AQA A-level Economics: Economic growth and development (7136) – Revision Notes

These notes condense the content point “Economic growth and development” in the AQA A-level Economics (7136) specification, version 1.3 (29 June 2022), numbered 3.2.6.5 on the AQA website and 4.2.6.5 in the combined PDF. For full explanations and longer worked examples use the study guide. Test yourself with the practice set, tick off the printable checklist, see the course hub and take a free diagnostic.

All countries and figures are invented for illustration.

Key definitions

Term	Meaning
Economic growth	Rise in real output over time, shown by real GDP or real GDP per capita
Economic development	Wider improvement in living standards: health, education, income, freedom, lower poverty
Human capital	Skills, knowledge and health of the workforce
Absolute poverty	Income too low to meet basic needs
Informal sector	Economic activity outside tax and legal regulation
Aid	Transfer of resources, as grants or loans, from donors to a poorer country
Tied aid	Aid conditional on buying from suppliers in the donor country
Institutions	Rules, laws and organisations that shape behaviour, such as courts and regulators

Growth versus development in five lines

• Growth is a quantity: real output. Development is a quality: what people can do and be.
• Growth is usually needed for development, but is not enough.
• Growth can be narrow, unequal or damaging to the environment.
• Development can be pushed ahead by health and school spending.
• Per capita growth is roughly real GDP growth minus population growth. With 3% real growth and 1% population growth, 1.03 / 1.01 - 1 = 1.98%.

Characteristics of less-developed economies

Low income per head; much employment in low-productivity farming; large informal sector; weak health and schooling; low saving and investment; poor infrastructure; reliance on a few primary exports; weak institutions; high inequality. Always add “tend to”: the group is varied.

Indicators

Indicator	Measures	Main weakness
Real GDP per capita	Average output per person	Ignores distribution, informal work, environment
Life expectancy, infant mortality	Health	One dimension only
Years of schooling, literacy	Education	Quantity not quality
Gini coefficient	Income inequality	Shows spread, not the level of income
Poverty headcount	Share below a line	Depends on where the line is set
HDI	Health, education, income combined	Excludes inequality, environment, freedom

HDI method. Turn each dimension into a score from 0 to 1 by placing it between a floor and a ceiling value. Income is entered as a log. Combine with a geometric mean: (health x education x income) ^ (1/3).

Why geometric? Indices of 0.8, 0.5 and 0.5 give a geometric mean of 0.585 but an arithmetic mean of 0.600. The geometric mean penalises imbalance and stops one strong dimension offsetting a weak one.

Factors and barriers, with the chain of reasoning

Factor or barrier	Chain
Investment	More capital, higher productivity and capacity, higher output. Needs saving or inflows
Education and training	Higher human capital, higher productivity, higher earnings, positive externalities
Corruption	Raises cost and risk, lowers net return, less investment, public money diverted
Institutional factors	Weak courts and instability, higher risk, less investment and trade
Poor infrastructure	Higher transport and energy costs, smaller markets, lower farm-gate prices
Inadequate human capital	Low skills and poor health, low productivity, low wages, brain drain
No property rights	No collateral, weaker incentive to improve land, less credit

Method in steps: investment arithmetic

1. Growth is roughly the investment share of GDP divided by the capital-output ratio.
2. Investment of 20% of GDP and a ratio of 4 gives growth of 5%.
3. For 4% growth with a ratio of 3.5, you need investment of 4 x 3.5 = 14% of GDP.
4. If waste or corruption raises the ratio, the same investment buys less growth.
5. The gap between needed investment and domestic saving is the shortfall that aid or foreign investment might fill. The arithmetic ignores the quality of investment.

Method in steps: net return after bribes

A project costs 200 and earns 30 a year, a return of 15%. Informal payments of 6 a year cut the net return to (30 - 6) / 200 = 12%. If the next best use of funds offers 13%, the project is not built.

Method in steps: structural change

Suppose 20 workers move from farming, where each produces 0.4 units, into factories producing 1.5 units each. The gain is 20 x (1.5 - 0.4) = 22 units. State the assumption: jobs and capital exist for the movers.

