Differences in economic development between countries | IGCSE Class 10 Economics Notes

This note covers differences in economic development between countries: how income levels differ, how productivity shapes output, how population growth and its structure affect development, how the relative size of the primary, secondary and tertiary sectors changes as countries develop, how saving and investment levels differ, and how education and healthcare outcomes diverge, with a case study of three Asian economies (China, India and Pakistan) to illustrate each cause and impact.

What is meant by differences in economic development between countries?

Economic development is a broader measure of a country's progress than economic growth alone: it includes rising income, but also improvements in living standards, health, education and the structure of the economy.

Two countries can have similar income levels yet very different development outcomes, because development depends on how income is generated and how it is shared.

A case study: three economies with a shared starting point

China, India and Pakistan make a useful case study because all three began their development journeys at almost the same time: India and Pakistan became independent nations in 1947, and the People's Republic of China was established in 1949.

All three adopted planning-based development strategies at similar times, and until the 1980s all three had similar growth rates and per capita incomes.

Since then their paths have diverged sharply, giving clear evidence of how the causes discussed below, income, productivity, population growth, sector structure, saving and investment, education and healthcare, produce different impacts.

Definition: Economic development. A wider measure of a country's progress that includes rising income together with improvements in living standards, health, education and the structure of production, not output growth alone.

How do differences in income cause and reflect differences in development?

Measuring income differences

Income differences between countries are usually measured in GNI per capita, which is a country's gross national income divided by its population, often adjusted for purchasing power so that living costs in each country are taken into account.

Large gaps in GNI per capita are both a cause and a result of other development gaps, because higher income allows more spending on health, education and infrastructure, which in turn raises future income.

By total output, China had the world's largest GDP (measured at purchasing power, or PPP) in the world at $35 trillion. The Indian economy's GDP (PPP) was $15 trillion, about 42 per cent of China's, and Pakistan's GDP was $1.5 trillion, roughly 10 per cent of the Indian figure.

On a per-person basis the gap is even clearer in the GNI per capita figures: $9,047 for India, $22,029 for China and $5,501 for Pakistan. China's income per person is therefore more than double India's and around four times Pakistan's. Much of this gap is explained by differences in productivity, discussed next.

Worked example 1. A country's GDP is $35 trillion (PPP) and its population is 1,411 million. A neighbouring country has a GDP of $15 trillion (PPP) and a population of 1,428 million. Calculate GDP per capita for each and compare.

Answer: GDP per capita = GDP ÷ Population. First country: $35,000,000 million ÷ 1,411 million ≈ $24,800 per person. Second country: $15,000,000 million ÷ 1,428 million ≈ $10,500 per person.

The first country's income per person is more than double the second's, even though its population is almost the same size, so total output alone is a poor guide to living standards; income per person matters more.

Causes behind the income gap

Income differences between countries have several causes, which the rest of this note sets out in turn: differences in productivity, in the rate of population growth, in the structure of the economy across the primary, secondary and tertiary sectors, in saving and investment, and in education and healthcare.

Each of these interacts with the others, so low productivity, for example, tends to go together with a large agricultural workforce and limited saving.

How does productivity cause differences in development?

Productivity is output produced per unit of input, commonly measured as output per worker or output per hour worked. Higher productivity allows a country to produce more from the same resources, which raises wages, profits and government revenue, and so supports higher income and more spending on development.

Productivity by sector

Productivity differences explain much of the income gap between the three economies. China's industrial sector produced 38 per cent of its national output while employing only 32 per cent of its workforce, meaning that output per worker in Chinese industry is relatively high.

In India, industry produced 28 per cent of output while employing 26 per cent of the workforce, a smaller gap.

In agriculture the contrast is sharper still: China's agricultural workforce was 23 per cent of the total but produced only 8 per cent of national output, while India's agricultural workforce of 43 per cent produced 18 per cent of output and Pakistan's 36 per cent produced 24 per cent.

A large share of workers producing a small share of output is the clearest sign of low productivity, and it is concentrated in agriculture in all three countries, but most severely in India.

The impact of low productivity is that a large share of the population works for a relatively small share of national income, which keeps average incomes low and limits the surplus available for saving, investment or taxation that could fund education and healthcare.

How does population growth cause differences in development?

A country's population growth rate is the annual percentage change in its population. Rapid population growth means that output has to grow faster just to keep income per person rising, and it increases the number of dependents, such as children, relative to the working-age population, which can slow the rise in living standards.

