A country can be getting richer in total and still leave most of its people no better off. That is why economists separate economic growth, which is a rise in output, from economic development, which is a rise in the quality of life. This topic explains the difference, the sources of growth, and how governments plan to speed it up.
The Institute of Chartered Accountants of Nigeria (ICAN) syllabus asks you to identify and explain the issues of growth and development. Learn the two definitions precisely, because examiners ask you to distinguish them, and learn the four sources of growth and the objectives of economic planning.
In 30 seconds
Economic growth is a sustained rise in a country’s real output, shown by rising real gross domestic product (GDP) and real income per head. Economic development is wider: it adds better health and education, a cleaner environment, institutional and legal reform and an effective system of production and distribution. Growth is needed for development but is not enough on its own.
The sources of growth are human resources, natural resources, capital formation and technology. Governments use development plans to allocate resources deliberately across sectors.
Economic growth
Economic growth is usually understood as a rise in a country’s actual output. Some economists prefer to define it as a rise in the country’s capacity to produce the goods and services its people want. In the strict sense, a country has growth when both real output (real GDP) and real income per head rise over time. The rate of growth is the percentage rise in real GDP.
The syllabus draws one more distinction: real GDP growth is the annual rise in real GDP, while economic growth is a steady rise in real GDP over time.
A numerical example
| Item | Year 1 | Year 2 | Change |
|---|---|---|---|
| Real GDP (₦ billion) | 12,000 | 12,600 | +5.0% |
| Population (million) | 120 | 122.4 | +2.0% |
| Real GDP per head (₦) | 100,000 | 102,941 | +2.9% |
Real GDP grew by 5%, but because the population grew by 2%, real income per head grew by only about 2.9%. A fast-growing population can cancel much of the gain from output growth.
Economic development
Economic development means more than growth. It is a sustained rise in real GDP that brings higher real income per head together with better health and education, protection of the environment, institutional and legal reforms, and an effective system of production and distribution. Growth is a condition for development but does not guarantee it.
| Point | Economic growth | Economic development |
|---|---|---|
| Meaning | A rise in real output and real income per head | A rise in living standards and in the structure of the economy |
| Scope | Narrow. Quantity of output | Wide. Output plus health, education, environment, institutions and distribution |
| Measure | Percentage change in real GDP, and in real income per head | Real income per head together with social and institutional indicators |
| Relationship | Necessary for development | Includes growth but goes further |
Sources of economic growth
| Source | How it raises growth | Qualification |
|---|---|---|
| Human resources | Investment in people, through education, training and technical skills, improves the quality of the workforce. Literacy raises productivity and helps people adapt to new situations | The quality of the workforce matters, not only its size |
| Natural resources | Minerals, land and other resources are an essential source of growth | How well they are exploited matters as much as having them. Growth should be sustainable and should not wreck the environment |
| Capital formation | More capital per worker, such as factories, roads and machinery, raises productive capacity | Accumulating money is not enough. Capital raises output only if there are profitable investment opportunities, and its marginal efficiency falls when it grows faster than the other factors |
| Technology | Scientific and engineering advances create new methods and products | It can be obtained from other countries or developed at home |
Economic planning
Economic planning is the government’s deliberate distribution of resources among sectors to encourage rapid growth. It is carried out through development plans, documents that set out a country’s policy framework and development agenda for a period, typically five years, organised around priorities or stated goals. Planning has three components: resource management, resource allocation and resource accumulation.
Objectives of planning
| Objective | Meaning |
|---|---|
| Maximise the use of resources | Resources are never enough for all needs, so efficient allocation speeds development |
| Correct the imperfections of the market | Real markets do not allocate resources as perfect competition would, so government steps in |
| Bridge the gap between private and social cost and benefit | Because of externalities, private investors ignore external benefits, so some worthwhile projects are not built and investment falls below the social best |
| Ensure balanced growth | Planning lets all sectors grow together, with supporting services and links between them |
| Attract foreign investment | Realistic plans reassure donors and private investors that funds will be used well |
| Match resources to goals | Projects depend on one another. Irrigation and transport for fresh produce, for example, must be planned together |
The main problem the syllabus names is a lack of data. Planning needs adequate, accurate statistics, and these are often missing in West Africa.
