INTRODUCTION TO ECONOMIC DEVELOPMENT

For many lay people, economic development - by which we mean the

analysis of the economic progress of nations - is what economics as a whole
is designed to address. Indeed, what but to find the "nature and causes" of
economic development was Adam Smith's purpose? For modern economists,
however, the status of economic development is somewhat more
uncomfortable: it has always been the maverick field, lurking somewhere in
the background but not really considered "real economics" but rather an
amalgam of sociology, anthropology, history, politics and, all-too- often,
ideology.

Nonetheless, "economic development", as it is now understood, really only

started in the 1930s when, prompted by Colin Clark's 1939 quantitative
study, economists began realizing that most of humankind did not live in an
advanced capitalist economic system. However, the great early concern was
still Europe: namely, postwar European reconstruction and the
industrialization of its eastern fringes - as exemplified by the pioneering
1943 article of Paul Rosenstein- Rodan and Kurt Mandelbaum's 1947 tome. It
was only sometime after the war that economists really began turning their
concerns towards Asia, Africa and Latin America.

To this end, decolonization was an important catalyst. Faced with a new

plethora of nations whose standards of living and institutions were so
different from the European, modern development theory, by which we
mean the analysis not only of growth but also of the institutions which could
induce, sustain and accelerate growth, began in earnest. Early development
theorists - such as Bert Hoselitz, Simon Kuznets, W. Arthur Lewis, Hla Myint
were among the first economists to begin analyzing economic development
as a distinct subject.

DEVELOPMENT as GROWTH and CAPITAL-FORMATION

Early economic development theory was but merely an extension of
conventional economic theory which equated "development" with growth
and industrialization. As a result, Latin American, Asian and African countries
were seen mostly as "underdeveloped" countries, i.e., "primitive" versions of
European nations that could, with time, "develop" the institutions and
standards of living of Europe and North America.

As a result, "stage theory" mentality of economic development dominated

discussions of economic development. As later made famous by Alexander
Gerschenkron (1953, 1962) and, more crudely, Walt W. Rostow (1960), the
stages theories argued that all countries passed through the same historical
stages of economic development and that current underdeveloped countries

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were merely at an earlier stage in this linear historical progress while First
World (European and North American) nations were at a later stage. "Linear
stages" theories had been developed earlier by German Historicists, thus it
ought not be surprising to find historians, such as Gerschenkron and Rostow,
among its main adherents.

More enlightened attempts to arrive at an empirical definition of the concept

of "underdevelopment", as exemplified by the work of Hollis Chenery, Simon
Kuznets and Irma Adelman, led to the general conclusion that while there
were no explicit "linear stages", countries tended nonetheless to exhibit
similar patterns of development, although some differences could and did
persist. The task of the development economist, in this light, was to suggest
"short-cuts" by which underdeveloped countries might "catch up" with the
developed and leap over a few stages.

By equating development with output growth, early development theorists,

prompted by Ragnar Nurkse (1952), identified capital formation as the
crucial component to accelerate development. The celebrated early work on
the "dual economy" by Sir W. Arthur Lewis (1954, 1955) precisely stressed
the role of savings in development. Early Keynesians, such as Kaldor and
Robinson, attempted to call attention to the issue of income distribution as a
determinant of savings and growth. Even modern Marxians such as Maurice
Dobb (1951, 1960) focused on the issue of savings-formation.

Of course, savings could themselves be manipulated by government

intervention - as Lewis had intimated and the Keynesians insisted. Indeed,
earlier, Rosenstein-Rodan (1943) had argued that increasing returns to scale
made government-directed industrialization feasible. The notion of turning
"vicious circles" of low savings and low growth into "virtuous circles" of high
savings and high growth by government intervention was reiterated by Hans
W. Singer in his doctrine of "balanced growth" and Gunnar Myrdal in his
theory of "cumulative causation". Thus, government involvement - whether
by planning, socio-economic engineering or effective demand management -
was regarded as a critical tool of economic development.

Other economists turned to international trade as the great catalyst to

growth. Already Hla Myint, Gottfried Haberler and Jacob Viner had stressed
this avenue - arguing along lines similar to the classical doctrine of Adam
Smith that trade and specialization can increase the "extent of the market".
However, earlier in the 1930s, D.H. Robertson had expressed his doubts on
this account.

