Economic development explained

Economic Development

The goal of being economically developed is to raise the per capita income to improve material living standards. Therefore, understanding economic development, especially in its policy dimensions, is crucial for policymakers and economists working to fulfill their governments’ goals. Furthermore, it is believed that political stability can only be guaranteed with minimum economic development.

What Is Economic Development?

Economic development is the process by which a country or nation progresses from a low-income economy to a thriving modern industrial economy. It is broader than economic growth and typically indicates a country’s transformation that involves qualitative and quantitative improvements.

Table of contents
  • What is economic development?
    • Economic development explained
    • Characteristics
    • Stages
    • Causes
    • Examples
    • Importance
    • Difference between economic development vs. economic growth vs. sustainable development
    • Economic development vs. sustainable development
    • Frequently Asked Questions (FAQs)
    • Recommended Articles

Key Takeaways

  • Economic development is the process of wealth production from which the community gains in equal parts. It usually refers to an economy’s transition from a low-income to a high-income state.
  • Economic development is a crucial element that fuels economic growth, generating new job possibilities and facilitating an enhanced quality of life for current and future citizens by facilitating more access to opportunities brought about by economic growth.
  • Essential phases of development are linked to three distinct transitions: structural, demographic transition, and urbanization process.
  • Economic development measures include parameters such as Gross National Product (GNP) and Gross Domestic Product (GDP).


Economic Development Explained

Economic development is the process of wealth production from which all members of the community gain. It usually refers to the economy’s transition from a low-income to a high-income state. From a public standpoint, local economic development entails distributing scarce resources, such as land, labor, capital, and entrepreneurship, to improve business activity, income, income distribution patterns, employment, and fiscal solvency. It is a key factor in what makes an economy flourish. It does this by generating new job possibilities and enabling citizens of the present and the future to have greater access to the opportunities that come with economic growth.

The study of economic development is a branch of economics developed out of conventional economics, which was solely concerned with the nation’s gross domestic product– the total output of goods and services. The development now concerns the growth of people’s rights and their associated capacities, morbidity, hydration, nutrition, literacy, and many other socioeconomic indicators.

Economic development is thought to follow a rise in per capita income. Therefore, it is the best indicator of the value of goods and services available in the country per person per year. Although measuring per capita income and its growth rate both present several measurement challenges, These two indicators are the finest available to evaluate the level of economic well-being inside a country and its economic growth.


Given below are a few characteristics possessed by a developing economy.

  • Sectoral shift: Economic development starts when the economy shifts from the primary sector. The transition begins with the development of agriculture and progresses to the manufacturing and service sectors. The concepts of urbanization, industrialization, and modernization greatly contribute to the development and transformation of society and, therefore, the economy.
  • Technological shift: Urbanization, industrialization, and modernization force development to be squeezed into short periods. An increase in the production of goods and services is required, which needs innovations and improvements. As a result, technological advancements are unavoidable. Capital-intensive technologies give better methods of production and income opportunities.
  • Increase in real national income: Economic opportunities help people get jobs and earn wages. When people earn wages, they spend more on goods and services, raising economic activity. The situation would eventually increase income-earning opportunities, reducing poverty and the resulting inequalities. In short, they can be summarized by increased levels of sustainable production and growing industrialization processes with significantly higher rates of goods and service consumption. A high quality of living for the majority of people.
  • Diversification of the productive sectors: Areas in the main sectors are mostly occupied by a few people actively seeking employment. Economic development introduces diversification through which science and technology can make significant advancements.


There is no precise definition of the stages of economic development. However, the majority of development economists consider that the essential phases of development are linked to three distinct transitions:

#1 – Structural Transformation

Structural transformation refers to a shift in the composition of the GDP. The agriculture sector serves as the initial focus for economic activity and employment. However, as a country develops, agriculture’s percentage of the Gross Domestic Product (GDP) declines as economic activity and employment move to the industrial sector, particularly manufacturing.

After a few decades of industrialization, the service sector will gradually overtake industry, while agriculture’s share will continue to decline. In other words, when an economy reaches its ultimate stage of development, people depend mostly on the service sector for their livelihood, with the industry sector playing a smaller but still significant role.

#2 – Demographic Transition

Changes in life expectancy and fertility rates, or the number of children per woman, are the two main factors influencing the demographic shift. Although fertility rates are initially strong, population expansion is constrained by relatively high death rates, especially high infant mortality rates. As a result, the next stage sees a dramatic rise in population size as life expectancy and fertility rates rise. Life expectancy continues to rise due to progress, but population expansion will be constrained by significantly dropping fertility rates.

