support from outside.

The "Build, Build, Build" program, which intends to considerably increase infrastructure
and stimulate employment development in the country, is one of the most notable initiatives of
the current government of President Rodrigo Duterte. Just the COVID-19 outbreak, which began
Figure
in China, slowed it down. 16 The Philippines strengthened 1.6. Land Use
connections in the
with Philippines
China, the world's
https://images.app.goo.gl/jkPpdFKcF8euojP77
largest economy, and made room for several collaborations in the public works and financial
sectors. There is a widespread initiative to eradicate crime, corruption, and drug misuse; the
opposition party did not disregard it, and many political organizations both locally and abroad
disapproved of it. Despite this, President Duterte's government enjoys a high level of support,
which was seen in the midterm elections when his allies won nine out of the Senate's twelve
seats.
Following the recovery of the Asia-Pacific region, exports accounted for almost one-third
of the nation's GDP. The leading export, which

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continued to be electronic goods, was followed by agro-based minerals, forest products, and
petroleum goods.
The COVID-19 pandemic had a significant impact on the tourist sector, albeit not just in
the nation as a whole. Because of the alleged sex industry and child trafficking that have been
revealed by several investigative agencies in other countries, travelers are reluctant to visit the
Philippines.

After investing the majority of its budget to combat the epidemic on health services and
financial support to its impoverished constituents, the Philippines now faces a significant hurdle
Figure 1.7. Tourism Arrivals in the Philippines
in its effort to restore its economy.

The Philippines joined the United Nations in 1945 and is currently a member of APEC,
ASEAN, the World Trade Organization (WTO), the Intergovernmental Group of 24 on
International Monetary Affairs and Development (G24), and the Non-Aligned Movement (NAM),
the second largest international organization after the United Nations. largest international
coalition of states.

ECONOMIC GROWTH AND THE WORLD

The 17 Sustainable Development Goals (SDGs) accepted by all UN member states were
made public by the UN Department of Economic and Social Affairs (UN-DESA). There are many
challenges that the world is currently facing, and one major issue is the pandemic and its
aftermath, an unprecedented occurrence that is shattering the modern economy. SDG 8 states
that one of them "promotes sustained, inclusive, and sustainable economic growth, full and
productive employment, and decent work for all."19 There are many challenges that the world
is currently facing, and one major issue is the pandemic and its aftermath. We are currently
experiencing the worst economic downturn since the Great Depression, with a 4.2% decline in
the GDP per person, a risk to the livelihoods of roughly 1.6 billion workers in the informal
economy, a slowing or even halting of tourism, which is significant given that the GDP of some
countries is heavily dependent on tourist revenue.

Here are the targets and indicators of SDG 8 to tackle economic growth:

 Sustain per capita economic growth in accordance with national circumstances and, in
particular, at least 7% GDP growth per annum in the least developed countries
 Achieve higher levels of economic productivity through diversification, technological
upgrading, and innovation, through a focus on high-value-added and labor-intensive
sectors
 Promote development-oriented policies that support productive activities, decent job
creation, entrepreneurship, creativity, and innovation, and encourage the formalization

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 and growth of micro-, small-, and medium-sized enterprises, including access to financial
services
 By 2030, achieve full and productive employment and decent work for all women and
men, including for young people and persons with disabilities, and equal pay for work of
equal value
 By 2020, substantially reduce the proportion of youth not in employment, education, or
training
 Take immediate and effective measures to eradicate forced labor, end modern slavery
and human trafficking, and secure the prohibition and elimination of the worst forms of
child labor, including recruitment and use of child soldiers, and by 2025, end child labor
in all of its forms
 Protect labor rights and promote safe and secure working environments for all workers,
including migrant workers, in particular, women migrants, and those in precarious
employment
 By 2030, devise and implement policies to promote sustainable tourism that creates jobs
and promotes local culture and products
 Strengthen the capacity of domestic financial institutions to encourage and expand
access to banking, insurance, and financial services for all.
From Sustainable Development Goals, by the Department of Social and Economic Affairs,
United Nations. Reprinted with the permission of the United Nations. Retrieved from
https://sdgs.un.org/goals/goal8, 2021.

ACTIVITIES:

CASE VIDEO

Look for a short video clip about the Case of Southeast Asian Economic Development.
Search the video entitled, “Economic Development in Southeast Asia” on the internet, and
answer the questions that follow. (https://www.youtube.com/watch?v=s_MxgRPRlE4)

The Economic Development in

Southeast Asia

DISCUSSION QUESTIONS:

1. According to the Boston Consulting Group's managing director, how can governments
create jobs?

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2. Discuss the three key success factors to consider an economy as an environment "easy
to do" with.
3. Why do we say that GDP is not enough to measure economic growth and development?
What else do we measure?

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