SOCIAL ASPECTS of ECONOMIC DEVELOPMENT

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Although capital-formation never really left the field, the meaning of the
term mutated somewhat over time. T.W. Schultz, drawing upon his famous
Chicago School thesis, turned away from physical capital accumulation to
emphasize the need for "human capital" formation. This led to an emphasis
on education and training as pre-requisites of growth and the identification
of the problem of the "brain drain" from the Third World to the First (and, as
would later be stressed, from the private sector to government
bureaucracies). W. Arthur Lewis and Hans W. Singer extended Schultz's
thesis by arguing that social development as a whole - notably education,
health, fertility, etc. - by improving human capital, were also necessary pre-
requisites for growth. In this view, industrialization, if it came at the cost of
social development, could never be self-sustaining.

However, it was really only in 1969 that Dudley Seers finally broke the
growth fetishism of development theory. Development, he argued, was a
social phenomenon that involved more than increasing per capita output.
Development meant, in Seers' opinion, eliminating poverty, unemployment
and inequality as well. Singer, Myrdal and Adelman were among the first old
hands to acknowledge the validity of Seers' complaint and many younger
economists, such as Mahbub ul Haq, were galvanized by Seers' call to
redefine economic development. Thus, structural issues such as dualism,
population growth, inequality, urbanization, agricultural transformation,
education, health, unemployment, etc., all began to be reviewed on their
own merits, and not merely as appendages to an underlying growth thesis.

Particularly worthy of note was the resurrection of the work of Chayanov on

the unique structures of peasant economies. Also emergent, in this period,
was a debate on the very desirability of growth. E.F. Schumacher, in a
famously provocative popular book, Small is Beautiful (1973), argued against
the desirability of industrialization and extolled the merits of handicrafts
economies. As the world environmental crisis became clearer in the 1980s,
this debate took a new twist as the very sustainability of economic
development was questioned. It became clear that the very desirability of
development needed to be reconsidered.

STRUCTURALISM and its DISCONTENTS

Before Seers' complaint, many economists had already felt extraordinarily
uncomfortable with early development theory and the implicit assumptions
behind "stages" reasoning. A new (or old - depending on one's vantage
point) idea began to germinate - what may be loosely termed
"structuralism". The "structuralist" thesis, succinctly, called attention to the
distinct structural problems of Third World countries: underdeveloped
countries, they argued, were not merely "primitive versions" of developed
countries, rather they had distinctive features of their own. As mentioned,
Chenery had argued a similar thesis, but nonetheless focused on the

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similarities of experience. The newer structuralists, in contrast, sought to
bring attention to the differences. Albert O. Hirschmann (1958) was one of
the early few who stressed the need for country-specific analysis of
development - as was stressed later by Dudley Seers.

One of these distinctive features was that, unlike European industrialization,

Third World industrialization was supposed to occur while these countries
existed alongside already- industrialized Western countries and were tied to
them by trade. This, speculated a few, could give rise to distinct structural
problems for development.

Coincidental with H.W. Singer, the UNCLA economist, Prebisch, formulated

the famous "dependency" theory of economic development, wherein he
argued that the world had developed into a "center-periphery" relationship
among nations, where the Third World was regressing into becoming the
producer of raw materials for First World manufacturers and were thus
condemned to a peripheral and dependent role in the world economy. Thus,
Prebisch concluded, some degree of protectionism in trade was necessary if
these countries were to enter a self-sustaining development path. Import-
substitution, enabled by protection and government policy, rather than trade
and export-orientation, was the preferred strategy. Historical examples of
government-directed industrialization, such as Meiji Japan and Soviet Russia,
were held up as proof that there was not only one path to development, as
had been implied by the cruder "stages" theories.

The Prebisch-Singer thesis resounded with particularly with Marxian thinkers

- who identified elements of Rosa Luxemburg's and V.I. Lenin's arguments on
imperialism in it. Breaking with savings-obsessed orthodox Marxian thinkers
such as Dobb, Neo-Marxians such as Paul Baran, Paul Sweezy, A.G. Frank
and Samir Amin took the Prebisch-Singer thesis, merged it the Luxemburg
thesis, and drew it into the modern era. Many Third World governments
adopted the language and policies of the structuralists and/or the Neo-
Marxians in the 1960s and 1970s, and indeed, the movement seemed to
have been eminently influential. "Neo-Colonialism", "core-periphery" and
"dependency" were the catch-words of the day.