Population growth, fertility and sex ratio

Population growth differed sharply between the three countries: Pakistan's annual population growth was 1.96 per cent, India's 0.81 per cent, and China's was actually negative at −0.10 per cent.

The fertility rate, the average number of children a woman has, was also very different: 3.4 in Pakistan, 2.0 in India and only 1.2 in China.

China's low fertility is traced to the one-child policy introduced in the late 1970s, which arrested population growth but also altered the balance between young and old: China will, after a few decades, have more elderly people in proportion to young people, which led China to allow couples to have two children.

A low or falling sex ratio (the number of females per 1,000 males) was recorded in all three countries, 930 in India, 898 in China and 948 in Pakistan, which scholars attribute to a preference for sons rather than daughters; this is itself a human development concern, since it shows unequal treatment of female children, and it is not simply a side effect of population policy.

Urbanisation

Urbanisation, the share of the population living in towns and cities, was highest in China at 65 per cent, with India at 36 per cent and Pakistan at 38 per cent.

Higher urbanisation generally goes with a shift of workers out of agriculture into industry and services, which supports higher productivity and income, discussed next.

How does the size of the primary, secondary and tertiary sectors affect development?

Economies are divided into the primary sector (extracting raw materials, such as farming, fishing and mining), the secondary sector (manufacturing and construction, turning raw materials into finished goods) and the tertiary sector (services, such as trade, transport, finance and education).

As countries develop, workers and output typically shift from the primary sector first to the secondary sector and then to the tertiary sector.

China's sectoral shift

China has followed this classical pattern of a gradual shift from agriculture to manufacturing and then to services.

In 1980 more than 80 per cent of China's workforce depended on farming; by 2022 only 23 per cent of China's workforce worked in agriculture, producing 8 per cent of output, while 32 per cent worked in industry producing 38 per cent of output, and the service sector employed 45 per cent of the workforce and produced 54 per cent of output.

India and Pakistan's path

India and Pakistan did not follow the same route. Their workforce has shifted more directly from agriculture to services without passing through a large manufacturing stage: industry's share of the workforce remained relatively low in both, at 26 per cent in each, while services employed 31 per cent of India's workforce and 38 per cent of Pakistan's.

Because India's growth has been driven mainly by services rather than manufacturing, and China's by both manufacturing and services, China's industrial sector grew much faster than India's during the 1980s, which supported faster growth in output per worker and hence in income per person at that time.

Worked example 2. A country's agricultural sector employs 43 per cent of the workforce but produces only 18 per cent of national output. Its service sector employs 31 per cent of the workforce and produces 54 per cent of output. Compare output per worker in the two sectors.

Answer: Treating each percentage as a ratio of output share to workforce share: agriculture = 18 ÷ 43 ≈ 0.42, services = 54 ÷ 31 ≈ 1.74.

Output per worker in services is more than four times higher than in agriculture, showing why a shift of workers out of low-productivity agriculture into services (or industry) raises average national income.

The impact of sector size on development is therefore twofold: a large primary sector, if it has low productivity, keeps a large share of workers poor relative to the rest of the economy, while growth concentrated in the secondary sector tends to raise overall productivity faster than growth concentrated in services alone, because manufacturing more easily uses large-scale production and new technology.

How do saving and investment cause differences in development?

Saving is the part of income not spent on current consumption, and investment is spending on capital goods, such as machinery, factories and infrastructure, that increases a country's future productive capacity.

Higher saving allows more funds to be available for investment, and higher investment raises productivity and future output, so the two together are a major cause of differences in long-run development.

China's investment-led growth

China's growth has drawn heavily on investment in industry: since 1978, reforms allowed private firms and township and village enterprises to produce goods, special economic zones were set up to attract foreign investors, and government-owned enterprises were made to face competition, all of which encouraged investment in productive capacity.

This investment, built on earlier saving and on infrastructure already established before the reform period, including rural health services and more equal distribution of foodgrains through the commune system, helped China sustain near double-digit annual GDP growth during the 1980s, shown by a growth rate of 10.3 per cent compared with 5.7 per cent in India and 6.3 per cent in Pakistan over the same period.

Pakistan's weaker saving base

Pakistan's experience shows the impact of a weaker saving and investment base. Rather than investment funded mainly from domestic saving, Pakistan depended heavily on remittances from workers in the Middle East and on foreign loans, with growing difficulty in repaying those loans.

Because agricultural growth depended on the weather rather than on sustained investment in technology, output was unstable: when harvests were good the economy did well, and when they were poor, growth and poverty indicators worsened.

