Economic growth
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Accumulated GDP growth for various countries. |
Economic growth is the increase in value of the goods and services produced by an
economy. It is generally a factor in an increase in the income, of a nation. It is conventionally measured as the percent rate of increase in real
gross domestic product, or
GDP. Growth is usually calculated in
real terms, i.e.
inflation-adjusted terms, in order to net out the effect of
inflation on the price of the goods and services produced. In
economics, "economic growth" or "economic growth theory" typically refers to growth of
potential output, i.e., production at "
full employment," which is caused by growth in
aggregate demand or observed output.
As economic growth is measured as the annual percent change of
National Income it has all the advantages and drawbacks of that level variable. But people tend to attach a particular value to the annual percentage change, perhaps since it tells them what happens to their wage cheque.
In the early modern period, some people in Western European nations began conceiving of the idea that economies could "grow", that is, produce a greater economic surplus which could be expended on something other than religious or governmental projects (such as war). The previous view was that only increasing either population or tax rates could generate more surplus money for the Crown or country.
Now it is generally recognized that economic growth also corresponds to a process of continual rapid replacement and reorganization of human activities facilitated by investment motivated to maximize returns. This exponential physical evolution of our self-organized life-support and cultural systems is remarkably creative and flexible, but highly unpredictable in many ways. Since science still has no good way of modeling complex self-organizing systems, various efforts to model the long term evolution of economies have produced few useful results.
During much of the
"Mercantilist" period, growth was seen as involving an increase in the total amount of specie, that is circulating medium such as silver and gold, under the control of the state. This
"Bullionist" theory led to policies to force trade through a particular state, the acquisition of colonies to supply cheaper raw materials which could then be manufactured and sold.
Later, such trade policies were justified instead simply in terms of promoting domestic trade and industry. The post-Bullionist insight that it was the increasing capability of manufacturing which led to policies in the 1700's to encourage manufacturing in itself, and the formula of importing raw materials and exporting finished goods. Under this system high tariffs were erected to allow manufacturers to establish "
factories". (The word comes from "factor", the term for someone who carried goods from one stage of production to the next.) Local markets would then pay the fixed costs of capital growth, and then allow them to export abroad, undercutting the prices of manufactured goods elsewhere. Once competition from abroad was removed, prices could then be increased to recoup the costs of establishing the business.
Under this theory of growth, the road to increased national wealth was to grant monopolies, which would give an incentive for an individual to exploit a market or resource, confident that he would make all of the profits when all other extra-national competitors were driven out of business. The "
Dutch East India company" and the "
British East India company" were examples of such state-granted trade
monopolies.
It should be stressed that Mercantilism was not simply a matter of restricting trade.
Within a country, it often meant breaking down trade barriers, building new roads, and abolishing local toll booths, all of which expanded markets. This corresponded to the centralization of power in the hands of the Crown (or "
Absolutism"). This process helped produce the modern
nation-state in Western Europe.
Internationally, Mercantilism led to a contradiction: growth was gained through trade, but to trade with other nations on equal terms was disadvantageous. This – along with the rise of nation-states –encouraged several major wars.
The modern conception of economic growth began with the critique of Mercantilism, especially by the
physiocrats and with the Scottish Enlightenment thinkers such as
David Hume and
Adam Smith, and the foundation of the discipline of modern
political economy. The theory of the physiocrats was that productive capacity, itself, allowed for growth, and the improving and increasing capital to allow that capacity was "the wealth of nations". Whereas they stressed the importance of agriculture and saw urban industry as "sterile", Smith extended the notion that manufacturing was central to the entire economy.
David Ricardo would then argue that trade was a benefit to a country, because if one could buy a good more cheaply from abroad, it meant that there was more profitable work to be done here. This theory of "
comparative advantage" would be the central basis for arguments in favor of
free trade as an essential component of growth.
