Economic Growth The long-run path of economic growth is one of

the central questions of economics; in spite of

 Economic growth refers to the the problems of measurement, an increase in
expansion of the national income—the GDP of a country is generally taken as an
total production of goods and services of increase in the standard of living of its
a country over a given period. Economic inhabitants. Over long periods of time, even
growth is usually measured by the pace small rates of annual growth can have large
of change of gross domestic product effects through compounding (exponential
(GDP) after adjustment for inflation also growth). A growth rate of 2.5% per annum will
known as real GDP. Economic growth lead to a doubling of GDP within 28 years,
refers only to the quantity of goods and while a growth rate of 8% per annum
services produced; it says nothing about (experienced by some Four Asian Tigers) will
the way in which they are produced. lead to a doubling of GDP within 9 years. This
 Economic growth can either be positive exponential characteristic can intensify
or negative. Negative growth can also be differences across nations.
referred that the economy is shrinking.
Negative growth is associated with In the early 20th century, it became the policy of
economic recession and economic most nations to encourage growth of this kind.
depression. To do this required enacting policies, and being
able to measure the results of those policies.
Gross national product (GNP) is sometimes This gave rise to the importance of
used as an alternative measure to gross domestic econometrics, or the field of creating
product. In order to compare multiple countries, measurements for underlying conditions. Terms
the statistics may be quoted in a single currency, such as "unemployment rate", "Gross Domestic
based on either prevailing exchange rates or Product" and "rate of inflation" are part of the
purchasing power parity. Then, in order to measuring of the changes in an economy.
compare countries of different population sizes,
the per capita figure is quoted. To compensate Various theories on Economic Growth
for changes in the value of money (inflation or
deflation) the GDP or GNP is usually given in Origins of the concept
"real" or inflation adjusted, terms rather than the
actual money figure compiled in a given year, In 1377, the Arabian economic thinker Ibn
which is called the nominal or current Khaldun provided one of the earliest
figure.GDP per capita is not the same thing as descriptions of economic growth in his famous
earnings per worker since GDP measures only Muqaddimah (known as Prolegomena in the
monetary transactions for all final goods and Western world):
services in country without regard to who
receives that money. "When civilization [population] increases, the
available labor again increases. In turn, luxury
Short-term stabilization and long-term growth again increases in correspondence with the
increasing profit, and the customs and needs of
Economists differentiate short-term economic luxury increase. Crafts are created to obtain
stabilization and long-term economic growth. luxury products. The value realized from them
The topic of economic growth is primarily increases, and, as a result, profits are again
concerned with the long run. multiplied in the town. Production there is
thriving even more than before. And so it goes
The short-run variation of economic growth is with the second and third increase. All the
termed the business cycle. additional labor serves luxury and wealth, in
contrast to the original labor that served the
necessity of life."
In the early modern period, some people in roads, and abolishing local toll booths, all of
Western European nations developed which expanded markets. This corresponded to
the idea that economies could "grow", that the centralization of power in the hands of the
is, produce a greater economic surplus Crown (or "Absolutism"). This process helped
which could be expended on something produce the modern nation-state in Western
other than mere subsistence. This surplus Europe.
could then be used for consumption,
warfare, or civic and religious projects. Classical growth theory
The previous view was that only
increasing either population or tax rates The modern conception of economic growth
could generate more surplus money for began with the critique of Mercantilism,
the Crown or country. especially by the physiocrats and with
the Scottish Enlightenment thinkers
During much of the "Mercantilist" period,
such as David Hume and Adam Smith,
growth was seen as involving an increase in the
total amount of specie that is circulating medium and the foundation of the discipline of
such as silver and gold, under the control of the modern political economy. The theory
state. This "Bullionist" theory led to policies to of the physiocrats was that productive
force trade through a particular state, the capacity, itself, allowed for growth and
acquisition of colonies to supply cheaper raw the improving and increasing capital to
materials which could then be manufactured and allow that capacity was "the wealth of
sold. This led to policies in the 1700s to
nations". Whereas they stressed the
encourage manufacturing in itself, and the
importing of raw materials and exporting importance of agriculture and saw urban
finished goods. Under this system high tariffs industry as "sterile", Smith extended the
were imposed to allow manufacturers to notion that manufacturing was central to
establish "factories". Local markets would then the entire economy.
