economic growth

created by qousqous

(idea) by FREETACO (5.9 y) (print) ? I like it! Thu Mar 14 2002 at 3:45:20

Economic growth is defined at the rate of change in the Per Capita GDP. Positive economic growth shows an outward shift in the economy's Production Possibilities Curve.

Many people think this is an indicator of a nation's standard of living, however, a positive rate of economic growth does not necessarily impact said nation's living standards because it does not take into account how the extra goods and services are distributed among the population, as well as the fact that it ignores other determinants such as leisure time.

(idea) by Basement_Johnny (10.9 mon) (print) ? 3 C!s I like it! Sun Jun 01 2003 at 22:03:47

As a slightly fuller definition, economic growth is the change in potential GDP. Potential GDP is 'the value of GDP that would exist if all resources in the economy were fully and efficiently employed' (From the website of Dr. Willie Redmond of the Harrison School of Business, Southeast Missouri State University. http://business.semo.edu/redmond/CH11a/tsld012.htm. Last accessed June 1st, 2003.) This is a bit different from per capita GDP, though per capita GDP is what many people are most interested in, as it is a measurement of living standards within an economy. The reason we talk about the change in potential GDP, as opposed to its growth, is that economic growth can be negative in some instances.

Economic growth is affected by changes in factor supplies and by changes in factor productivity. Factors include labour, physical capital (such as factories and machines) and human capital (such as education and on-the-job training). Some economists would argue technology is also a relevant factor, and of these some would include technology in human capital. Factor productivity (which is the ouput per unit of factor input).

Traditional theories of economic growth tend to emphasise the role of changes in factor supplies. Neo-Classical economists have provided most of what we recognise in modern growth theory. They believe that the ultimate determinant of economic growth is population growth, which is exogenous (in that government policies are to all intents and purposes unable to affect it). Neo-Classical theory states that increases in a single factor input will increase economic growth but with diminishing returns (that is, by an increasingly small amount) because after a while there is, for instance, only so much that extra labourers can add to the economy if there are only twenty factories. If, on the other hand, factors increase together, then economic growth will be constant.

In relation to per capita GDP, Neo-Classical theory states that an increase in labour will produce diminishing per capita GDP, because more labourers are adding relatively less and thus the wages paid to all will go down. If, on the other hand, physical capital increases above labour then there is no reason why per capita GDP should increase. If all factors increase at a constant rate, then per capita GDP will increase at a constant rate. Neo-Classical theory is quite depressing, because it implies that it is difficult for living standards to decrease and, in relation to general economic growth it implies that in the long run economic growth will slow down and may even halt if factor inputs increase unevenly. Because economic growth is largely the result of exogenous factors on this theory, it also means there's very little we can do about it. Bugger.

But, have no fear, the Neo-Classicists missed something out! They did not take into account the input of technological change, which largely affects factor productivity. Robert Solow, in his growth theory established that technology was the most important factor in economic growth. It increases growth by allowing us to produce the same amount of output with fewer factor inputs - for example, through machines - and often by completely altering the way we live, for example with cars and improved communications. As pointed out by Lipsey and Chrystal, the economy isn't better off now because we use make more Victorian commodities with more Victorian factories. It has grown because we do things differently and more efficiently. (Lipsey and Chrystal, Principles of Economics p.553 (9th edition. Oxford, OUP. 1999))

Governments generally believe that they can affect economic growth. Policies which aim at factor input increases have largely been ineffective, for the reasons given by the Neo-Classical economists. However, government can give incentives to firms to invest in research and development (R & D), by cutting taxes on these areas, or by giving grants. Thus, with the input of technology, there is room for optimism in the theory of economic growth. However, this is still a very uncertain field, with people unsure of the relative effectiveness of any single factor, such as education or R & D incentives.

It is also worth saying that some people see economic growth as undesirable, because as economies grow, they use more and more, often unrenewable resources, thus draining our planet. They sometimes also emphasise the need to concentrate on other goals, such as equitable redistribution (though those in favour of economic growth argue that with a larger economy it is easier to help the less well-off, because they can redistribute without the richer people losing any money). One of the key problems with economic growth is that it often lead to increased pollution. However, one of the inputs of technology is relatively to reduce pollution, which hopefully will be a continuing trend in the growth of our economies.

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