ECONOMICS DEVELOPMENTS - LECTURE -1.pptx

ECONOMICS DEVELOPMENTS - LECTURE -1.pptx

1. ECONOMIC GROWTH AND DEVELOPMENT CA1007 Lecture Prepared by: J. Lopez

2. WHAT IS ECONOMIC GROWTH? The term economic growth refers to the percentage change in the nation’s per capita GDP—the money value of all goods and services produced over a long period of time. Many economists would suggest that economic growth is the key indicator of a country’s power and accomplishment.

3. WHAT IS ECONOMIC GROWTH? Economic growth is often associated with the standard of living in a country for a relevant time horizon. Standard of living as defined by the PSA is the level of consumption that people enjoy, on the average, and is measured by the average income per person. There is also what we call cost of living which means the amount of money it takes to buy goods and services that a family typically consumes. A rising cost of living is called inflation and deflation as otherwise.

4. DIFFERENTIATING ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT Basis for Comparison Economic Growth Economic Development Meaning Economic growth is the positive change in the real output of the country in a particular span of time. Economic development involves the rise in the level of production in an economy along with the advancement of technology, improvement in living standards and so on.

5. DIFFERENTIATING ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT Basis for Comparison Economic Growth Economic Development Concept Narrow Broad Scope Increase in the indicators like GDP, per capita income etc. Improvement in life expectancy rate, infant mortality rate, literacy rate, and poverty rates Term Short-term process Long term process Applicable To Developed Economies Developing Economies How it can be measured? Upward movement in national income Upward movement in real national income

6. DIFFERENTIATING ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT Basis for Comparison Economic Growth Economic Development Which kind of changes are expected? Quantitative changes Qualitative and quantitative changes Type of process Automatic Manual When it arises? In a certain period of time Continuous process

7. DIFFERENTIATING ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT Economic growth boosts the national output, the total money value of all goods and services produced by one country, whereas, economic development means advancement of standard of living, e.g. education, healthcare, innovation, environment, to name a few. Growth directly boosts development; ceteris paribus, as higher GDP would mean more to spend on factors that are considered development .

8. Governments around the world are face with issues concerning productivity and living standards. In 2013, the World Bank Group adopted the twin goals to guide its work: ending extreme poverty and boosting shared prosperity .

9. FACTORS CONSIDERED IN BUILDING AN ECONOMY Saving and Investment In order to produce more, we have to invest in capital assets to enable us to have the capacity to yield more goods and services. However, it is to be noted that capital investment would mean sacrifice to consume more. There is a need for a country to promote both domestic and foreign investments in order to reduce unemployment . Ideally, a reduction in unemployment will reduce poverty levels, and hence, the government’s social burden, which will ultimately allow for increased in public savings.

10. FACTORS CONSIDERED IN BUILDING AN ECONOMY Diminishing Returns and Catch-Up Effect As the stock of capital increases, the extra output produced from an additional unit of capital decreases. Productivity is considerably affected minimally when workers with a large quantity of capital they use in the production process are given extra units of capital. In the long run, a higher saving rate leads to a great level of productivity and income but not greater growth in these variables .

11. FACTORS CONSIDERED IN BUILDING AN ECONOMY Investment from Abroad An investment that is sponsored with foreign money and operated domestically is called foreign portfolio investment. It is expected that the use of the foreign money would mean more opportunities to produce where the money is capitalized, but of course, a certain interest in that money is foreseen as well. The World Bank (WB) and the International Monetary Fund (IMF) were established to ensure there is economic prosperity around the world by financing public goods and services with funds accumulated from more advance economies like the USA.

12. FACTORS CONSIDERED IN BUILDING AN ECONOMY Education Human capital theory attributes differential investments in human capital to inequalities in income, such as those found to exist between women and men or minorities and whites. This theory emphasizes human capital as a set of economic assets. Education benefits human capital that is as important as physical capital. In fact, the largest chunk of the annual budget is dedicated to the education sector. More quality educated people produced in a country would mean an opportunity to generate more and better ideas to produce goods and services .

13. FACTORS CONSIDERED IN BUILDING AN ECONOMY Health and Nutrition A healthy population would also mean human capital, just like education, hence, are capable to produce more goods and services because they can maximize employment as compared to an unhealthy population. Other things remain fixed, healthier individuals are more productive. Policies that lead to economic growth would consider having healthy workers to promote greater productivity .

14. FACTORS CONSIDERED IN BUILDING AN ECONOMY Property Rights and Political Stability Property rights ensure the exercise of rights over one’s property and these guarantee more production of goods and services . In addition, when there is less uncertainty in government decisions and policies, especially in terms of market trading, there is opportunity to improve production processes and distribute products in the country. A stable political environment is considered to have efficient executive, legislative, and judiciary systems, working together for the country’s economic development.