pay the fixed costs of capital growth, and then
allow them to export abroad, undercutting the Creative destruction and economic growth
prices of manufactured goods elsewhere. Once
competition from abroad was removed, prices
could then be increased to recoup the costs of Many economists view entrepreneurship as
establishing the business.Under this theory of having a major influence on a society's rate of
growth, one policy attempted to foster growth
technological progress and thus economic
was to grant monopolies, which would give an
incentive for an individual to exploit a market or growth. Joseph Schumpeter was a key figure in
resource, confident that he would make all of the understanding the influence of entrepreneurs on
profits when all other extra-national competitors technological progress. In Schumpeter's
were driven out of business. The "Dutch East Capitalism, Socialism and Democracy,
India company" and the "British East India published in 1942, an entrepreneur is a person
company" were examples of such state-granted who is willing and able to convert a new idea or
trade monopolies.
invention into a successful innovation.
Entrepreneurship forces "creative destruction"
In this period the view was that growth was
gained through "advantageous" trade in which across markets and industries, creating new
specie would flow in to the country, but to trade products and business models. In this way,
with other nations on equal terms was creative destruction is largely responsible for the
disadvantageous. It should be stressed that dynamism of industries and long-run economic
Mercantilism was not simply a matter of growth. Former Federal Reserve chairman Alan
restricting trade. Within a country, it often meant Greenspan has described the influence of
breaking down trade barriers, building new
creative destruction on economic growth as model's predictions; in particular that all
follows: "Capitalism expands wealth primarily countries grow at the same rate in the long run
through creative destruction—the process by or that poorer countries should grow faster until
they reach their steady state. Also, the data
which the cash flow from obsolescent, low-
suggests the world has slowly increased its rate
return capital is invested in high-return, cutting- of growth.
edge technologies.”
However modern economic research shows that
The neo-classical growth model this model of economic growth is not supported
by the evidence. Calculations made by Solow
The notion of growth as increased stocks of claimed that the majority of economic growth
capital goods (means of production) was was due to technological progress rather than
codified as the Solow-Swan Growth Model, inputs of capital and labour. Recent economic
which involved a series of equations which research has, however, found the calculations
showed the relationship between labor-time, made to support this claim to be invalid as they
capital goods, output, and investment. do not take into account changes in both
According to this view, the role of technological investment and labor inputs.
change became crucial, even more important
than the accumulation of capital. This model, Dale Jorgenson, of Harvard University,
developed by Robert Solow and Trevor Swan in President of the American Economic
the 1950s, was the first attempt to model long- Association in 2000, concludes that: ‘Griliches
run growth analytically. This model assumes and I showed that changes in the quality of
that countries use their resources efficiently and capital and labor inputs and the quality of
that there are diminishing returns to capital and investment goods explained most of the Solow
labor increases. From these two premises, the residual. We estimated that capital and labor
neoclassical model makes three important inputs accounted for 85 percent of growth
predictions. 1) Increasing capital relative to during the period 1945–1965, while only 15
labor creates economic growth, since people can percent could be attributed to productivity
be more productive given more capital. 2) Poor growth… This has precipitated the sudden
countries with less capital per person will grow obsolescence of earlier productivity research
faster because each investment in capital will employing the conventions of Kuznets and
produce a higher return than rich countries with Solow.
ample capital.3)Because of diminishing returns
to capital, economies will eventually reach a John Ross has analysed the long term
point at which no new increase in capital will correlation between the level of investment in
create economic growth. This point is called a the economy, rising from 5-7% of GDP at the
"steady state". time of the Industrial Revolution in England, to
25% of GDP in the post-war German ‘economic
The model also notes that countries can miracle’, to over 35% of GDP in the world’s
overcome this steady state and continue growing most rapidly growing contemporary economies
by inventing new technology. In the long run, of India and China.[8]
output per capita depends on the rate of saving,
but the rate of output growth should be equal for Taking the G7 economies and the largest non-
any saving rate. In this model, the process by G7 economies Jorgenson and Vu conclude in
which countries continue growing despite the considering: ‘the growth of world output
diminishing returns is "exogenous" and between input growth and productivity… input
represents the creation of new technology that growth greatly predominated… Productivity
allows production with fewer resources. growth accounted for only one-fifth of the total
Technology improves, the steady state level of during 1989-1995, while input growth accounted
capital increases, and the country invests and for almost four-fifths. Similarly, input growth
grows. The data does not support some of this
accounted for more than 70 percent of growth 3. Growth has improved working
after 1995, while productivity accounted for less conditions.
