-
Economic growth
GDP real growth rates, 19901998 and 19902006, in
selectedcountries.
Rate of change of Gross domestic product, world and OECD,since
1961.
Economic growth is the increase in the market valueof the goods
and services produced by an economy overtime. It is conventionally
measured as the percent rate ofincrease in real gross domestic
product, or real GDP.[1]Of more importance is the growth of the
ratio of GDPto population (GDP per capita, which is also calledper
capita income). An increase in growth caused bymore ecient use of
inputs is referred to as intensivegrowth. GDP growth caused only by
increases in inputssuch as capital, population or territory is
called extensivegrowth.[2]
In economics, economic growth or economic growththeory typically
refers to growth of potential output,i.e., production at "full
employment". As an area ofstudy, economic growth is generally
distinguished fromdevelopment economics. The former is primarily
the studyof how countries can advance their economies. The latteris
the study of the economic development process partic-ularly in
low-income countries.Growth is usually calculated in real terms
i.e., ination-
Quan
tity
of G
uns
Prod
uced
Quantity of Butter Produced
Economic growth caused the production-possibility frontier
toshift outward.
adjusted terms to eliminate the distorting eect ofination on the
price of goods produced. Measurementof economic growth uses
national income accounting.[3]Since economic growth is measured as
the annual per-cent change of gross domestic product (GDP), it has
allthe advantages and drawbacks of that measure.
1 Measuring economic growthMain article: Gross domestic
product
Economic growth is generally calculated from data onGDP and
population provided by countries statisticalagencies, although
independent scholarly estimates arealso available.
2 Importance of long-run growthOver long periods of time, even
small rates of growth,such as a 2% annual increase, have large
eects. For ex-ample, the United Kingdom experienced a 1.97%
aver-age annual increase in its ination-adjusted GDP between1830
and 2008.[4] In 1830, the GDP was 41,373 millionpounds. It grew to
1,330,088 million pounds by 2008. A
1
-
2 3 FACTORS AFFECTING ECONOMIC GROWTH
growth rate that averaged 1.97% over 178 years resultedin a
32-fold increase in GDP by 2008.The large impact of a relatively
small growth rate over along period of time is due to the power of
exponentialgrowth. The rule of 72, a mathematical result, states
thatif something grows at the rate of x% per year, then itslevel
will double every 72/x years. For example, a growthrate of 2.5% per
annum leads to a doubling of the GDPwithin 28.8 years, whilst a
growth rate of 8% per yearleads to a doubling of GDP within 9
years. Thus, a smalldierence in economic growth rates between
countriescan result in very dierent standards of living for
theirpopulations if this small dierence continues for
manyyears.
2.1 Quality of life
Happiness has been shown to increase with a higher GDPper
capita, at least up to a level of $15,000 per person.[5]Economic
growth has the indirect potential to alleviatepoverty, as a result
of a simultaneous increase in employ-ment opportunities and
increased labour productivity.[6]A study by researchers at the
Overseas Development In-stitute (ODI) of 24 countries that
experienced growthfound that in 18 cases, poverty was
alleviated.[6] How-ever, employment is no guarantee of escaping
poverty;the International Labour Organization (ILO) estimatesthat
as many as 40% of workers are poor, not earningenough to keep their
families above the $2 a day povertyline.[6] For instance, in India
most of the chronically poorare wage earners in formal employment,
because theirjobs are insecure and low paid and oer no chance
toaccumulate wealth to avoid risks; other countries foundbigger
benets from focusing more on productivity im-provement than on
low-skilled work.[6]
Increases in employment without increases in productiv-ity lead
to a rise in the number of working poor, whichis why some experts
are now promoting the creation ofquality and not quantity in labour
market policies.[6]This approach does highlight how higher
productivity hashelped reduce poverty in East Asia, but the
negative im-pact is beginning to show.[6] In Vietnam, for
example,employment growth has slowedwhile productivity growthhas
continued.[6] Furthermore, productivity increases donot always lead
to increased wages, as can be seen in theUnited States, where the
gap between productivity andwages has been rising since the
1980s.[6] The ODI studyshowed that other sectors were just as
important in re-ducing unemployment, as manufacturing.[6] The
servicessector is most eective at translating productivity
growthinto employment growth. Agriculture provides a safetynet for
jobs and an economic buer when other sectorsare struggling.[6] This
study suggests a more nuanced un-derstanding of economic growth and
quality of life andpoverty alleviation.