15. FACTORS CONSIDERED IN BUILDING AN ECONOMY Free Trade A competitive economy that reduces or eliminates trade restrictions experiences economic growth after benefiting from more products to be used as an input to production . Outward-oriented policies give way to developing countries’ opportunity to interact with other countries and trade freely, thus creating more prospects to improve production.

16. FACTORS CONSIDERED IN BUILDING AN ECONOMY Research and Development The product of research and development (R&D) are new ideas, goods, and services that people consume. Government institutions allocate a part of their yearly budget to research to continue improving the ways things are done, in a more efficient or totally distinctive way . To protect the idea, a patent is awarded to an innovator for a certain number of years to encourage more researchers to discover beneficial things. Essentially, R&D turning money into knowledge and innovation is a process of creating a business out of this knowledge.

17. FACTORS CONSIDERED IN BUILDING AN ECONOMY Population Growth There are two schools of thought regarding population growth. On one hand, a relatively large population means more human resources working and contributing to the production of the country, but on the other hand, it also means more people to consume those goods and services . It is to be noted, however, that there are countries with a few population and slow population growth rate but are considered developed like Germany, having an annual growth rate of 0.2%, and Singapore, -0.3% in the 2020 study of the World Bank.

18. PRODUCTIVITY FACTORS Assets that are utilized to produce goods and services. The more capital we use, the more production we have. Physical Capital Knowledge, skills and abilities (KSA) humans develop. The KSA is developed in a person with education, training, years of experience, more knowledgeable, skilled, and able, which produces more than those who do not have. Human Capital Innovation and advances to make life easier and more efficient production. Related to R&D as it refers to the output of innovation and never-ending thrust to discover new things and new processes that would make production more efficient and faster using less input. Related to human capital because humans create these advances in tech. Technology Refers to the bounty of the land and water used in production. Natural Resources

19. PRODUCTIVITY In production, we consider the factors such as quantity of labor (L), quantity of human capital (H), quantity of natural resources (N), and technological advances (T). This can be summarized by writing: production (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 . It is obvious that the key factor in defining the standard of living is the advances in productivity.

20. O-RING THEORY OF DEVELOPMENT O-Ring Theory of economic development was proposed by economists Michael Kremer in 1993 O-Ring was derived from the devastating destruction of the Challenger space shuttle in 1986, resulting from a faulty little gasket or O-Ring It explains that production is composed of a set of tasks, and each task must be carried our proficiently for each one of the task It explains the discrepancy of the developed and underdeveloped countries in terms of the complexity of their production , product intricacies, and the level of skilled workers that they have.

21. O-RING THEORY OF DEVELOPMENT The theory tells us that a weak link in the production process may cause surmountable quality failure of the final output . The quality of input is given more value that its quantity . Assume N tasks, one worker per task Let q i [0,1] be the quality level of worker I E.g. q i = .9 means: - 90% chance of completing task perfectly and 10% chance of complete failure or, say, - 50% probability of completing task perfectly and 50% chance of reducing value by 20%, i.e. q i = ½ x 1 + ½ x 0.8 = 0.9  

22. O-RING THEORY OF DEVELOPMENT Output, Y = N x ( q 1 x q 2 x q 3 x q i x q N ) Example: N=10 q = 0.99 : Y = 10 x .99 10 = 9.04 N=10 q = 0.95 : Y = 10 x .95 10 = 5.99 N=10 q = 0.9 : Y = 10 x .9 10 = 3.49

23. O-RING THEORY OF DEVELOPMENT Implications: Inequality - In competitive economy with quality matching, higher output means higher wages. - If there are differences in quality levels across countries, the one country may have much, much smaller GDP per capita than the other country, even though the quality levels are not that different. - A fairly small decrease in the quality levels of the workers creates a big decrease in wages.

24. O-RING THEORY OF DEVELOPMENT Implications: Investment Incentives - Workers performing the same task earn higher wages in a high-skill firm that in a low-skill firm. Example: the highest quality secretaries will work with the highest quality CEOs. - Same idea applies to the economy as a whole. High quality workers are paid more when there are more high quality workers to work with. Talents would like to work with talents.

25. O-RING THEORY OF DEVELOPMENT Implications: Investment Incentives - Greater incentive to invest in skill/quality the more high quality workers are already in your economy - Potential for multiple equilibria - Smart people in a poor country surrounded by low quality workers, that smart person would not earn a lot and would be discouraged to get education since there is no high pay off.

26. O-RING THEORY OF DEVELOPMENT Implications: Investment Incentives - In an O-ring model, capital also wants to work with high quality workers - Match the best workers with the most expensive machines - Poor countries will have more workers in less capital intensive, primary production (e.g. agriculture). - Capital is going to fly away from countries which have low-skilled workers and will go to countries with high-skilled workers.