The result was a declining growth rate over time, falling from 6.3 per cent a year in 1980 to 1990 to 3.1 per cent in 2024.

Worked example 3. An economy grows at 10.3 per cent a year on average. A neighbouring economy grows at 6.3 per cent a year on average.

Over ten years, if both start from the same level of output of $100 billion, estimate the gap that opens up (ignore compounding for simplicity, using total approximate growth of rate × 10 years).

Answer: First economy: approximate rise ≈ 10.3% × 10 = 103% of starting output, so output roughly doubles to about $203 billion. Second economy: approximate rise ≈ 6.3% × 10 = 63%, so output rises to about $163 billion.

Even a few percentage points of difference in the annual growth rate, sustained over a decade, opens a large gap in total output, which is why differences in saving and investment that raise or lower growth rates matter so much for long-run development.

How does education cause differences in development?

Education raises the skills of the workforce, supports higher productivity, and is itself a direct measure of human development. One standard indicator is mean years of schooling among adults, which was 6.9 years in India, 8.0 years in China and only 4.3 years in Pakistan.

These education differences line up with the productivity and income differences described earlier: China's higher average schooling supports its higher output per worker, particularly in industry, while Pakistan's lower schooling is consistent with its lower income per person and its continuing dependence on agriculture, where few new skills are required.

Education differences are therefore both a cause of future productivity gaps and a result of a country's past investment choices, since government and household spending on schools and universities is itself a form of investment.

How does healthcare cause differences in development?

Healthcare outcomes are measured by indicators such as life expectancy at birth, the infant mortality rate (deaths of infants under one year old per 1,000 live births) and the maternal mortality rate (deaths of mothers per 100,000 births). These indicators show large gaps between the three countries.

Mortality and life expectancy

Life expectancy at birth was 78.0 years in China, 72.0 years in India and 67.6 years in Pakistan.

The infant mortality rate was lowest in China at 4.8, compared with 25.5 in India and 51 in Pakistan, meaning that for every thousand live births, far more infants die before their first birthday in Pakistan than in China.

The maternal mortality rate shows an even sharper gap: for every 100,000 births, only 23 women die in China, compared with 103 in India and 154 in Pakistan.

Access to basic services

Access to basic services also differs: 96 per cent of China's population used at least basic sanitation, against 78 per cent in India and 71 per cent in Pakistan, while prevalence of undernourishment (the share of the population without enough food) was 3 per cent in China, 17 per cent in India and 19 per cent in Pakistan.

These healthcare gaps are consistent with China's public intervention in rural health services well before its 1978 reforms, which gave it a stronger base from which to improve further.

What are the combined impacts of these differences on development?

The causes above do not act separately: they reinforce one another. Higher saving and investment raise productivity; higher productivity supports a shift of workers from the primary sector to secondary and tertiary sectors; this shift, combined with slower population growth, raises income per person; and higher income allows more spending on education and healthcare, which raises productivity further still.

Human Development Index and poverty

China shows this virtuous combination most clearly, with a Human Development Index (a combined measure of income, education and life expectancy) value of 0.797 and a global HDI rank of 78, well ahead of India's 0.685 (rank 130) and Pakistan's 0.544 (rank 168).

A poverty line is the minimum income needed to meet basic needs; the share of the population below the national poverty line was about 21.9 per cent in both India and Pakistan over the periods reported, while official Chinese figures recorded 0.0 per cent, showing that reducing income poverty, like the other indicators, has moved in China's favour.

Why similar starting points led to different outcomes

India's growth has been driven mainly by the service sector rather than by manufacturing, whereas China's growth has come from both manufacturing and services together.

China also invested in rural health services and land reform before its 1978 market reforms, and combined those reforms with strong state direction. Together the three economies show how similar starting points can still produce very different combined outcomes once productivity, population growth, sector structure, saving and investment, education and healthcare begin to interact over several decades.

Going beyond the syllabus

Scholars caution that income and human development indicators, though extremely important, are not sufficient on their own to judge development: alongside them, "liberty indicators", such as the extent of democratic participation in decision-making, constitutional protection of citizens' rights, and the independence of the judiciary and the rule of law, also matter.

Why liberty indicators matter

Without these, a human development index may be said to be incomplete, since a country's lack of political freedom and its implications for human rights are a real cost of development that income and health statistics alone cannot capture.

This matters for the three-country case study because the three differ sharply in their political structures: India is a democracy with a liberal constitution, Pakistan has experienced periods of military rule, and China is a one-party state that has combined tight political control with market reforms since 1978.