Worked example: growth or development?
Scenario. A country’s real GDP rises by 6% a year. But life expectancy has not improved, most children leave school early, and a few cities gain nearly all the new income. Is the country developing?
- Test growth. Real GDP is rising at 6%. If the population grows by less than that, real income per head is rising too. The country has economic growth.
- Test development. Health has not improved, education is poor and gains are concentrated. Several of the elements of development are missing.
- Conclude. The country has growth without development. It needs to invest in health and education, which are also sources of growth through human resources, and to spread income more widely.
- Recommend. Use a development plan that targets human capital, balanced regional growth and the infrastructure that links poorer areas to markets.
Growth and development in more detail
Why growth matters, and what it costs
Growth raises incomes and the capacity to pay for health, education and infrastructure, so it is the main route out of poverty. But it can bring costs: pollution and resource depletion, widening inequality if gains go to a few, and the stress of structural change as old industries decline. This is why development, which adds quality of life, is the wider aim.
Measuring development
Real income per head is one indicator. Others include life expectancy, adult literacy and school enrolment, infant mortality, access to clean water and sanitation, and the extent of poverty and inequality. A composite index, such as the Human Development Index, combines income, health and education.
The sources of growth explained
- Human resources. Education and training raise the skill and productivity of workers, and health raises the number of productive years. Investment in people also helps workers adapt to new technology.
- Natural resources. Oil, minerals and fertile land give a country a start, but it is how they are used that counts. A country that exports raw materials but does not use the income to build skills and industry gains little lasting benefit. Growth should not exhaust the resources for future generations.
- Capital formation. A country saves part of its output and invests it in machines, roads and buildings, which raises output per worker. The saving rate, the quality of investment and political stability decide how much results.
- Technology. New methods let the same resources produce more. A country can import technology, which is cheaper, or develop its own through research.
Growth in numbers
If real GDP grows 5% a year, it doubles in about 14 years (72 ÷ 5 = 14.4). If population grows at 2%, real GDP per head grows at about 3%, and income per head doubles in about 24 years. So a country must grow faster than its population to raise living standards, and population growth of 3% would take nearly all of 5% growth.
Planning: strengths and weaknesses
A development plan sets targets for the economy and shows how resources will be allocated among sectors over, typically, five years. Strengths: it focuses on priorities, co-ordinates sectors, corrects market failures and gives investors confidence. Weaknesses: it needs good data, which is often missing; targets may be unrealistic; implementation may be weak; and plans may be changed with changes of government. Planning works best when it is realistic, monitored and flexible.
Everything the syllabus says: complete notes
Growth: two ways to define it, and the difference from real GDP growth
Economic growth is often understood as an increase in a country’s actual output. Some economists prefer to define it as an increase in the country’s capacity to generate the goods and services its citizens want, which is the same as saying the production possibility curve moves outward.
In the strict sense, a nation is growing if both real output (real GDP) and real per capita income rise over time. The pace of growth is the percentage rise in real GDP over time. The syllabus also asks you to separate two things that sound alike: real GDP growth is the annual rise in real GDP, while economic growth is a steady rise in real GDP over time.
A single good year is real GDP growth. A sustained trend is economic growth.
Growth is a prerequisite for development, not the same thing
Economic development means more than growth. It is a steady rise in real GDP that brings with it higher real per capita income, improved health and education, protection of the environment, institutional and legal reforms, and an effective system of production and distribution of goods and services.
A country can have growth without development, for instance when the gains of a growing oil sector go to a small group and do not reach health, schooling or infrastructure. It cannot have development without growth, because there would be nothing to pay for the improvements.
The four sources of growth in the syllabus’s own words of emphasis
- Human resources. Investment in human capital is a critical component of expansion. It is achieved by improving the calibre of the workforce through education and training, including advanced technology education. Literacy raises productivity and makes people better able to adjust to new situations.
- Natural resources. Access to minerals and land is an essential source of growth. The degree of exploitation matters just as much as availability, so a country that has resources but exploits them badly gains little. Care must be taken not to sacrifice the environment, so that growth from resource use is sustainable while environmental standards stay high.