3 Factors aecting economicgrowth
3.1 Political institutions, property rights,and rule of law
See also: Great Divergence Property rights, GreatDivergence
Eciency of markets and state interven-tion and Great Divergence
State prohibition of newtechnology
In economics and economic history, the transition tocapitalism
from earlier economic systems was enabled bythe adoption of
government policies that facilitated com-merce and gave individuals
more personal and economicfreedom. These included new laws
favorable to the estab-lishment of business, including contract
law, the abolish-ment of anti-usury laws and laws providing for the
pro-tection of private property.[7][8] When property rights areless
certain, transaction costs can increase, hindering eco-nomic
development. Enforcement of contractual rightsis necessary for
economic development because it deter-mines the rate and direction
of investments. When therule of law is absent or weak, the
enforcement of prop-erty rights depends on threats of violence,
which causesbias against new rms because they can not
demonstratereliability to their customers.[9]
3.2 Productivity
Increases in labor productivity(ratio of value out-put to labor
input) have historically been the mostimportant source of real per
capita economicgrowth.[10][11][12][13][14] (Note: There are
variousmeasures of productivity. The term used here appliesto a
broad measure of productivity. By contrast, Totalfactor
productivity (TFP) measures the change in outputnot attributable to
capital and labor. Many of the citedreferences use TFP. Increases
in productivity lower thereal cost of goods. Over the 20th century
the real priceof many goods fell by over 90%.[15]
3.2.1 Historical sources of productivity growth
Main article: Productivity (economic history)
Economic growth has traditionally been attributedto the
accumulation of human and physical capital,and increased
productivity arising from technologicalinnovation.[16]
Before industrialization, technological progress resultedin an
increase in population, which was kept in checkby food supply and
other resources, which acted to limitper capita income, a condition
known as the Malthusian
-
3.3 Capital 3
trap.[17][18] The rapid economic growth that occurred dur-ing
the Industrial Revolution was remarkable because itwas in excess of
population growth, providing an escapefrom theMalthusian trap.[19]
Countries that industrializedeventually saw their population growth
slow down, a phe-nomenon known as the demographic
transition.Increases in productivity are the major factor
responsi-ble for per capita economic growth this has been
es-pecially evident since the mid-19th century. Most of theeconomic
growth in the 20th century was due to reducedinputs of labor,
materials, energy, and land per unit ofeconomic output (less input
per widget). The balance ofgrowth has come from using more inputs
overall becauseof the growth in output (more widgets or alternately
morevalue added), including new kinds of goods and
services(innovations).[20]
During the Industrial Revolution, mechanization beganto replace
hand methods in manufacturing, and new pro-cesses streamlined
production of chemicals, iron, steel,and other products.[21]
Machine tools made the economi-cal production of metal parts
possible, so that parts couldbe interchangeable.[22] See:
Interchangeable parts.During the Second Industrial Revolution, a
major fac-tor of productivity growth was the substitution of
inan-imate power for human and animal labor. Also therewas a great
increase power as steam powered electricitygeneration and internal
combustion supplanted limitedwind and water power.[21] Since that
replacement, thegreat expansion of total power was driven by
contin-uous improvements in energy conversion eciency.[23]Other
major historical sources of productivity wereautomation,
transportation infrastructures (canals, rail-roads, and
highways),[24][25] new materials (steel) andpower, which includes
steam and internal combustionengines and electricity. Other
productivity improve-ments included mechanized agriculture and
scienticagriculture including chemical fertilizers and livestockand
poultry management, and the Green Revolution.Interchangeable parts
made with machine tools poweredby electric motors evolved into mass
production, which isuniversally used today.[22]
Great sources of productivity improvement in the late19th
century were railroads, steam ships, horse-pulledreapers and
combine harvesters, and steam-poweredfactories.[26][27] The
invention of processes for mak-ing cheap steel were important for
many forms ofmechanization and transportation. By the late 19th
cen-tury both prices and weekly work hours fell because lesslabor,
materials, and energy were required to produceand transport goods.