27. 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 in 1956, an American economist and a Nobel Prize winner in Economic Science. Standard Solow-model predicts that in the long-run, economies converge to the steady-state equilibrium .

28. SOLOW MODEL Assumptions: Savings equal investments Labor and Capital (L&K) are substitutable for each other Capital depreciates at a constant rate Population grows at a constant rate There are diminishing returns to an individual output Full employment of labor Constant return to scale No technological progress

29. SOLOW MODEL In this graph, we can see the relationship of the depreciation, capital, d, and output lines.

30. ECONOMIC DEVELOPMENT IN THE PHILIPPINES According to the World Fact Book 2020 of the Central Intelligence Agency (CIA) of the USA, the Philippines ranks 132 nd out of an estimated 211 countries or states with per capita GDP (on purchasing power parity basis) of $8,400 annually in 2017.

31. ECONOMIC DEVELOPMENT IN THE PHILIPPINES

32. ECONOMIC DEVELOPMENT IN THE PHILIPPINES Inflation is commonly known as the quantitative measure of the price rate increase of goods and services over a period of time. Strong coconut, pineapple, and banana export industries and remittances of OFWs fully open outside investment and development of business process outsourcing center.

33. ECONOMIC DEVELOPMENT IN THE PHILIPPINES Inflation of the country is at 5.7% p.a. (1995-2004). The full year average inflation in 2023 is 6.0% according to NEDA.

34. ECONOMIC DEVELOPMENT IN THE PHILIPPINES A shortfall in budget, diminishing investor confidence, and outrageous political sandal were eminent during the time of former President ERAP, while former President GMA acted a lot of deregulations and privatizations of public corporations and tax reforms thus, redeeming the country’s status in the IMF and the international community.

35. ECONOMIC DEVELOPMENT IN THE PHILIPPINES There was an annual growth rate of 5% because of the Asian Financial Crisis of 2008. The country’s export begam to plunge. Despite this, the country did not go into recession and was even strengthened by former Pres Noynoy Aquino in 2010.

36. ECONOMIC DEVELOPMENT IN THE PHILIPPINES 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.

37. ECONOMIC DEVELOPMENT IN THE PHILIPPINES Another factor that is considered in the country’s economic development is how the government deals with the leftists and separatists like the MILF, Abu Sayyaf, NPA, and such.

38. ECONOMIC DEVELOPMENT IN THE PHILIPPINES The Build, Build, Build program of former Pres Duterte aimed to significantly expand infrastructure and boost employment but sadly it was hampered by the Covid-19 pandemic. It should also be noted that the deadly war on drugs has scared off investors. Currently, the ICC is looking into the offenses of the previous admin.

39. ECONOMIC DEVELOPMENT IN THE PHILIPPINES Approximately 1/3 of the country’s GDP went to exportation after the revival of the Asia-Pacific region. Electronic products continued to be the top export followed by agro -based minerals, forest, and petroleum products.

40. ECONOMIC DEVELOPMENT IN THE PHILIPPINES Covid-19 has hit the tourism industry greatly. All the umbrella orgs suffered. Plus the strict restrictions, the many lockdown names (ECQ, MEQC, hard lockdown, soft lockdown), and the ever changing and confusing protocols.

41. ECONOMIC DEVELOPMENT IN THE PHILIPPINES Covid-19 has hit the tourism industry greatly. All the umbrella orgs suffered. Plus the strict restrictions, the many lockdown names (ECQ, MEQC, hard lockdown, soft lockdown), and the ever changing and confusing protocols.

42. ECONOMIC GROWTH AND THE WORLD The Sustainable Development Goals (SDGs), also known as the Global Goals, were adopted by the United Nations in 2015 as a universal call to action to end poverty, protect the planet, and ensure that by 2030 all people enjoy peace and prosperity. The 17 SDGs are integrated—they recognize that action in one area will affect outcomes in others, and that development must balance social, economic and environmental sustainability. Countries have committed to prioritize progress for those who're furthest behind. The SDGs are designed to end poverty, hunger, AIDS, and discrimination against women and girls.

43. References: Balisacan , A.M., & Hill, H. (2003). The Philippine Economy: Development, Policies, and Challenges . Oxford University Press on Demand.   Batalla , E. V. C. (2016). Divided politics and economic growth in the Philippines.  Journal of Current Southeast Asian Affairs ,  35 (3), 161–186. https://doi.org/10.1177/186810341603500308 Cabudol , E.G. (2022). Economic Development (First). Rex Book Store, Inc. IBON Foundation. (2023, August 10).  Latest growth figures confirm economy in decline under Marcos Jr . https://www.ibon.org/latest-growth-figures-confirm-economy-in-decline-under-marcos-jr/ Sustainable development goals . (n.d.). UNDP. https://www.undp.org/sustainable-development-goals

44. Thank you very much!