However, as time moved on, these policies seemed to fail to yield their
promised fruit, and a Neoclassical (or, more accurately, Neo-Liberal)
countermovement initiated by the lone voices of P.T. Bauer, I.M.D. Little,
Deepak Lal, Bela Balassa, Anne Krueger and Harry G. Johnson began to gain
more adherents. Their thesis was simple: government intervention did not
only not improve development, it in fact thwarted it. The emergence of huge
bureaucracies and state regulations, they argued, suffocated private
investment and distorted prices making developing economies
extraordinarily inefficient. In their view, the ills of unbalanced growth,

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dependency, etc. were all ascribed to too much government dirigisme, not
too little.

In recent years, the Neoclassical thesis has gained greater adherence,

particularly in Latin America. However, the evidence is still ambivalent and
disputed. Both structuralists and counter-structuralists point to fast East
Asian development and disastrous African experience as proofs of their
directly opposing theses.

ECONOMIC DEVELOPMENT

Newly industrialized countries Other emerging markets Other developing economies

Economic development is the increase in the standard of living in a
nation's population with sustained growth from a simple, low-income
economy to a modern, high-income economy. Also, if the local quality of life
could be improved, economic development would be enhanced. Its scope
includes the process and policies by which a nation improves the economic,
political, and social well-being of its people. Gonçalo L. Fonsesca at the New
School for Social Research defines economic development as "the analysis of
the economic development of nations."

The University of Iowa's Center for International Finance and Development

states that:
“Economic development” is a term that economists, politicians, and others
have used frequently in the 20th century. The concept, however, has been in
existence in the West for centuries. Modernization, Westernization, and
especially Industrialization are other terms people have used when
discussing economic development. Although no one is sure when the
concept originated, most people agree that development is closely bound up
with the evolution of capitalism and the demise of feudalism."

The study of economic development by social scientists encompasses

theories of the causes of industrial-economic modernization, plus
organizational and related aspects of enterprise development in modern

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societies. It embraces sociological research on business organization and
enterprise development from a historical and comparative perspective;
specific processes of the evolution (growth, modernization) of markets and
management-employee relations; and culturally related cross-national
similarities and differences in patterns of industrial organization in
contemporary Western societies. On the subject of the nature and causes of
the considerable variations that exist in levels of industrial-economic growth
and performance internationally, it seeks answers to such questions as:
"Why are levels of direct foreign investment and labor productivity
significantly higher in some countries than in others?"

Mansell and Wehn state that development has been understood since the
second World War to involve economic growth, increases in per capita
income, and attainment of a standard of living equivalent to that of
industrialized countries.

Economy Development can also be considered as a static theory that

documents the state of economy at a certain time. According to Schumpeter
(2003) the changes in this equilibrium state to document in economic theory
can only be caused by intervening factors coming from the outside.

ECONOMIC GROWTH versus ECONOMIC DEVELOPMENT

Freidman defines growth as an expansion of the system in one or more

dimensions without a change in its structure and development as an
innovative process leading to the structural transformation of social systems.

Thus, Economic growth is related to a quantitative sustained increase in the

country’s per capita output or income accompanied by expansion in its labor
force, consumption capital and volume of trade. On the other hand,
economic wants goods incentives and institutions.

Development is a phenomenon which occurs over a long period of time but

economic growth is increase in GNP which can occur when we are able to
achieve increase in number of resources or increase in technology or by the
combination of both.

Economic Development is a branch of economics that deals with the study of

macroeconomic causes of long-term economic growth, and microeconomics;
the incentive issues of individual households and firms, especially in
developing countries. This may involve using mathematical methods from
dynamical systems like differential equations and inter-temporal
optimization, or it may involve a mixture of quantitative and qualitative
methods.

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Economic development refers to social and technological progress. It implies
a change in the way goods and services are produced, not merely an
increase in production achieved using the old methods of production on a
wider scale. Economic growth implies only an increase in quantitative output;
it may or may not involve development. Economic growth is often measured
by rate of change of gross domestic product (e.g., percent GDP increase per
year.) Gross domestic product is the aggregate value-added by the economic
activity within a country's borders.

Economic development typically involves improvements in a variety of

indicators such as literacy rates, life expectancy, and poverty rates. GDP
does not take into account other aspects such as leisure time, environmental
quality, freedom, or social justice; alternative measures of economic
wellbeing have been proposed.

A country's economic development is related to its human development,

which encompasses, among other things, health and education.

DOES GROWTH CREATE DEVELOPMENT?

Dependency theorists argue that poor countries have sometimes
experienced economic growth with little or no economic development; for
instance, in cases where they have functioned mainly as resource-providers
to wealthy industrialized countries. There is an opposing argument, however,
that growth causes development because some of the increase in income
gets spent on human development such as education and health.