However, real wages rose, allow-ing workers to improve their diet,
buy consumer goodsand aord better housing.[26]
Mass production of the 1920s created overproduction,which was
arguably one of several causes of the GreatDepression of the
1930s.[28] Following the Great Depres-sion, economic growth
resumed, aided in part by de-
Productivity lowered the cost of most items in terms of work
timerequired to purchase. Real food prices fell due to
improvementsin transportation and trade, mechanized agriculture,
fertilizers,scientic farming and the Green Revolution.
mand for entirely new goods and services, such as tele-phones,
radio, television, automobiles, and household ap-pliances, air
conditioning, and commercial aviation (after1950), creating enough
new demand to stabilize the workweek.[29] The building of highway
infrastructures alsocontributed to post World War II growth, as did
capitalinvestments in manufacturing and chemical industries.[30]The
post World War II economy also beneted from thediscovery of vast
amounts of oil around the world, par-ticularly in the Middle East.
By John W. Kendricks esti-mate, three-quarters of increase in U.S.
per capita GDPfrom 1889 to 1957 was due to increased
productivity.[14]
Economic growth in in the United States slowed down af-ter
1973.[31] In contrast growth in Asia has been strongsince then,
starting with Japan and spreading to Ko-rea, China, the Indian
subcontinent and other parts ofAsia. In 1957 South Korea had a
lower per capita GDPthan Ghana,[32] and by 2008 it was 17 times as
high asGhanas.[33] The Japanese economic growth has slack-ened
considerably since the late 1980s.Productivity in the United States
grew at an increas-ing rate throughout the 19th century and was
mostrapid in the early to middle decades of the
20thcentury.[34][35][36][37][38] US productivity growth
spikedtowards the end of the century in 19962004, due toan
acceleration in the rate of technological innovationknown as Moores
law.[39][40][41][42] After 2004 U.S. pro-ductivity growth returned
to the low levels of 1972-96.[39]
3.3 Capital
Capital in economics ordinarily refers to physical capi-tal,
which consists of structures and equipment used inbusiness
(machinery, factory equipment, computers andoce equipment,
construction equipment, business ve-hicles, etc.).[3] Up to a point
the amount of capital perworker is an important determinant of
economic output.
-
4 3 FACTORS AFFECTING ECONOMIC GROWTH
Capital is subject to diminishing returns because of theamount
that can be eectively invested and because ofthe growing burden of
depreciation.In the development of economic theory the
distributionof income was considered to be between labor and
theowners of land and capital.[43]
3.4 New products and services
Another major cause of economic growth is the introduc-tion of
new products and services and the improvement ofexisting products.
New products create demand, which isnecessary to oset the decline
in employment that occursthrough labor saving
technology.[40][44]
3.5 Growth phases and sector shares
Economic growth in the U.S. and other developed coun-tries went
through phases that aected growth throughchanges in the labor force
participation rate and the rel-ative sizes of economic sectors. The
transition from anagricultural economy to manufacturing increased
the sizeof the high output per hour, high productivity
growthmanufacturing sector while reducing the size of the
loweroutput per hour, lower productivity growth agriculturalsector.
Eventually high productivity growth in manufac-turing reduced the
sector size as prices fell and employ-ment shrank relative to other
sectors.[45][46] The serviceand government sectors, where output
per hour and pro-ductivity growth is very low, saw increases in
share of theeconomy and employment.[10]
3.5.1 Business cycle
For more details on this topic, see Business cycle.
Economists distinguish between short-run economicchanges in
production and long-run economic growth.Short-run variation in
economic growth is termed thebusiness cycle. The business cycle is
made up of boomsand drops in production that occur over a period
ofmonths or years. Generally, economists attribute theups and downs
in the business cycle to uctuations inaggregate demand. In
contrast, economic growth is con-cerned with the long-run trend in
production due to struc-tural causes such as technological growth
and factor ac-cumulation. The business cycle moves up and down,
cre-ating uctuations around the long-run trend in
economicgrowth.
3.6 Income equality
For more details on this topic, see Economic inequality.