#3 – Process Of Urbanization

Urbanization is characterized by the migration of people to cities as the opportunities and living standards increase. The key causes causing the urbanization process are:

  • The movement of individuals from rural regions searching for employment in newly developing urban centers.
  • The conversion of formerly semi-urban suburbs into completely urban centers.
  • And disparities in the demographic dynamics of rural and urban areas.


The major factors affecting economic development and economic growth are as follows:

  • Increased investment: This brings in more economic and employment opportunities.
  • Higher labor productivity—higher labor productivity typically results in greater productivity and increased profits.
  • Increased labor force participation: Increased labor force participation contributes to increased labor productivity.
  • Technological improvements: Technological improvements open new avenues of economic activity and investment opportunities. This, in turn, contributes to increased employment and growth.
  • Higher real wages: With more employment opportunities, people get employed more and earn more. They spend on health and education when they earn well, contributing to economic growth.
  • Tax cuts: When the government cuts taxes, people have more money to spend, which results in productive spending on things like health, education, and entertainment.

Other factors affecting economic development include Government spending, lower interest rates, etc., an increase in the money supply in the economy, and a boost in economic activities and favorable conditions for growth.


Check out these examples to get a better idea:

Example #1

Suppose there is a country “A”, and the gross national income (GNI) there is $1000. This nation is a low-income country. Low-income nations have a GNI per capita of less than $1,035; lower middle-income nations with GNI between $1,036 and $4,085; upper-middle-income nations are a GNI between $4,086 and $12,615; and high-income nations are those with GNI over $12,615 per capita. However, after a decade of industrial development, the GNI of country A is $12700, which means that due to its economic development, it has now fallen into the category of a high-income country.

Example #2

India is an emerging economy. As of 2021, the country’s GNI was $2170, but there had been a significant jump since the 1960s (in 1963, it was at $100). Since the 2000s, India has significantly reduced absolute poverty. Over 90 million individuals were rescued from extreme poverty between 2011 and 2015. In FY22, the nominal GDP of India was predicted to be Rs. 232.15 trillion ($3.12 trillion) at current prices. This exemplifies how economic development could influence a country’s wealth.


Economic development is a crucial element that fuels economic growth, generating new job possibilities and facilitating an enhanced quality of life for current and future citizens. It is done by facilitating more access to opportunities brought about by economic growth. A few points that demonstrate the importance of economic development are given below:

  • Job creation: Development provides new opportunities for people to work, through which they can earn more and improve their standard of living.
  • Industry diversification: development results in transitioning from primary sectors to industry and service sectors. They provide better opportunities and play an important role in the overall development of the economy. Economic diversification is a key component of economic development since it lessens a region’s dependence on a single industry.
  • Higher tax collections: increased income tax provides the government with increased revenue. Increasing tax revenue and the development of local infrastructure result from the increased business presence in the area. It gives scope for government spending to aid development.
  • Quality of life: Inclusive economic development supports the community’s quality of life through programs that promote the local workforce’s upskilling opportunities. It also improves the regional transportation network, affordable housing, innovation, health, education, and entrepreneurship. In addition, these programs give the existing workforce the necessary access and skills to take advantage of the new, high-paying job possibilities brought about by economic development initiatives and result in further development.
  • Better living quality: As the region’s economy grows and its population’s standard of living rises, better infrastructure and more jobs benefit the residents.

Difference between Economic Development vs Economic Growth vs Sustainable Development

Basis Economic development Economic growth Sustainable development 
Meaning It describes how a country’s quality of life as a whole has evolved, including economic growth. Economic growth is meant by an increase in a country’s monetary growth during a specific period. The development that will remain forever is termed sustainable development.
Applicable to Developing economies Developed economies Both developed and developing economies.
Measures GDP and GNP measure it. It is measured by HDI, per capita income, industrial development, etc. The sustainable development index measures it.

Frequently Asked Questions (FAQs)

Does economic development lead to democracy?

Economic development does not necessarily lead to democracy, but it sure can affect it. Both can go hand-in-hand with increasing the prosperity of a nation and reducing inequality.

What is socioeconomic development?

A society’s social and economic development is known as socioeconomic development. Life expectancy, literacy, and employment rates evaluate socioeconomic development. In addition, economic development indicators like GDP are also included.

What are the indicators of economic development?

Economic development indicators include many indices such as life expectancy at birth, Infant mortality, Literacy rates, the Growth rate of National Income, and Per Capita Income (PCI). It also includes health indices, employment and unemployment rates, and gender equality. The coverage is quite wide as it is a broad concept.

What is the role of entrepreneurship in economic development?

The role of entrepreneurship in economic development is indispensable. They create new employment by developing new goods and services, which eventually accelerates economic growth and standard of living.

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