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

This guide covers the content point “Economic growth and development” in the AQA A-level Economics (7136) specification, version 1.3 (29 June 2022). It is numbered 3.2.6.5 on the AQA website and appears as 4.2.6.5 in the combined AS and A-level PDF. The specification marks none of it as AS-only or A-level-only.

Related pages: the course hub, the printable checklist, the revision notes, the practice set, the globalisation guide and the free diagnostics.

Every country, firm and figure below is invented for illustration. None is real data.

What the specification asks for

Content point	What you must be able to do
Growth and development	Explain the difference between them
Less-developed economies	Describe their main characteristics
Indicators	Use the main indicators, including the Human Development Index (HDI)
Factors	Explain how investment, education and training affect growth and development
Barriers	Explain corruption, institutional factors, poor infrastructure, inadequate human capital and lack of property rights
Policies	Explain policies that might promote growth and development
Aid and trade	Assess their role

The additional information asks you to see links with globalisation, trade, the determinants of economic growth and inequality, and to compare market-based strategies with interventionist strategies. Those links are built into the sections below.

Growth versus development

Economic growth is an increase in real output over time, normally measured by real GDP or real GDP per capita. Economic development is a wider improvement in people’s living standards and freedoms: longer lives, better health, education, lower poverty, less inequality, more choice and security.

Growth is usually necessary for development, because it raises the resources available for schools, clinics and incomes. It is not sufficient. Growth can be narrow (one mining sector), can bypass the poor, can damage the environment, and can leave health and education unchanged. Development can also move ahead of growth when a government directs resources to basic health and schooling.

Worked example: growth without much development. In illustrative Country A, real GDP grows 6% a year and population 2.5% a year.

Real GDP per capita growth = 1.06 / 1.025 - 1 = 3.41% a year
GDP per capita after 10 years = 1000 x 1.0341^10 = 1399   (+39.9%)

Over the decade the poorest 40% of people see their share of income fall from 14% to 11%.

Average income of the poorest 40%, start: (0.14 / 0.40) x 1000 = 350
Average income of the poorest 40%, end:   (0.11 / 0.40) x 1399 = 384.7   (+9.9%)

Average income rises 39.9% but the poorest 40% gain only 9.9%. That is growth with weak development. Use the inequality link in your evaluation: growth figures are averages and say nothing about who gains.

Characteristics of less-developed economies

Less-developed economies tend to share some of these features, though no economy shows all of them and the group is very varied.

• Low real income per head and widespread absolute poverty.
• A large share of employment in agriculture and other primary activity, with low productivity there.
• A large informal sector, with little tax revenue or legal protection for workers.
• Weaker health and education: lower life expectancy, higher child mortality, fewer years of schooling.
• High population growth and a large share of dependants in some cases.
• Low saving and investment, and limited access to credit.
• Poor infrastructure: roads, power, water, ports, communications.
• Dependence on a narrow range of primary exports, so export earnings are volatile.
• Weak institutions, and often corruption or insecure property rights.
• High inequality in income, wealth or access to services.

Worked example: why the farm-to-factory shift matters. In illustrative Country B, 55% of workers produce 28% of output in agriculture; the other 45% produce 72% in industry and services. Take total employment as 100 workers and total output as 100 units.

Output per farm worker  = 28 / 55 = 0.509
Output per other worker = 72 / 45 = 1.600   (3.1 times higher)
Move 10 workers out of farming: gain = 10 x (1.600 - 0.509) = 10.9 units

Output rises by 10.9%, with no extra workers. The assumption is that the movers become as productive as existing non-farm workers, which needs jobs, skills and capital to exist. Structural change raises growth only if those conditions hold.

Indicators of development

Real GDP per capita is the starting point, ideally adjusted for differences in price levels between countries. It misses distribution, the informal economy, unpaid work, environmental damage and non-material wellbeing.

Other single indicators: life expectancy, infant mortality, adult literacy or years of schooling, access to clean water, the share of people below a poverty line, and a measure of inequality such as the Gini coefficient.

The Human Development Index (HDI) combines three dimensions: health (how long people can expect to live), education (years of schooling completed and years a child can expect to receive) and standard of living (income per head). Income enters through its natural log, which means a rise in income lifts the index by less at higher incomes. The three dimension indices are combined by a geometric mean. A geometric mean is lower when the dimensions are unbalanced, so a country cannot fully make up for poor health with high income.

Worked example: an HDI-style calculation. The goalposts below are invented so you can practise the method. The real index uses published minimum and maximum values.

Health index    = (life expectancy - 20) / (85 - 20)
Education index = average of (mean years / 15) and (expected years / 18)
Income index    = (ln income - ln 100) / (ln 75000 - ln 100)
HDI             = (health x education x income) ^ (1/3)

	Life exp.	Mean yrs	Expected yrs	Income	Health	Education	Income idx	HDI
Country C	68	7	12	4,500	0.738	0.567	0.575	0.622
Country D	74	9	13	3,000	0.831	0.661	0.514	0.656

Country C has the higher income, yet Country D has the higher HDI because of better health and schooling. That is the case for using HDI alongside GDP.