A 1999 review in the Journal of Economic Literaturestates high
inequality lowers growth, perhaps becauseit increases social and
political instability.[47] A 1992World Bank report published in the
Journal of Develop-ment Economics said that inequality is
negatively, androbustly, correlated with growth. This result is not
highlydependent upon assumptions about either the form ofthe growth
regression or the measure of inequality.[48]NYU economist William
Baumol found that substan-tial inequality does not stimulate growth
because povertyreduces labor force productivity.[49] Economists
DierkHerzer and Sebastian Vollmer found that increased in-come
inequality reduces economic growth, but growth it-self increases
income inequality.[50]
Berg and Ostry of the International Monetary Fund found that
ofthe factors aecting the duration of growth spells (not the rate
ofgrowth) in developed and developing countries, income equalityis
more benecial than trade openness, sound political institu-tions,
or foreign investment.[51][52]
According to International Monetary Fund economists,inequality
in wealth and income is negatively correlatedwith the duration of
economic growth spells (not the rateof growth).[51] High levels of
inequality prevent not justeconomic prosperity, but also the
quality of a countrysinstitutions and high levels of
education.[53]
According to economists David Castells-Quintana andVicente
Royuela, increasing inequality harms economicgrowth.[54] High and
persistent unemployment, in whichinequality increases, has a
negative eect on subsequentlong-run economic growth.[54]
Unemployment can harmgrowth not only because it is a waste of
resources, butalso because it generates redistributive pressures
and sub-sequent distortions, drives people to poverty,
constrainsliquidity limiting labor mobility, and erodes
self-esteempromoting social dislocation, unrest and conict.[54]
Poli-cies aiming at controlling unemployment and in partic-ular at
reducing its inequality-associated eects supporteconomic
growth.[54]
Economist Joseph Stiglitz presented evidence in 2009that both
global inequality and inequality within coun-tries prevent growth
by limiting aggregate demand.[55]Economist Branko Milanovic, wrote
in 2001 that, Theview that income inequality harms growth or that
im-proved equality can help sustain growth has becomemore widely
held in recent years. ... The main reasonfor this shift is the
increasing importance of human capi-
-
3.7 Demographic changes 5
tal in development. When physical capital mattered most,savings
and investments were key. Then it was importantto have a large
contingent of rich people who could savea greater proportion of
their income than the poor and in-vest it in physical capital. But
now that human capital isscarcer than machines, widespread
education has becomethe secret to growth.[56]
In 1993, Galor and Zeira showed that inequality in thepresence
of credit market imperfections has a long last-ing detrimental eect
on human capital formation andeconomic development.[57] A 1996
study by Perotti ex-amined the channels through which inequality
may aecteconomic growth. He showed that, in accordance withthe
credit market imperfection approach, inequality is as-sociated with
lower level of human capital formation (ed-ucation, experience, and
apprenticeship) and higher levelof fertility, and thereby lower
levels of growth. He foundthat inequality is associated with higher
levels of redis-tributive taxation, which is associated with lower
levelsof growth from reductions in private savings and invest-ment.