- Capital formation. Growth economists see the accumulation of capital as a primary driver, with more capital per person in the form of industries, roads and machinery. But the sheer accumulation of money does not produce growth. Increasing the stock of capital alone will not raise productive capacity unless there are untapped investment opportunities. Capital is only one of the productive factors, and its marginal efficiency falls when it is increased relative to the others.
- Technology. Scientific and engineering advances increase knowledge and bring new methods of manufacture and new products. Technology can be acquired from other nations or developed at home.
Economic planning: components and the development plan
To encourage rapid growth, economic planning is the government’s deliberate distribution of resources among the economic sectors. It is done through development plans. Planning has three components: resource management, resource allocation and resource accumulation.
A development plan is a document that sets out a country’s policy framework and development agenda for a stated period, typically five years, with broad policies and action plans arranged according to a list of priorities or declared goals.
The six objectives of planning, with the reasoning
- Maximise the use of economic resources. A country’s resources are never enough for all its needs, so they must be distributed to be used to the full. Countries that allocate resources efficiently can speed up their development.
- Correct the imperfections of the market system. In practice markets are not perfect, so resources are not allocated as they would be under perfect competition. The government must step in to secure effective distribution.
- Bridge the gap between private and social cost, and private and social benefit. Externalities, which are costs or benefits falling on third parties, create the gap. In a pure market economy where private people take every investment decision, many necessary projects may not be profitable because their benefits go to others. Private investors ignore external and supplementary benefits when they estimate returns, so investment may fall short of the social optimum.
- Ensure balanced growth. Planning lets all sectors grow together, giving steady growth, supplementary services and links between sectors.
- Attract foreign investment. Grants and loans from foreign governments and international bodies must come with assurance that the money will be used well. Realistic plans that show the expected level of growth encourage private investment, so coordinated allocation strategies matter to donor countries.
- Match available resources with desired goals. Projects are complementary: one may depend on another. For example, developing farming may need both irrigation and a specialised transport system to move fresh fish, vegetables and other produce from the fields to the markets, and planning coordinates them.
The six problems of economic planning
| Problem | Explanation |
|---|---|
| 1. Lack of data | The main obstacle to planning in West Africa is the lack of adequate, accurate or complete economic data. Effective planning is impossible without it, so the database must be improved |
| 2. Lack of coordination | Planning needs the activities of several ministries to be coordinated. This is very hard if they are semi-autonomous, and it affects how development strategies are drawn up and carried out |
| 3. Failure of foreign resources to materialise | Plans list foreign aid so that cash matches expected needs, but the amount listed may never arrive. Ghana’s five-year and seven-year plans did not attract the expected foreign finance and investment, which harmed their implementation |
| 4. Failure of politicians to follow the plan | Politicians may refuse to accept the discipline of planning even when the plan has real initiatives. Classes, groups and ethnic interests that gain from the status quo may find key parts of the plan unacceptable |
| 5. Political instability | Political unrest has repeatedly disrupted planning in Nigeria. The 1966 military coup ended the First Republic and derailed key national development programmes. Instability makes investors unsure of their safety, discouraging local and foreign investment and weakening long-term growth |
| 6. Shortage of manpower | Designing and running any development programme is a management challenge. It needs appropriately trained people and a well-organised administration, and skilled labour is scarce in developing countries |
Questions that could be asked on this topic, and how to answer them
| Question | What a full answer contains |
|---|---|
| Distinguish economic growth from economic development | Both definitions, the real GDP growth versus growth distinction, that growth is necessary but not sufficient, and an example of growth without development |
| Explain the sources of economic growth | Human resources, natural resources, capital formation, technology, each with its qualification (quality of workforce, sustainable use, need for investment opportunities, acquired or home-grown) |
| Explain the objectives of economic planning | Six objectives with the reason for each. If a number is given, choose that many and explain fully |
| Discuss the problems of economic planning in a developing country such as Nigeria | The six problems, with Ghana’s plans for foreign finance and Nigeria’s 1966 coup as examples, and a sentence on how each might be reduced (better statistics, a coordinating body, political commitment, training) |
| Calculate growth rates | Percentage change in real GDP, and in real GDP per head after adjusting for population growth |
Exam focus: economic growth, development and planning
Growth and development
Economic growth is a steady rise in real GDP over time, with real per capita income also rising. Real GDP growth is the annual rise in real GDP. Economic development is more than growth: it includes higher real per capita income, better health and education, environmental protection, institutional and legal reforms, and an effective system of production and distribution. Growth is a prerequisite for development.