Two countries can therefore show very similar scores on income and health indicators while differing greatly on liberty indicators, and a full judgement about which country has "developed" more needs to look at both sets of measures together rather than at income and health statistics alone.

This is also why development economists increasingly argue that a single index number, however carefully constructed from income, education and health data, can never fully capture every aspect of a society's wellbeing or its citizens' freedoms.

Glossary

• Economic development: a wider measure of progress than growth alone, including rising income together with improvements in health, education and the structure of the economy.
• Productivity: output produced per unit of input, often measured as output per worker or per hour worked.
• Primary sector: the part of the economy that extracts raw materials, such as farming, fishing and mining.
• Secondary sector: the part of the economy that manufactures goods from raw materials, including construction.
• Tertiary sector: the service part of the economy, such as trade, transport, finance and education.
• Saving: the part of income not spent on current consumption.
• Investment: spending on capital goods that increases a country's future productive capacity.
• GNI per capita: a country's gross national income divided by its population, often adjusted for purchasing power.
• Human Development Index: a combined measure of income, education and life expectancy used to compare countries.
• Population growth rate: the annual percentage change in a country's population.
• Fertility rate: the average number of children a woman has during her lifetime.
• Urbanisation: the proportion of a country's population living in towns and cities.
• Infant mortality rate: the number of infant deaths under one year old per 1,000 live births.
• Maternal mortality rate: the number of maternal deaths per 100,000 live births.
• Poverty line: the minimum income needed to meet a country's basic needs.

Common errors and misconceptions

• Misconception: a country with a larger total GDP is automatically more developed. Correct: total GDP must be divided by population to give income per person, since a large population can mean a large GDP but low income per person.
• Misconception: fast population growth is always bad for development. Correct: it slows the rise in income per person only if output does not grow at least as fast, and it also affects the balance between young and old dependents.
• Misconception: all developing countries follow the same route from agriculture to industry to services. Correct: some economies, such as India and Pakistan, have shifted their workforce more directly from agriculture to services, without a large manufacturing stage.
• Misconception: a large agricultural workforce always means a large contribution to national output. Correct: agriculture can employ a large share of workers while producing a much smaller share of output, showing low productivity in that sector.
• Misconception: saving and investment are the same thing. Correct: saving is income not spent on consumption, while investment is spending on capital goods; saving provides the funds that make investment possible.
• Misconception: income and human development always move together. Correct: they usually move together, but liberty indicators such as political freedom and the rule of law are a separate aspect of development not captured by income or health statistics.

Exam-style questions with model answers

Q1. Define 'productivity'. [2 marks]

1. Productivity is output produced per unit of input, commonly measured as output per worker or output per hour worked; higher productivity means more is produced from the same resources.

Q2. Identify two indicators that measure differences in healthcare between countries. [2 marks]

1. Life expectancy at birth.
2. Infant mortality rate (or maternal mortality rate).

Q3. A country has GNI per capita (PPP) of $22,029. A neighbouring country has GNI per capita of $5,501. Explain two reasons why GNI per capita might differ this much between two countries. [4 marks]

1. Differences in productivity: if workers in the first country produce more output per hour, for example because more are employed in higher-output industry and services rather than low-output agriculture, average income per person will be higher.
2. Differences in saving and investment: a country that has saved and invested more in capital goods and infrastructure over time will have built up a larger productive capacity, supporting higher income per person, while a country more dependent on remittances and foreign loans may have built up less lasting productive capacity.

Q4. Explain two reasons why a country's population growth rate might fall sharply. [4 marks]

1. Government policy: a country may introduce a policy limiting the number of children a family may have, such as a one-child policy, which directly reduces the fertility rate and slows population growth.
2. Rising income and urbanisation: as more people move to cities and incomes rise, the cost of raising children increases relative to income and the fertility rate tends to fall, reducing population growth over time.

Q5. Using the data that agriculture employs 43 per cent of a country's workforce but produces only 18 per cent of its national output, while services employ 31 per cent of the workforce and produce 54 per cent of output, analyse what this tells us about productivity in the two sectors. [6 marks]

1. Output per worker can be estimated by comparing each sector's share of output to its share of the workforce.
2. In agriculture, the output share (18 per cent) is much smaller than the workforce share (43 per cent), giving a ratio of about 0.42, which shows that output per worker is low.
3. In services, the output share (54 per cent) is much larger than the workforce share (31 per cent), giving a ratio of about 1.74, which shows that output per worker is high.
4. This means a worker in services produces, on average, roughly four times as much output as a worker in agriculture in this economy.
5. It explains why a shift of workers out of agriculture and into services (or industry) tends to raise a country's average income per person.
6. It also explains why a country with a very large share of its workforce still in agriculture, as in this example, tends to have a lower average income per person than a country where most workers have already moved into services or industry.