than 30 percent. Regarding differences in output 4. Growth allows more leisure and less
per capita Jorgenson and Vu conclude: alienation from work
‘differences in per capita output levels are
primarily explained by differences in per capital Negative effects
input, rather than variations in productivity.’
1. Growth has negative effects on the
New growth theory quality of life such as crime, prisons, or
pollution.
Growth theory advanced again with the theories 2. Growth encourages the creation of
of economist Paul Romer in the late 1980s and artificial needs: Industry cause
early 1990s. Other important new growth consumers to develop new tastes, and
theorists include Robert E. Lucas and Robert J. preferences for growth to occur.
Barro. Consequently, "wants are created, and
consumers have become the servants,
Unsatisfied with Solow's explanation, instead of the masters, of the economy.
economists worked to "endogenize" technology 3. Distribution of income: The gap
in the 1980s. They developed the endogenous between the poorest and richest
growth theory that includes a mathematical countries in the world has been growing.
explanation of technological advancement. This Although mean and median wealth has
model also incorporated a new concept of increased globally, it adds to the
human capital, the skills and knowledge that inequality of wealth.
make workers productive. Unlike physical 4. Growth causes pollution, global
capital, human capital has increasing rates of warming, ozone depletion, and other
return. Therefore, overall there are constant problems. Many aspects of economic
returns to capital, and economies never reach a growth that affect the quality of life,
steady state. Growth does not slow as capital such as the environment are not traded
accumulates, but the rate of growth depends on or accounted in the market.
the types of capital a country invests in. 5. The human population is now larger
Research done in this area has focused on what than the resources available. Canadian
increases human capital (e.g. education) or scientist, David Suzuki stated in the
technological change (e.g. innovation).Recent 1990s that ecologies can only sustain
empirical analyses suggest that differences in typically about 1.5-3% new growth per
cognitive skills, related to schooling and other year, and thus any requirement for
factors, can largely explain variations in growth greater returns from agriculture or
rates across countries. forestry will necessarily cannibalize the
natural capital of soil or forest.
Effects of growth
Economic Growth Factors
Positive effects
1. accumulation of resources (labor, human
1. Growth helps to reduce poverty in poor capital, physical capital, land and natural
countries. The decline in poverty has resources);
been the slowest where growth 2. improvements in the technologies for
performance has been the worst (ie. in converting those resources into goods;
Africa). 3. investments in efficient public
2. Growth leads to improved standard of infrastructure;
living. Like in the countries of United 4. innovation of new goods and services.
Kingdom, America and others.
Economic Development between the advanced and the less developed
countries. The more developed countries are
• Is a process that transform a stagnant healthier because of better medical care and
society with a low average real income improved sanitation. Life expectancy may be
to one which income or less 35to40 years in some African countries and
continuously as technology is embodied over70 years in Northern Europe. Changes occur
in accumulating capital. in the family system as center of social life
changes. In less-developed countries, people
Origin of the concept lived together in extended families. In advanced
countries the common household unit is a couple
Modern Western economic development began and their children. In less-developed counties
in the Renaissance; Europe was in the process of the proportion of the population that is rural and
organizing into national states but it evolved dependent upon farming is likely to be between
slowly. A flood of industrial and agricultural 50% and 90%.in the United States it is only
developments began in the mid-18th century and about 3%.
produced a remarkable acceleration. During 19th
century the spread of the advancement of Why the United States Progressed
technology and the conversion of the economies
of Europe and North America to the market 1. Change in the kind of the capital
system raised incomes to levels beyond any in accumulated, embodying a new, more
history. productive technology.