Economic planning
Economic planning is the government’s deliberate distribution of resources among sectors to speed up growth. It has three components: resource management, resource allocation and resource accumulation. A development plan is a document, usually covering five years, that sets out the policy framework and priorities.
Objectives of planning
- To maximise the use of economic resources.
- To correct the imperfection of the market system.
- To close the gap between private and social cost and benefit, caused by externalities that private investors ignore.
- To ensure balanced growth across sectors.
- To attract foreign investment and aid, which donors give only against realistic plans.
- To match available resources with desired goals, since some projects depend on others, for example irrigation and transport for agriculture.
Problems of planning
- Lack of data. The main obstacle in West Africa is the absence of adequate, accurate data.
- Lack of coordination among ministries, especially semi-autonomous ones.
- Failure of foreign resources to materialise. Aid listed in a plan may never arrive.
- Failure of politicians to follow the plan. Groups with a stake in the status quo may resist it.
- Political instability, which has disrupted planning in Nigeria.
Sources of growth
Human resources (education, training and literacy); natural resources (used sustainably, without sacrificing the environment); capital formation (useful only where investment opportunities exist, since its marginal efficiency falls as it rises relative to other factors); and technology (acquired abroad or developed at home).
Common mistakes in the exam
- Treating growth and development as the same.
- Using nominal GDP to show growth. Growth is measured with real GDP.
- Forgetting population growth when judging income per head.
- Listing the sources of growth with no explanation or qualification.
- Saying that more capital always means more growth.
- Describing planning only as a list of targets. Its aim is to allocate resources deliberately.
Quick revision
- Growth: a rise in real GDP and real income per head over time. Rate = percentage change in real GDP.
- Development: growth plus health, education, environment, institutions and distribution.
- Sources: human resources, natural resources, capital formation, technology.
- Planning: deliberate allocation of resources through development plans, usually for five years.
- Six objectives of planning. The main problem is a lack of data.
Practice questions
These are original questions written in the style of the ICAN exam. Try each one before you open the answer.
Section A style: multiple choice
Question 1. Economic growth is best measured by the percentage change in:
- Nominal GDP
- Real GDP
- The money supply
- Government spending
Show the answer
B. Real GDP removes the effect of price changes.
Question 2. Real GDP rises by 4% and the population rises by 1%. Real GDP per head will rise by about:
- 1%
- 3%
- 4%
- 5%
Show the answer
B. 1.04 ÷ 1.01 − 1 is about 3%.
Question 3. Economic development differs from economic growth because it also includes:
- Higher nominal output only
- Better health and education, environmental protection and institutional reform
- Lower taxes
- A larger population
Show the answer
B. Development covers the quality of life as well as output.
Question 4. Which of the following is a source of economic growth?
- Capital formation
- Inflation
- Unemployment
- A trade deficit
Show the answer
A. The four sources are human resources, natural resources, capital formation and technology.
Question 5. A development plan typically covers a period of:
- One month
- One year only
- About five years
- Fifty years
Show the answer
C. Development plans usually run for five years.
Question 6. The main problem of economic planning that the syllabus names is:
- Too much data
- A lack of adequate and accurate data
- Too many foreign investors
- Excess capital
Show the answer
B. Planning depends on reliable statistics, which are often missing.
Question 7. If real GDP grows 6% and the population grows 2%, real GDP per head grows by about:
- 8%
- 4%
- 3%
- 12%
Show the answer
B. About 6% − 2%.
Question 8. Which is a measure of development rather than only growth?