Q6. Discuss whether a government should prioritise spending on education or on healthcare to raise its country's level of economic development. [8 marks]

1. Spending on education raises the skills of the future workforce, supporting higher productivity and, over time, higher income per person; a country with more years of average schooling tends to have workers who can move more easily into higher-output industry and service jobs rather than remaining in low-productivity agriculture.
2. Spending on healthcare raises life expectancy and reduces infant and maternal mortality, which has a direct and immediate effect on human welfare and also supports productivity, because a healthier workforce can work more hours and more effectively.
3. The two are complementary rather than substitutes: healthy children are better able to attend and benefit from school, and an educated population tends to make better use of healthcare services and health information, so spending only on one while neglecting the other is likely to produce weaker overall development.
4. Developing countries face limited government budgets, so there is a genuine trade-off between education and healthcare spending at the margin, and the right balance may depend on which indicator is currently weakest: a country with a very high infant or maternal mortality rate may need to prioritise basic healthcare first, while a country with very low average years of schooling may need to prioritise education.
5. Overall, a balanced judgement is that neither should be prioritised to the exclusion of the other; most successful development experiences, judged by indicators such as the Human Development Index, combine sustained public spending on both basic health services and education, often beginning before other reforms are introduced, so that gains in one area reinforce gains in the other.

Q7. State two features of an economy with a large tertiary sector. [2 marks]

1. A large share of the workforce is employed in services such as trade, transport, finance or education.
2. A large share of national output (GDP or GVA) comes from services rather than from farming or manufacturing.

Q8. Explain two reasons why saving and investment matter for a country's long-run economic development. [4 marks]

1. Saving provides the funds that banks and financial markets can lend for investment, so a country with higher domestic saving generally has more funds available to invest in capital goods, infrastructure and new enterprises without relying heavily on foreign borrowing.
2. Investment in capital goods, such as machinery, factories and infrastructure, raises the productive capacity of the economy, supporting higher output and, if sustained over many years, a higher and more stable rate of economic growth than relying on volatile sources of income such as remittances or foreign loans.

Key takeaways

• Differences in GNI per capita between countries are both a cause and a result of differences in productivity, population growth, sector structure, saving and investment, education and healthcare.
• Higher productivity, especially in industry, raises output per worker and supports higher national income.
• Rapid population growth and high fertility rates make it harder to raise income per person, while very low fertility can create an ageing population instead.
• As economies develop, the workforce and output typically shift from the primary sector, through the secondary sector, and then into the tertiary sector, though some economies shift more directly from primary to tertiary.
• Higher saving supports higher investment, which raises a country's future productive capacity and growth rate.
• More years of schooling are associated with higher productivity and higher income per person.
• Lower infant and maternal mortality rates, higher life expectancy and better access to sanitation reflect stronger healthcare systems and support human development.
• A combined measure such as the Human Development Index shows that income, education and health gaps between countries tend to move together, but liberty indicators capture a separate dimension of development that income and health data alone do not show.

Test yourself

What is the difference between economic growth and economic development?

Growth is a rise in output or income, while development is a wider idea that also includes improvements in health, education and the structure of the economy, not just rising income.

Why might a country with a lower total GDP have a higher GNI per capita than a country with a higher total GDP?

GNI per capita depends on population size as well as total income; a smaller population sharing a smaller total income can still have a higher income per person than a larger population sharing a larger total income.

Give one reason why a falling fertility rate might eventually create problems for a country.

A falling fertility rate, if sustained for decades, leads to an ageing population with proportionally fewer young workers to support more elderly dependents.

Why does a shift of workers from agriculture to industry or services usually raise average income?

Output per worker is typically much higher in industry and services than in agriculture, so moving workers into these sectors raises the economy's average output per worker and hence average income.

Explain in one sentence why saving matters for investment.

Saving is the part of income not spent on consumption, and it provides the funds that can be lent out and used for investment in capital goods.

Name two indicators used to measure healthcare outcomes between countries.

Life expectancy at birth and the infant mortality rate (or the maternal mortality rate).

What is a 'liberty indicator', and why might it matter for judging development?

A liberty indicator measures things such as democratic participation, constitutional protection of rights, and the rule of law; it matters because income and health statistics alone do not capture political freedom, which is also part of development.