2. Increase in human capital, embodying
Since the end of the world II there has been a education.
revival of interest in economic development, 3. Improvement of output from given
focusing in the needs of non-Western countries inputs, reflecting the economic
that failed to make the economic transformation advantage of a larger scale.
along with Europe, North America, Australia 4. Change in the way resources are
and South Africa after two centuries. The end of combined, using new technology that
colonialism and the establishment of new does not require new capital such as
nations in Asia and Africa after World War II better organization of production and
stimulated an uneven economic development more efficient specialization.
reminiscent of Europe’s earlier experiences. 5. Switches in production to new goods
that can be produced more
The Development Process. The process of economically.
economic development encompasses changes in
the quality and composition of production Barriers to Technological Change
inputs, the technology by which the inputs are
combined, and the final goods and services Barriers of Demand. In other cases potential
(outputs) produced. Inputs at first are investments do not appear profitable by
predominantly direct labor and the products of themselves, because of lack of adequate
nature, such as coffee beans and iron ore. Later demand, but could be profitable if at the same
there is a gradual substitution of capital for time other investments were going forward to
labor. Although the total number of hours generate a new demands for output.
worked per family per week may not decline, the
quality of labor changes. Developed labor, Barriers of Supply. Because of lack of local
embodying more training and education, is more supplies of some of the required inputs, the costs
skilled and productive. of production remain high for many goods with
potentially favorable conditions of production in
Effects on People. The family system and the less-developed countries. To satisfy varied
percentage of farm jobs differ considerably supply needs at an economically practical cost
may require a broad multi-industry investment labor and little capital to take advantage
program that would strain the local supply of of a surplus labor supply.
skills in capital. 3. The policy of political-economic
integration (the elimination of trade
Institutional Barriers. Many institutional barriers among specific groups of
problem arise. Unless a country’s economy is countries to gain benefits of
directed in detail by central authority(as in international specialization) is pursued
Albania or Cuba), developments depends on in the form of reaching economic
replacing traditional controls over productive unions, free trade associations, more far
resources with market control. Some “reforms” reaching economic unions, political
are designed to change control in the opposite federation and even political unification.
way from market control to legalized protection Integration permits the expansion of the
from the market for a favored group of country’s lowest-cost industries to the
landholders. The institutional barriers to extent of the integrated market’s
economic development are not simply the results capacity before the next best choice of
of backwardness or stupidity. They may reflect industries (next highest cost relative to
the priority given to other social objectives that world market cost) must be introduced.
conflict with the goal of economic development. 4. Another dimension are policies that are
characterized as “instruments”, such as
Economic Development Policies the use of some form of centralized
planning and the use of government
1. Economic development may be based power to alter institutions and social
on a policy of expanding export trade in attitudes that are significant for
commodities in which the aspiring development.
country has known comparative
advantage or an ability to produce more
cheaply than others. Expansion of the
export industries is limited only by the
country’s own resources and the
capacity of the world market to absorb Reference:
the new supply. General dependence of
developing countries on export • “Economic Growth”,
expansion would cause prices of the www.en.Wikipedia.org./wiki/Economic
goods they export to fall and the prices _Growth.com, September 5, 2009
of the goods they import to rise thus • Macroeconomic Goal : Economic
reducing the potential benefits of the Growth,
policy. In addition, the growth of one or hhttp://www.harpercollege.edu/mhealy/
a few industries might to fail to eco212i/lectures/econgrow/econgrow.ht
encourage development in the rest of the m, September 5, 2009
economy. Also, there may be an • Policy Paper Number 2:Trade Policy
emotional objection to a colonial form and Economic Growth (Fall 1998),
of economic dependence on the rest of http://www.colorado.edu/AmStudies/le
the world and to what is regarded as a wis/2010/trade.htm, September 5,2009
lopsided dependence on the on the
• Economic Growth,
production and export of primary goods
http://www.canadianeconomy.gc.ca/Eng
such as minerals and crops.
lish/economy/economic_growth.html,
2. The export-based growth strategy may
September 5, 200
be modified to a policy of exporting
manufactured goods that require much