According to Ranis et al. (2000), we view economic growth to human

development as a two-way relationship. Moreover, Ranis suggested that the
first chain consist of economic growth benefiting human development with
GNP. Namely, GNP increases human development by expenditure from
families, government and organizations such as NGOs. With the increase in
economic growth, families and individuals will likely increase expenditures
with the increased in incomes, which leads to increase in human
development. Further, with the increased in expenditures, health, education
tend to increases in the country and later will contribute to economic growth.

In addition to increasing private incomes, economic growth also generates

additional resources that can be used to improve social services (such as
healthcare, safe drinking water etc...). By generating additional resources for
social services, unequal income distribution will be limited as such social
services are distributed equally across each community; benefiting each
individual. Thus, increasing living standards for the public.

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To summarize, as noted in Anand’s article (1993), we can view the
relationship between human development and economic development in
three different explanations.
1. First, increase in average income leading to improve in health and
nutrition (known as Capability Expansion through Economic Growth).
2. Second, it is believed that social outcomes can only be improved by
reducing income poverty (known as Capability Expansion through
Poverty Reduction).
3. Thirdly, (known as Capability Expansion through Social Services),
defines the improvement of social outcomes with essential services
such as education, health care, and clean drinking water.

ECONOMIC DEVELOPMENT CONCEPTS

Traditionally economists have made little if any distinction between
economic growth and economic development using the terms almost
synonymously.

As a concept, Economic development can be seen as a complex multi-

dimensional concept involving improvements in human well-being, however
defined Critics point out that GDP is a narrow measure of economic welfare
that does not take account of important non-economic aspects e.g., more
leisure time, access to health & education, environment, freedom or social
justice. Economic growth is a necessary but insufficient condition for
economic development.

Professor Dudley Seers argues development is about outcomes i.e.,

development occurs with the reduction and elimination of poverty, inequality
and unemployment within a growing economy.

Professor Michael Todaro sees three objectives of development:

1. Producing more life sustaining necessities such as food shelter & health
care and
2. Broadening their distribution Raising standards of living and individual
self-esteem
3. Expanding economic and social choice and reducing fear.

ECONOMICS for DEVELOPMENT

Economic development is the development of economic wealth of countries
or regions for the well-being of their inhabitants. This is the short definition of
Economic Development.

Economic Growth & development are two different terms used in economics.
Generally speaking, economic development refers to the problems of

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underdeveloped countries and economic growth to those of developed
countries.

By Economic Growth we simply mean increase in per capita income or

increase in GNP. In recent literature, the term economic growth refers to
sustained increase in a country's output of goods and services, or more
precisely product per capita. Output is generally measured in terms of GNP.

The term economic development is far more comprehensive. It implies

progressive changes in the socio-economic structure of a country. Viewed in
this way economic development Involves a steady decline in agricultural
shares in GNP and continuous increase in shares of industries, trade banking
construction and services. Further whereas economic growth merely refers
to rise in output; development implies change in technological and
institutional organization of production as well as in distributive pattern of
income.

Hence, compared to the objective of development, economic growth is easy

realize. By a larger mobilization of resources and raising their productivity,
output level can be raised. The process of development is far more
extensive. Apart from a rise in output, it involves changes in composition of
output, shift in the allocation of productive resources, and elimination or
reduction of poverty, inequalities and unemployment.

In the words of Amartya Sen "Development requires the removal of major

sources of unfreedom poverty as well as tyranny, poor economic
opportunities as well as systematic social deprivation neglect of public
facilities as well as intolerance or over activity of repressive states."

Economic development is not possible without growth but growth is possible

without development because growth is just increase in GNP It does not have
any other parameters to it. Development can be conceived as multi-
dimensional process or phenomena. If there is increase in GNP more than the
increase in per capita Income then we can say that Development is possible.
When given conditions of population improves then we can say that this is
also an indicator of economic Development.

Economic Development Theories

The 3 building blocks of most growth models are:

1. The production function,
2. The saving function,
3. The labor supply function (related to population growth).

Together with a saving function, growth rate equals s/β (s is the saving rate,
and β is the capital-output ratio). Assuming that the capital-output ratio is

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fixed by technology and does not change in the short run, growth rate is
solely determined by the saving rate on the basis of whatever is saved will
be invested.