This notion of growth as increased stocks of capital goods (means of production) was codified as the
Solow-Swan Growth Model, which involved a series of equations which showed the relationship between labor-time, capital goods, output, and investment. In this modern view, the role of
technological change became crucial, even more important than the
accumulation of capital.
It has been argued that GDP per capita was essentially flat until the
industrial revolution and the emergence of the capitalist economy, and that it has since increased rapidly in capitalist countries [
1][
2]. The timing of this sudden boom in growth coincides with the use of fossil fuels as means of energy to augment manual labour. Since fossil fuels are a limited resource, economic growth as it has been for the last 150 years may be directly linked to the use of fossil fuels, and may not continue after their depletion.
The late 20th century, with its global economy of a few very wealthy nations, and many very poor nations, led to the study of how the transition from subsistence and resource-based economies, to production and consumption based economies occurred, leading to the field of
Development economics.
The real GDP
per capita of an economy is often used as an indicator of the average
standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living.
However, there are some problems in using growth in GDP
per capita to measure increasing well-being.
In particular, GDP includes things that it should not:
*
defensive expenditure to offset the adverse environmental effects of economic growth such as
pollution.
... does not include some things it should...
* measurement of non-marketed output like housework or DIY. If you hire a cleaner or decorator, their pay is included in GDP. If you do the work yourself, it isn't
* goods on markets which are not observed by statistics agencies. This includes anything from illegal drug deals to minor tax frauds.
*
externality effects from traded goods, for instance the effects of fuel use on global warming
... and is silent on some important questions
*
economic inequality is not measured by GDP
* Important outcomes like
healthcare and
education can often be
worse in 'richer' countries.
Other
measures of national income, such as the
Index of Sustainable Economic Welfare, the
Genuine Progress Indicator or
Sustainable National Income, have been developed in an attempt to give a more complete picture of the level of well-being and the position with reference to natural depletion, but there is no consensus as to which, if any, is a better measure than GDP. GDP still remains by far the most often-used measure. One reason may be that a rise in real GDP is correlated with an increase in the availability of jobs, which are necessary to most individuals' survival. A key question in this debate is whether care for the environment and quality of life costs jobs or actually requires more jobs.
The short-run variation of economic growth is termed the
business cycle, and almost all economies experience periodic
recessions. Explaining and preventing these fluctuations is one of the main focuses of
macroeconomics.
A statistical relationship called
Okun's law relates the growth rate of an economy to the level of
unemployment. On a
Keynesian view, growth varies because of changes in
aggregate demand, causing firms to produce more or less goods for sale and hence altering the size of the economy. The contrasting
real business cycle model suggests that in the short run growth depends on a series of shocks to the productivity of the economy, e.g. an oil price rise making the economy generally less productive and reducing growth.
The long-run path of economic growth is one of the central questions of
economics; in spite of the problems of measurement, an increase in GDP of a country is generally taken as an increase in the standard of living of its inhabitants. Over long periods of time, even small rates of annual growth can have large effects through compounding. A growth rate of 2.5% per annum will lead to a doubling of GDP within 30 years, whilst a growth rate of 8% per annum (experienced by some
East Asian Tigers) will lead to a doubling of GDP within 10 years.
The
neo-classical growth model, developed by
Robert Solow in the 1950s, was the first attempt to model long-run growth analytically. This model assumes that countries use their resources
efficiently and that there are
diminishing returns to capital and labor increases. From these two premises, the neo-classical model makes three important predictions. First, increasing capital relative to labor creates economic growth, since people can be more productive given more capital. Second, poor countries with less capital per person will grow faster because each investment in capital will produce a higher return than rich countries with ample capital. Third, because of diminishing returns to capital, economies will eventually reach a point at which no new increase in capital will create economic growth. This point is called a "steady state." The model also notes that countries can overcome this steady state and continue growing by inventing new technology that allows production with fewer resources, but the model assumes technological progress, "exogenizing" technology from the model.