Method in steps: return to training

1. Work out the annual gain: a rise in pay of 36 a month is 36 x 12 = 432 a year.
2. Add all costs, including fees and lost earnings. Suppose they total 2,700.
3. Simple return = 432 / 2,700 = 16% a year; payback = 2,700 / 432 = 6.25 years.
4. Comment: a high private return can still go unfunded if households cannot borrow, which supports a subsidy. Wider gains (health, lower fertility, better government) are external benefits.

Links to the rest of the specification

The additional information asks you to connect this topic to other content. Use these links in extended answers.

• Globalisation and trade: openness can bring investment, technology and markets, but exposes a narrow economy to world price swings.
• Determinants of growth: investment, human capital and technology shift long-run productive capacity.
• Inequality: growth that leaves the poor behind is weak development, so quote averages with care.
• Government intervention: the state can correct market failure but can also fail, so judge by institutions.

Market-based versus interventionist strategies

	Market-based	Interventionist
Examples	Trade liberalisation, privatisation, deregulation, open to foreign investment, secure property rights	State infrastructure, public health and schooling, infant industry protection, subsidies, industrial policy
Case for	Incentives, efficiency, competition, less government failure	Corrects market failure, builds public goods, can target the poor
Case against	Neglects equity and public goods, can expose weak firms	Corruption, poor information, costs, picking losers
Evaluation test	Are institutions and property rights in place?	Is state capacity strong enough to implement?

Judgement: success depends on the country’s institutions and its starting point, and mixed strategies are common.

Aid

Type	Note
Grant or loan	Loans add to debt and need repayment
Bilateral or multilateral	Government to government, or through an international body
Tied or untied	Tied aid can cost the recipient more; 300 of aid with a 25% price premium buys 300 / 1.25 = 240 of real goods
Emergency or long-term	Relief, or investment in health, schools, roads

Debt burden check: a loan of 600 at 5% costs 30 a year in interest; with export earnings of 1,500, the debt service ratio is 30 / 1,500 = 2%.

Aid gains: fills the investment gap, funds public goods, can help in crises. Aid problems: leakage, dependency, conditions, debt, volatility.

Trade

Gains: bigger markets, specialisation, technology, competition. Risks: dependence on primary exports with volatile prices, import competition for infant industries, gains that bypass the poor. If a commodity is 50% of exports and its price falls 40% with volume unchanged, export revenue falls 0.5 x 40% = 20%.

Quick self-test

1. Distinguish growth from development in one sentence each.
2. Real GDP rises 4.5% and population 2%. Find the growth rate of real GDP per capita.
3. Why does HDI use a geometric mean?
4. State two limitations of HDI.
5. Investment is 20% of GDP and the capital-output ratio is 4. What is growth?
6. A bribe of 6 on a project costing 200 and earning 30 a year. What is the net return?
7. Give two reasons aid may fail to promote development.
8. Tied aid of 300 carries a 25% price premium. What is its real value?
9. Explain how poor infrastructure can limit farmers’ incomes.
10. Give one argument for and one against an interventionist strategy.

Answers

1. Growth is a rise in real output; development is a wider improvement in living standards, health, education and freedom.
2. 1.045 / 1.02 - 1 = 2.45%.
3. It penalises imbalance between dimensions, so high income cannot fully offset poor health or schooling.
4. It excludes inequality within a country and the environment; it covers only three dimensions with judgemental weights.
5. 20 / 4 = 5%.
6. (30 - 6) / 200 = 12%.
7. Leakage through corruption; dependency; tied conditions that raise costs; added debt if it is a loan.
8. 300 / 1.25 = 240.
9. High transport costs cut the farm-gate price, reduce the incentive to produce and limit market access.
10. For: can correct market failure such as missing infrastructure. Against: government failure and corruption may waste funds.

Where marks are usually lost

• Writing “growth” when the question asks about development, or the reverse.
• Quoting HDI as a measure of inequality.
• Describing a barrier but not linking it to investment or productivity.
• Giving aid a one-sided verdict with no condition such as leakage or tying.
• Listing market and interventionist policies without comparing them.
• Presenting growth in total GDP as if it were growth per head.
• Ignoring the question’s context and writing about development in general.
• Forgetting to state the assumption behind a calculation.

Official syllabus

AQA AS and A-level Economics (7135 and 7136), specification version 1.3, 29 June 2022, published by AQA, for first teaching from September 2015. Section 4.2.6.5 of the combined PDF, “Economic growth and development”.