Q74. What is economic development?

Economic development is the process by which agricultural economies are transformed into manufacturing and service-based economies. Since the Industrial Revolution began in the 1870s, countries have followed the same pattern of development, though at different rates.

Economic development is often contrasted with social development, where the development of society as a whole - notably education, health, and fertility - by improving people, and their ability to combine the raw resources they have been given in new and better ways - also is a necessary pre-requisite for growth. It is argued that mere industrialization (one of the 'stages' of development in many theories), if it comes at the cost of social development, cannot be self-sustaining. Other writers on economic development do not see the process of development as an increase in overall output, but rather a process whereby inequality, unemployment, child mortality, population growth, education, access to medical care, education, and civil rights, are all affected within the process.

Currently, a debate is raging about the efficacy of development aid. Money has been pouring into poorer nations now for decades, with little real change in conditions. Some feel aid is 'dead', and should be stopped. Others feel it should be spent better, and with more oversight. All agree that aid simply does not work as it was intended.

Q75. What is economic inequality?

Economic inequality is defined by the differences in wealth and income between people, and between households. If there are two people in society - you and I - and I am richer than you, then income inequality exists. If I earned less than you last year, but I own much more property or other economic assets, then I may be richer than you overall. Either way, economic inequality exists.

There are many causes of economic inequality - class, gender, labour market decisions, education, ability and talent, and luck are just some of them. Recently, several authors have shown that industrialised, developed societies with less income inequality are happier, more balanced societies.

Named for the statistician Corrado Gini, the Gini coefficient is a measure of income inequality within a group. Gini varies between 0 and 1, with 1 being completely unequal, and 0 being completely equal. Gini is calculated as the mean of the difference between every possible pair of individuals, divided by the mean size. The main aspect of the Gini measure is its ability to compare distributions across different states of the world.

For example, say there are three people in the world. In the first state of the world (A), Andrew has €70, Betty has €20, and Cillian has €10. In the second state of the world (B), Andrew gives some of his money to both Betty and Cillian, equalizing income at €33 each. The graph shows that, in state B, the world is more equal, with Gini falling from state A to state B. The Gini coefficient for State A is 0.89, the Gini coefficient for state B, where income has been redistributed is 0.

Changes in economic equality, the case of income redistribution.

Q76. What is the paradox of thrift?

In macro-economics, income in any economy at a point in time is the sum of consumption expenditure and savings. In any year, economic output is the sum of consumption, investment, government expenditure, and net exports.

If everyone in the economy decides to save more than they spend, then the economy's output will collapse, as individual households consume less. The paradox is that increases in savings in the short-run lead to increased investment in the medium- to long-run. But if savings in a period are greater than investment, then there will be a decline in overall output as well.

So while savings are a 'good thing', the old warning about 'too much of a good thing' applies.