Introduction to

ECONOMIC
DEVELOPMEN
T
 Lesson
Outline

Defining Economics

Basic Concepts of Economic Development

Macroeconomics and Microeconomics

Circular Flow Model of the Economy

Classification of developing countries

DEFINING
ECONOMICS
Economics is a social science that
deals with the proper allocation of
scarce resources to satisfy unlimited
human needs and wants.
Economics is often associated with wealth and
finance, but it is not all about money.

Economics is a social science. In basic terms,

it is the study of people and their choices. It
considers how things are made (produced),
how things are moved around (distributed),
and how things are used (consumed).
 What does an Why is
economist do? economics
important?
Economics is important because it helps
An economist is a person who investigates
us understand how resources are
the rationale behind human decision-
allocated, how decisions are made, and
making and is interested in applying
how these decisions affect individuals,
statistics to improve public policy, increase
businesses, and societies as a whole.
profits, or carry out research.
Macroeconomics
an Microeconomics
d
There are two major fields of economics: macroeconomics and microeconomics.

Macroeconomics:

Macroeconomics looks at the economy as a whole and deals with broad aggregate
indicators and economic policies. It focuses on the overall performance, structure, and
behavior of an economy.

Microeconomics:
Microeconomics deals with the behavior and decision-making processes of individual units
within the economy, such as households, firms, and industries.
 Circular Flow Model
Model that presents how money, goods, and services move between
sectors in an economic system.

Two-Sector Model

Three-Sector Model

Four-Sector Model

Five-Sector Model
 Two-Sector Model

In the two-sector model, it is

assumed that households spend
all their incomes as consumer
expenditures and purchase the
goods and services produced by
businesses.
 Three-Sector Model

The three-sector economy model

includes the role of government when
determining the flow of money. In this
type of economy, the government
plays an essential part.

Hence, the flow of money follows from

the firms and households to the
government in taxes.
Four-Sector Model

The four-sector model contains

the foreign sector, which is also
known as the overseas sector
or external sector. The
overseas sector turns a closed
economy into an open
economy.
 Five-Sector Model

The fifth sector – the financial sector – is

added to complete the circular flow model. It
includes banks and other institutions that
provide borrowing and lending services to
the other sectors.
 Developme Growth
nt
It is the enhancement of freedoms
that allow people to lead lives that It refers to an increase in the
they have reason to live. size of a country's economy
over a period of time.
Economic development is the
process in which certain changes
are made regularly for acquiring
desired results. It also alludes to the
increased output volume brought
about by technological
breakthroughs.
INDICATORS OF ECONOMIC
DEVELOPMENT
WHAT IS
ECONOMIC
GROWTH?
Economic growth can be referred to as the increase that is
witnessed in the monetary value of all the goods and
services produced in the economy during a time period. It is
a type of quantitative measure that reflects the potential
increase in the number of business transactions taking place
in the economy.
WHAT IS
ECONOMIC
DEVELOPMENT?
• Branch of economics that focuses on improving
fiscal, economic, social conditions in developing
countries.

• Use of economic analysis, methods and tools to

understand the problems, constraints and
opportunities facing developing countries.
WHAT IS
HUMAN
DEVELOPMENT
INDEX?
• The Human Development Index (HDI) is a summary measure of
average achievement in key dimensions of human development: a
long and healthy life, being knowledgeable and having a decent
standard of living. The HDI is the geometric mean of normalized
indices for each of the three dimensions.
⚬ a long and healthy life, as measured by life expectancy at birth;
⚬ knowledge, as measured by mean years of schooling and
expected years of schooling; and
⚬ a decent standard of living, as measured by GNI per capita in
PPP terms in US$.
 Three Core Components of
Development
1. Life-sustenance. It is concerned with the
provision of basic needs. The basic needs
approach to development was initiated by
the Work Bank in the 1970s. A major
objective of development must be to raise 3. Freedom refers to freedom from the
people from primary poverty and to three
provide basic needs simultaneously. evils of ‘want, ignorance, and squalor’ so that
people are more able to determine their own
2. Self-esteem is concerned with the destiny.
feeling of
self-respect and independence. No
country
can be regarded as fully developed if it
is
exploited by others and does not have
the
power and influence to conduct relations on
equal terms.
 CLASSIFYING
COUNTRIES
• Most Developed Countries (MDCs)
⚬ The richest of the industrialized and democratic nations of the
world.
• Less Developed Countries (LDCs
⚬ Countries with little industrial development, little wealth and
high population growth.
• Least Developed Countries (LLDCs)
⚬ are low-income countries confronting severe structural
impediments to sustainable development.
The World Bank classifies countries into income categories based on Gross
National Income (GNI) per capita:

1.Low-Income Countries (LICs)

- Countries with a GNI per capita of $1,085 or less.

2. Lower-Middle-Income Countries:
- GNI per capita between $1,086 and $4,255.

3. Upper-Middle-Income Countries: GNI per capita between $4,256 and

$13,205.

4. High-Income Countries: GNI per capita of $13,206 or more.

 DEVELOPING COUNTRIES
It refers to country with low standard of living, less industrialization, low HDI
compared to Developed Country..

CHARACTERISTICS OF DEVELOPING COUNTRY

1. Low GDP per Capita

> It is a situation where the average income per person in a country
is low.

2. Low Levels of Living Standard

> refers to the inability of the population to intake the required amount per day to
sustain their basic needs and services such as food, water, healthcare, education, employment
opportunities.
 CHARACTERISTICS OF
DEVELOPING COUNTRIES

Common Characteristics of Low Living Standards

- Income Poverty
- Poor Housing
- Limited access to Education
- Inadequate Healthcare
- Food Insecurity
- Unemployment or Underemployment
 Reason of Low Level
of Living Standard
• Larger income inequalities

In developing countries apart from GNP per capita being

considerably lower, income inequalities are also larger than in
developed countries.