- Nominal GDP
- Life expectancy and literacy
- Number of banks
- Export value
Show the answer
B. Development includes quality of life.
Question 9. A country that exports oil but invests little in skills and industry:
- Will always develop
- May gain little lasting benefit from its resources
- Cannot grow
- Has no natural resources
Show the answer
B. How resources are used is what matters.
Question 10. A development plan is most likely to fail where there is:
- Reliable data
- Weak implementation
- Clear targets
- Investor confidence
Show the answer
B. Planning depends on carrying plans out.
Section B style: written questions
Question 11 (10 marks). Distinguish between economic growth and economic development.
Show the marking guide
Growth (3 marks). A sustained rise in real GDP and real income per head, measured by the percentage change in real GDP.
Development (4 marks). A sustained rise in real GDP with higher real income per head, better health and education, environmental protection, institutional and legal reforms, and an effective system of production and distribution.
Relationship (3 marks). Growth is necessary for development but does not guarantee it. A country can have growth without development.
Question 12 (20 marks). Real GDP rises from ₦12,000 billion to ₦12,600 billion while the population rises from 120 million to 122.4 million.
(a) Calculate the growth rate of real GDP and of real GDP per head. (6 marks)
(b) Explain the four sources of economic growth. (8 marks)
(c) Explain three objectives of economic planning. (6 marks)
Show the marking guide
(a) 6 marks.
- Real GDP growth.
(12,600 − 12,000) ÷ 12,000 = 5% (2). - Real GDP per head.
year 1 = ₦100,000 and year 2 = ₦102,941 (2). - Growth per head = 2.9% (2).
(b) 8 marks, 2 each. Human resources: education and training raise productivity. Natural resources: their use matters as much as their existence, and growth should be sustainable. Capital formation: more capital per worker, provided there are investment opportunities. Technology: new methods and products, acquired or developed.
(c) 6 marks, 2 each. Any three of: maximise the use of resources, correct market imperfections, bridge private and social cost and benefit, ensure balanced growth, attract foreign investment, match resources to goals.
A further written question
Question 13 (10 marks). Explain the costs of economic growth.
Model answers
Show the model answer to Question 11
Growth is a sustained rise in real GDP and real income per head, measured by the percentage change in real GDP. Development is wider: a sustained rise in real GDP with higher real income per head, together with better health and education, protection of the environment, institutional and legal reforms, and an effective system of production and distribution.
Relationship: growth is necessary for development, because it gives the resources to improve living standards, but it does not guarantee it. A country can have growth without development if the gains are not shared or do not improve health and education.
Show the model answer to Question 12
(a)
- Real GDP growth.
(12,600 − 12,000) ÷ 12,000 = 5%. - Real GDP per head.
year 1 = ₦100,000 and year 2 = 12,600 billion ÷ 122.4 million = ₦102,941. - Growth per head = about 2.9%.
(b) Four sources of growth. Human resources: education and training raise productivity, and quality matters as much as numbers. Natural resources: minerals, land and other resources are a basis for growth, but how well they are used matters, and growth should be sustainable. Capital formation: more capital per worker raises output, provided there are profitable investment opportunities.
Technology: new methods and products allow more output from the same resources, whether acquired from abroad or developed at home.
(c) Objectives of planning. To maximise the use of resources, by allocating scarce resources efficiently. To correct market imperfections, since real markets do not allocate as perfect competition would. To bridge the gap between private and social cost and benefit, so worthwhile projects with external benefits are not left unbuilt. Others are balanced growth, attracting foreign investment and matching resources to goals.
Show the model answer to Question 13
Economic growth has costs as well as benefits. Environmental damage: faster output can bring pollution, deforestation and the depletion of resources that future generations will need. Inequality: the gains may go mostly to a few, widening the gap between rich and poor. Structural change: old industries decline, and workers may lose jobs and need retraining. Social costs: rapid urbanisation can bring congestion, crime and strain on services.
Opportunity cost: resources invested now for growth mean less consumption today. Governments try to manage these costs through regulation, redistribution, training and sustainable policy.
Pathfinder on economic growth and development
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
None of the diets mapped so far has a written question on this topic, so practise it through the multiple-choice questions. Check Section A of every diet for items on growth, development, the sources of growth and planning.
Revise first: Economic development
Source: ICAN Pathfinder, Business Environment. Diets covered: May Diet, 2021 to May Diet, 2026. November Diet, 2024 is not yet mapped.
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