Defining economic growth

Ekancone

I was having a discussion on this topic with a friend which i thought i would share with you. How do you define economic growth in a way that can be applied to all countries. I'm sure most of you would say that it is the change in the amount of goods and services produced by a nation over time, but that only accounts for formal exchanges. That is all well and good in the western world where most of these things are accounted for, but what about 3rd world countries where the bulk of transations are made through informal means? Is there a possibility of 3rd world growth rates being undertstated?

AngryHippie

Its a thorny one. Quite complex. Your GDP has to out-pace inflation, Production need not necessarily be up, if the value of the production is up, again wrt inflation. There are loads of other criteria too, have a gawk at the CSO website, Their economic report will show some indication of whats involved or the Central Bank report, Both have some fairly practical data that you can get your head around to understand it.

rediguana

At the risk of wading in out of my depth, I get worried when I see high rates of "growth" from Chad, Iraq, Nigeria etc and this being equated with better times for their people. Numbers are fake, but indicative, I guess.

I do think there is a move to arrive at a more holistic view of welfare there days. The Economist had an article recently where it said that traditional measures of economic welbeing overestimated the extent of separation between (e.g.) the very rich and the very poor. The former drive Ferraris, have high-end, deluxe fridges, go to the sun every year, and work 50 hours a week; the latter drive lesser cars, have fridges, jet off to the sun every year, and work 40 hours a week. The stats say these two groups of people are hugely different, but they're doing a lot of the same things.

Past a certain level of income, differences become more nuanced - the humble "97 Fiat does a disturbingly similar job to the Masserrati "08; the Lanzarote sun burneth as the Kenya orb.

Ekancone

AngryHippie wrote: »

Its a thorny one. Quite complex. Your GDP has to out-pace inflation, Production need not necessarily be up, if the value of the production is up, again wrt inflation. There are loads of other criteria too, have a gawk at the CSO website, Their economic report will show some indication of whats involved or the Central Bank report, Both have some fairly practical data that you can get your head around to understand it.

Thanks, i think you misunderstand me though. I fully understand what economics has to say about economic growth, and to clarify i am talking about real GDP. What i am getting to is that economics as a science can only measure what is formally exchanged and cannot account for informal exchanges, ie. the black market. Given that the bulk of exchanges in the 3rd world are informal, would that suggest that maybe their growth estimates are understated?

Time Magazine

It's well-known that the informal economy plays a greater role in less-developed countries than in the developed world. Todaro & Smith's (2006) Economic Development (9e) has a good graph on p. 329 that cites the UN's State of the World's Cities (2001) (link) which I cannot quite locate, but a similar graph can be found here. The extent of the informal economy can be measured/estimated. Whether or not it's included in statistical techniques is a technical question that I imagine varies from agency to agency.