Income Inequality is defined as the difference in how income is

distributed among individuals and/or populations. It is also
described as the gap between rich and poor, wealth disparity,
wealth and income differences, or the wealth gap.
HOW IS INCOME INEQUALITY
MEASURED?
1. GINI COEFFICIENT

A common measure of income inequality, where 0 represents perfect equality (everyone has
the same income) and 1 represents perfect inequality (one person has all the income).
HOW IS INCOME INEQUALITY
MEASURED?
2. Lorenz Curve

The Lorenz Curve is a graphical representation used to illustrate the distribution of income or
wealth within a population. It visually shows the degree of income inequality and helps in
calculating the Gini Coefficient.
 CAUSES OF INCOME
INEQUALITY

> Education and Skills

Higher education and specialized skills generally lead to
better-paying jobs, while those with lower education levels
may have limited earning potential.
> Economic Factors
Differences in wages, investment income, and asset
ownership can create disparities.

> Labor Market Structures

variations in labor market conditions, including
unemployment rates, job security, and working
conditions, can impact income distribution.
 CHARACTERISTICS OF DEVELOPING COUNTRY

3. Low levels of Productivity

> Productivity of labor is low in developing countries. The

reason being lack of physical capital (principle of diminishing marginal
productivity)
and the quality of labor.

> Labor productivity depends on a number

of factors, particularly the availability of other inputs to be combined with labor,
health
and skill of workers, motivation for work and institutional flexibilities.
 CHARACTERISTICS OF DEVELOPING COUNTRY

4. High rate of population growth and dependency burden

> Population has been rising in most developing countries at rates varying
between 2 and 3.5 percent per annum for the past few decades.

> Birth rate and death rate are both higher in developing countries
compared to developed countries. This also contributes to high dependency
burden in the developing countries
It is a demographic measure that indicates the
number of live births in a given year per 1,000 people
in the total population.

It is a demographic measure that indicates the

number of deaths in a given year per 1,000 people in
the total population.
 HIGH AND RISING LEVELS OF UNEMPLOYMENT
UNDEREMPLOYMENT
AND
• One of the principal manifestations of and factors contributing to the low levels of
living
in developing nations is their relatively inadequate or inefficient utilization of labor in
comparison with the developed nations.
UNEMPLOYME
NT
Unemployment refers to the condition where individuals who are actively seeking work
are unable to find a job.
 HIGH AND RISING LEVELS OF UNEMPLOYMENT
UNDEREMPLOYMENT
AND
ILLUSTRATIO
N: million. Out
The total adult, working-age population was 126.19
of this total population, 18.2 million were classified as
employed, and 8.23 million were classified as unemployed. The
remaining 2.51 million were classified as out of the labor force.
TYPES OF UNEMPLOYMENT

FRICTIONAL UNEMPLOYMENT
Frictional unemployment" refers to workers who are out of work for a short period of
time while changing jobs. Frictional unemployment is caused by factors that prevent
unemployed workers from moving geographically or occupationally to open positions.

STRUCTURAL UNEMPLOYMENT
Structural unemployment may occur as a result of the economy's structural changes.
Structural unemployment is caused by a drop in demand for a particular industry's
products, which leads to disinvestment and a reduction in the industry's manpower
requirements.
TYPES OF UNEMPLOYMENT

CYCLICAL UNEMPLOYMENT
It occurs due to fluctuations in the economic cycle—specifically during periods of
economic downturn or recession.

SEASONAL UNEMPLOYMENT
Seasonal unemployment exists in all countries, developed and developing alike.
Seasonal unemployment entails not only underutilization of manpower, but also
underutilization of capital stocks in seasonal industries.
 HIGH AND RISING LEVELS OF UNEMPLOYMENT
UNDEREMPLOYMENT
AND

UNDEREMPLOYMENT

Underemployment occurs when individuals are working in jobs that do not fully
utilize their skills, education, or experience, or when they are working fewer hours
than they would like.

Underemployment occurs when individuals are working in jobs that do not fully
utilize their skills, education, or experience, or when they are working fewer hours
than they would like.
LIMITED ACCESS
TO HEALTHCARE
Developing countries often struggle to provide
adequate healthcare and education to their
citizens.
 N G /
FIN I G
DE U R IN • UN’s System
E A S ED
M ELOP
• World Bank’s System
⚬ Classification by levels of GNI
DE V R Y
U N T per capita

C O • UNDP’s Human Development Index

⚬ Classification by levels of
Human Development
• OECD’s System
 IMPORTANCE OF ECONOMIC
DEVELOPMENT
1.To improve standard of living
2.To reduce poverty
⚬ Job Creation: Economic development fosters job creation, reducing
unemployment and providing individuals with opportunities to improve their
financial situation.
3. Enhancing Education and Healthcare
⚬ Improved Education Systems:
⚬ Advance Healthcare
4. Boosting Economic Growth
⚬ Increased Productivity: Economic development leads to higher
productivity through technological advancements and innovation,
contributing to overall economic growth.
 IMPORTANCE OF ECONOMIC
DEVELOPMENT

5. Strengthening Infrastructure
⚬ Investment in Infrastructure: Economic development typically
involves investment in infrastructure such as transportation, energy,
and communication systems
6. Promoting Innovation and Technology
7. Strengthening Resilience
8. Supporting Social Stability