MEASUREMENT of ECONOMIC DEVELOPMENT

==GDP==the sum total value of goods produced in a particular year

Main article: List of countries by GDP (real) growth rate

World map showing GDP real growth rates for 2008.

Apart from measuring income with the help of per capita GNP we have one
more method to calculate Economic development is HDI.

HDI does not replace GNP but adds considerably to an understanding of the
real position of as society in many respects as would be clear from the
following discussion:

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1. Besides Y the HDI measures education and health and is thus multi-
dimensional rather than One Dimensional
2. It focuses the attention of the policy makers on the ultimate objective of
development not just the means
3. It is more meaningful as a rational average than GNP because there are
much greater extremes in Y distribution than in the distribution of life
expectancy and literacy.
4. It shows that Human development gaps between nations are more
manageable than the ever-widening disparities in income. In search for a
comprehensive measure that could capture the various dimensions of human
development led to the definition and formulation of Human Development
Index by the United Nations Development program in human dev report
published in 1990.

HDI is composite of 3 basic indicators of human development– longevity,

knowledge and standard of living.

Longevity is measured by life expectancy at birth; knowledge by a

combination of adult literacy and combined primary and secondary and
tertiary enroll. Ratios and standard of living is measured by real GDP per
capita.

The UN has developed a widely accepted set of indices to measure

development against a mix of composite indicators:

UN's Human Development Index (HDI) measures a country's average

achievements in three basic dimensions of human development: life
expectancy, educational attainment and adjusted real income ($PPP per
person).

UN's Human Poverty Index (HPI) measure deprivation using % of people

expected to die before age 40, % of illiterate adults, % of people without
access to health services and safe water and the % of underweight children
under five.

Development economics emerged as a branch of economics because

economists after World War II become concerned about the low standard of
living in so many countries of Latin America, Africa, and Asia. There are,
however, important reservations in making development economics as
branch of economics as opposed to the ultimate objective of the study of
economics. The first approaches to development economics assumed that
the economies of the less developed countries (LDCs) were so different from
the developed countries that basic economics could not explain the behavior
of LDC economies. Such approaches produced some interesting and even
elegant economic models, but these models failed to explain the patterns of

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no growth, slow growth, or growth and retrogression found in the LDCs.

Slowly the field swung back towards more acceptance that opportunity cost,
supply and demand, and so on apply to the LDCs also. This cleared the
ground for better approaches. Traditional economics, however, still couldn't
reconcile the weak and failed growth patterns. What was required to explain
poor growth were macro and institutional factors beyond micro concepts of
the firm, individual preferences, and endowments? Institutional analysis has
been able to explain the poor growth patterns much better than the market
failure theories did. However, there is no generally accepted institutional
theory of economic development that a large share of development
economists agrees upon. There is not even agreement on how important
institutional factors are.

COMMUNITY and ECONOMIC DEVELOPMENT

Key Concepts
Community and economic development are that sustainable and united
effort by a community to utilize their social, human and physical and find
more resources to enhance their local economic and employment
opportunities and quality of life.
It is often about local people taking responsibility for their future. It is about
changing perspectives and choices regarding development options,
community resources, markets rules and decision-making capacity.

It is based on a simple premise that each community has within itself or

within its grasp considerable capacity and opportunities to influence its
social, economic and employment future.

By its very nature, community and economic development involves:

• focusing on the stimulation of opportunities that will generate additional
income and jobs, while preserving and enhancing the dynamics and features
that make the local community special
• actively involving local people in decision making about their economic and
social futures
• seeking the development of more resilient, durable and diversified local
economies
• encouraging the use of development processes that are compatible to the
aspirations, needs, values and resources of the community
• emphasizing a ‘holistic’ approach to development, seeing the social,
cultural, environmental and economic aspects as interrelated dimensions of
the community
• emphasizing specific action to achieve desired goals
• encouraging collaboration and partnership between the public, private and
community sectors

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• educating community members about the local economy and economic
development processes

Community and economic development (CED) involve a local

community in actions such as:
• identifying their competitive advantages
• helping existing businesses improve productivity and profitability
• attracting more money into their community
• keeping money circulating in their community and plugging leaks
• understanding existing markets
• exploring and identifying new market possibilities
• identifying new development opportunities
• creating strategic alliances between key groups
• increasing the net number, quality and variety of local jobs

Key Ingredients for Success

In the field of community and economic development, there are communities
which make things happen and those which flounder. Studies identifying the
key ingredients for successful community and economic development
emphasize the importance of the following five key factors:

1. Positive Attitude, Belief and Expectation

This involves such community attitudes and behaviors as:
• a positive mindset where hope and optimism prevail
• a proactive attitude to change
• a ‘can-do’ spirit and self-help mentality, rather than a dependence on ‘the
cavalry’ from outside
• a commitment to quality and excellence in business and community life
• a focus on the ‘half full part of the glass’
• a willingness to invest local dollars, resources and time
• a willingness to experiment, make changes, take risks and encourage
possibility thinking
• strong community pride
• regular celebration of creativity and achievement

2. Participation, Inclusiveness and Collaboration

This is illustrated by:
• a strong sense of identity as a community
• strong broad based resident participation and involvement
• encouragement of diversity in every dimension
• a participatory approach to community decision making
• co-operation between the public, private and community sectors
• effective communication mechanisms within the communities
• an ability to positively manage community division
• the integration of economic, social, cultural and environmental objectives

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• willingness to work with other communities and outside agencies and
resources

3. Local Leadership
This can be judged by the existence of:
• the presence of a core of local leaders committed in terms of time, priority
and belief in the notion of local economic development and possessing the
appropriate skills, knowledge and attitudes to manage change
• development of home-grown talent
• an ongoing process of identifying, recruiting and skilling local leadership
through a local strategy and development fund
• the encouragement and acceptance of women in leadership roles
• the active involvement of young people
• welcoming and integration of newcomers

4. A Strategic Approach to Planning and Action

Important dimensions in this include:
• development of community vision and a community action plan
• the establishment of appropriate locally based organization to manage and
facilitate development efforts
• the research and prioritization of the range of development options
• a realistic appraisal of the feasibility of potential opportunities
• continuous identification of resources
• mechanisms to maintain local interest and involvement beyond the first
rush of enthusiasm
• the evaluation and adjustment of the action plan on a regular basis

5. Opportunity Obsession
This involves a combination of:
• continued alertness to new opportunities
• continuous mapping and linking of community assets
6. Community & Economic Development
• never ending search for best practice processes, development options and
resources
• continuous monitoring of available resources
• mechanisms that foster idea generation and exchange
• the marketing of one’s community as a vibrant and ‘can-do’ entity
• an ability to respond quickly and positively to new opportunities

PROBLEMS of ECONOMIC ACTIVITY

Most societies aim to use economic activity as a channel to improve the

people’s standards of living within the limits of available resources. Hence, a
government can restructure the economic system in order to solve its
shortcomings or problem like:
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 1. Unemployment of labor and other resources. Why?
Unemployment is a problem because it leads to the existence of idle
resources. This means that income is foregone on resources which
would generate earnings to the owner if used.
2. Economic instability that causes highs and lows in production
and investment levels. Why? Economic instability in nation makes it
difficult for producers to make accurate forecasts on demand and
consumption levels. This would cause fluctuations in their production
and supply of goods and services resulting in surpluses or shortages of
the goods.
3. Low levels of growth and development, which make it more
difficult for underdeveloped and developing nations to rise
from their low levels of income and employment. Why? Poor
countries especially suffer from low levels of economic growth and
development. They get caught in the vicious cycle of poverty making it
difficult to get started on their development take-off. Their low levels of
income make them to channel funds to investments in order to propel
economic growth.
4. Inequality in income distribution resulting in the concentration
of the nation’s wealth in the hands of a few. Why? The problem
of unequal income distribution exists when too many people in the
nation belong to the low-income group causing a pyramidal structure
in the economy. The base which is made up of the majority of the
population are the low-income earners who may only afford to satisfy
their basic needs. The wealth of the nation is concentrated in a small
number of families who control the bulk of the country’s purchasing
power and who can afford to ride in gasoline-guzzling limousines,
travel to Europe when they want to take a break and furnish their
wardrobes with the most expensive creations of the world’s most
famous couturiers.
5. Determination of the type of economic system to adopt to fit
the country’s peculiar conditions and needs. Why? The choice of
the nation’s economic system is vital to any country because it
determines the manner in which goods will be produced, the quantities
of each good that will be produced, and the distribution of these goods
and services.

Economics, aims to develop theories, principles, and models which are

abstractions and generalization of reality that can be applied in resolving or
alleviating specific problems and in furthering the realization of society’s
overall goals. The goal is to develop policies that might prevent or correct
such macroeconomic problems as inflation and unemployment, and micro-
economic problems as poverty, population explosion, pollution and
urbanization.

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