Unsatisfied with Solow's explanation, economists worked to "endogenize" technology in the 1980s. They developed the
endogenous growth theory that includes a mathematical explanation of technological advancement. This model also incorporated a new concept of
human capital, the skills and knowledge that make workers productive. Unlike physical capital, human capital has increasing rates of return. Therefore, overall there are constant returns to capital, and economies never reach a steady state. Growth does not slow as capital accumulates, but the rate of growth depends on the types of capital a country invests in. Research done in this area has focussed on what increases human capital (e.g. education) or technological change (e.g. innovation).
Analysis of recent economic success shows a close correlation between growth and climate, though the actual linkage between the tworemains a topic of hot debate. Cold states like
Sweden are much more successful economically than warm countries like
Nigeria. In early human history, economic as well as cultural development was concentrated in warmer parts of the world, like
Egypt. Today, however, cold, Northern states have much higher GDP per capita compared to the hot, tropical states. This aspect of economics (
economic geography)was extensively studied by
Ellsworth Huntington, a professor of Economics at Yale University in the early 20th century.
Economic growth is a key part of most governments macroeconomic policies due to the benefits of it. The first benefit of economic growth is an increase in the
standard of living. However this may not always be the case if the
wealth within a country isn't distributed fairly i.e. one particular section of society reap the benefits while other parts do not see the effects. However, if the economic development is very low, there is nothing to distribute. The second benefit is it stimulates higher
employment. This is because economic growth is represented by an extension in
aggregate demand, or a shift to the right of the aggregate demand curve. Either way it means more of an economy's resources, which include labour, are being utilised. Thirdly it means the government has a fiscal dividend. Economic growth boosts tax revenues and provides the government with extra money to finance spending projects. Fourthly it increases the
accelerator effect. This means rising demand encourages investment in new capital machinery which helps sustain economic growth by increasing long run
aggregate supply. Lastly it boosts business confidence. It normally has a positive effect on firms profits, which boosts the
stock exchange helps both small and large businesses grow.
There are four major disadvantages to economic growth. The first is the risk from inflation. If an economy grows too rapidly, aggregate demand will race ahead of
aggregate supply. Producers may take advantage of this by raising prices for
consumers. The second disadvantage of economic growth is its environmental impact. It can produce several negative
externalities. For example if the wealth of the population increases, this could result in an increase and over
consumption of de-merit goods. This can have a negative effect on people's quality of life and may also affect a country's ability to sustain its rate of growth, for example, the over-exploitation of fish stocks. The third is that an inequitable distribution of the gains from economic growth can cause civil unrest. The fourth, which is controversial, is that changing the earth at explosively accelerating rates, to whatever purpose, inevitably conflicts with the normal delays in correcting the problems that develop. Growth has been sustained for hundreds of years, but from a physical systems point of view is fundamentally unsustainable, and the question many prefer to avoid is what kind of transition will occur and when.
* Georg Erber, Harald Hagemann,
Growth, Structural Change, and Employment, in: Frontiers of Economics, Ed. Klaus F. Zimmermann, Springer-Verlag, Berlin â€" Heidelberg â€" New York, 2002, 269-310.
*
Boom and bust*
Capital accumulation*
Capital formation*
Development economics*
Economic determinism*
Gross fixed capital formation*
Gross Output*
Growth accounting*
Human development theory*
Investment*
Measures of national income*
Net output*
Uneconomic growth*
Stagflation*
Sustainability*
Megaprojects and growth
*
Green Accounting Bibliography contains a discussion and related material on green or environmental accounting, an effort to create more comprehensive measures of conventional national income statistics.
*
Historicalstatistics.org - Links to historical economic statistics for different countries and regions
*
Beyond Classical and Keynesian Macroeconomic Policy is
Paul Romer's plain-English explanation of Endogenous Growth Theory.
*
United States Employment and Wage Reports*
Charleston Area Alliance*
The Path to sustainable Growth Lessons from 20 years Growth Differentials in Europe - 2006