Limits of HDI: only three dimensions; it ignores inequality within a country, the environment, political freedom and security; the weights are a judgement; and two countries can have the same HDI with very different mixes.

Factors that affect growth and development

Investment. Spending on physical capital raises productive capacity and productivity. A simple link: growth is roughly the investment share of GDP divided by the capital-output ratio (units of capital needed per extra unit of output).

Investment 15% of GDP, capital-output ratio 3: growth = 15 / 3 = 5%
Investment raised to 24%:                      growth = 24 / 3 = 8%

Investment needs saving or foreign funds, so low incomes, weak banks and poor returns all limit it. This is arithmetic, not a law: it ignores the quality of investment.

Education and training. These build human capital, which lifts labour productivity, supports new technology and raises earnings. Educated workers can also bring wider gains (health, lower fertility, better government), so there are positive externalities.

Worked example: the private return to schooling. A worker earns 120 a month with primary schooling and 168 with secondary. The extra two years cost 1,800 in fees and books, plus two years of lost earnings.

Annual gain = (168 - 120) x 12 = 576
Total cost  = 1800 + (2 x 120 x 12) = 4,680
Simple return = 576 / 4680 = 12.3% a year; payback 4680 / 576 = 8.1 years

Families on very low incomes may not afford the fees or the lost earnings, so a high return can coexist with under-investment. That is a case for subsidy.

Other factors you can use: foreign direct investment, technology transfer, saving, stable institutions and macroeconomic stability, natural resources, and openness to trade.

Barriers to growth and development

Corruption acts like a tax on investment, raises costs, diverts public money and discourages firms.

Worked example: corruption and an investment decision. A project costs 500 and earns 60 a year (12%). Informal payments take 15 a year.

Return before payments = 60 / 500 = 12%
Return after payments  = (60 - 15) / 500 = 9%

If a safe alternative yields 10%, the firm builds nothing. The loss is the investment that never happens.

Institutional factors. Weak courts, unreliable contract enforcement, political instability and poor regulation raise risk and cut investment.

Poor infrastructure. Roads, power and ports raise costs and cut market access.

Worked example: a rural road. A crop sells in the city for 60 a unit. Transport costs 18 a unit, so the farm-gate price is 42. A new road cuts transport to 9.

New farm-gate price = 60 - 9 = 51, a rise of (51 / 42) - 1 = 21.4%
With price elasticity of supply 0.8: output rises 0.8 x 21.4% = 17.1%

Inadequate human capital. Poor health and low skills limit productivity, and skilled workers may emigrate.

Lack of property rights. If farmers cannot prove ownership, they cannot use land as collateral and have less incentive to invest. Suppose land worth 8,000 could secure a loan of half its value. That releases 4,000, which at a 20% return earns 800 a year. Without a title, the loan is unavailable.

Policies, market-based and interventionist

Market-based strategies rely on prices and private firms: trade liberalisation, privatisation, deregulation, openness to foreign investment, low and stable inflation, and secure property rights.

Interventionist strategies use the state: public spending on infrastructure, health and schooling, industrial policy, protection for infant industries, subsidies, state ownership, and managed exchange rates.

	Market-based	Interventionist
Strength	Efficient allocation, competition, incentives	Can fix market failure in public goods, externalities and missing markets
Weakness	May neglect the poor, public goods and the environment	Government failure, corruption, poor information
Time scale	Gains may be slow and uneven	Spending can act quickly but costs money

Evaluate by asking: how strong are the country’s institutions, and what market failure is the target? An interventionist policy works only where the state can implement it. Many successful strategies combine both.

The role of aid and trade

Aid may be grants or loans, bilateral or multilateral, tied or untied, for emergencies or long-term projects. It can fill a gap between needed and domestic investment.

Country E: GDP 20,000m, target growth 6%, capital-output ratio 3
Investment needed = 18% of GDP = 3,600m;  domestic saving 14% = 2,800m;  gap = 800m
If aid of 800m all reaches projects, the gap closes.
If 25% leaks away, only 600m arrives:  (2,800 + 600) / 20,000 = 17% investment
Growth = 17 / 3 = 5.7%

Limits of aid: leakage, dependency, tied aid (a 20% price premium cuts 800m to 667m of real value), debt burdens if it is a loan, and a weaker incentive to raise taxes.

Trade supports growth by widening markets, giving access to inputs and technology, and allowing specialisation. Dependence on one primary export is a risk: if a commodity makes up 70% of export revenue and its price falls 25% with volume unchanged, export revenue falls 17.5%. If exports are 30% of GDP, that is a 5.25% direct loss of GDP. Diversifying exports reduces that risk. Trade also links to globalisation and to inequality, since gains from trade are not automatically shared.

Common errors

• Treating growth and development as the same thing.
• Quoting GDP per capita as if it showed how income is shared.
• Saying HDI includes inequality or the environment.
• Listing barriers without saying why each lowers investment or productivity.
• Concluding that aid always works, or never works, without a judgement based on conditions.

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”.