Perotti concluded that, more equal societies havelower fertility
rates and higher rates of investment in edu-cation. Both are
reected in higher rates of growth. Also,very unequal societies tend
to be politically and sociallyunstable, which is reected in lower
rates of investmentand therefore growth.[58]
Research by Harvard economist Robert Barro, found thatthere is
little overall relation between income inequal-ity and rates of
growth and investment. According towork by Barro in 1999 and 2000,
high levels of inequal-ity reduce growth in relatively poor
countries but encour-age growth in richer countries.[59][60] A
study of Swedishcounties between 1960 and 2000 found a positive
im-pact of inequality on growth with lead times of ve yearsor less,
but no correlation after ten years.[61] Studies oflarger data sets
have found no correlations for any xedlead time,[62] and a negative
impact on the duration ofgrowth.[51]
Some theories developed in the 1970s established possi-ble
avenues through which inequality may have a positiveeect on
economic development.[51][52] According to a1955 review, savings by
the wealthy, if these increasewith inequality, were thought to oset
reduced con-sumer demand.[63] A 2013 report on Nigeria suggests
thatgrowth has risen with increased income inequality.[64]Some
theories popular from the 1950s to 2011 incorrectlystated that
inequality had a positive eect on economicdevelopment.[51][52]
Analyses based on comparing yearlyequality gures to yearly growth
rates were misleadingbecause it takes several years for eects to
manifest aschanges to economic growth.[62] IMF economists founda
strong association between lower levels of inequality indeveloping
countries and sustained periods of economicgrowth. Developing
countries with high inequality havesucceeded in initiating growth
at high rates for a fewyears but longer growth spells are robustly
associatedwith more equality in the income distribution.[52]
3.6.1 Equitable growth
Main article: Inclusive growth
While acknowledging the central role economic growthcan
potentially play in human development, poverty re-duction and the
achievement of the Millennium Devel-opment Goals, it is becoming
widely understood amongstthe development community that special
eorts mustbe made to ensure poorer sections of society are ableto
participate in economic growth.[65][66][67] The eectof economic
growth on poverty reduction - the growthelasticity of poverty - can
depend on the existing levelof inequality.[68][69] For instance,
with low inequality acountry with a growth rate of 2% per head and
40%of its population living in poverty, can halve poverty inten
years, but a country with high inequality would takenearly 60 years
to achieve the same reduction.[70][71] Inthe words of the Secretary
General of the United NationsBan Ki-Moon: While economic growth is
necessary, itis not sucient for progress on reducing
poverty.[65]
3.7 Demographic changesDemographic factors may inuence growth by
chang-ing the employment to population ratio and the laborforce
participation rate.[10] Industrialization creates ademographic
transition in which birth rates decline andthe average age of the
population increases.Women with fewer children and better access
market em-ployment tend to join the labor force in higher
percent-ages. There is a reduced demand for child labor andchildren
spend more years in school. The increase inthe percentage of women
in the labor force in the U.S.contributed to economic growth, as
did the entrance ofthe baby boomers into the work force.[10] See:
Spendingwave
4 Negative eectsA number of arguments have been raised against
eco-nomic growth.[72]
4.1 Resource depletionSee also: Energy returned on energy
invested
Many earlier predictions of resource depletion, such asThomas
Malthus' 1798 predictions about approachingfamines in Europe, The
Population Bomb (1968),[73][74]and the SimonEhrlich wager (1980)
[75] have not ma-terialized. Diminished production of most
resources hasnot occurred so far, one reason being that
advancementsin technology and science have allowed some
previously
-
6 4 NEGATIVE EFFECTS
unavailable resources to be produced.[75] In some
cases,substitution of more abundant materials, such as plasticsfor
cast metals, lowered growth of usage for some metals.In the case of
the limited resource of land, famine was re-lieved rstly by the
revolution in transportation caused byrailroads and steam ships,
and later by the Green Revolu-tion and chemical fertilizers,
especially the Haber processfor ammonia synthesis.[76][77]
0
2
4
6
8
10
12
14
1850 1900 1950 2000 2050 2100 2150 2200
Pro
duct
ion
(10
9 bb
ls/y
r)
Year
90x10 9 bbls
cumulative production
250x10 9 bbls proven reserves
Future discoveries 910x10 9 bbls
M. King Hubbert's prediction of world petroleum productionrates.
Virtually all economic sectors rely heavily on petroleum.
In the case of minerals, lower grades of mineral resourcesare
being extracted, requiring higher inputs of capital andenergy for
both extraction and processing.[78] An exampleis natural gas from
shale and other low permeability rock,which can be developed with
much higher inputs of en-ergy, capital, and materials than
conventional gas in pre-vious decades. Another example is oshore
oil and gas,which has exponentially increasing cost as water
depthincreases.
4.2 Environmental impact
See also: The Limits to GrowthCritics such as the Club of Rome
argue that a narrow
Forest in Indonesia being cut for palm oil plantation.
view of economic growth, combined with globalization,
is creating a scenario where we could see a systemic col-lapse
of our planets natural resources.[79][80]
Concerns about possible negative eects of growth onthe
environment and society led some to advocate lowerlevels of growth.
This led to the ideas of uneconomicgrowth and de-growth and Green
parties that argue thateconomies are part of a global society and
global ecology,and cannot outstrip their natural growth without
damag-ing those.Those more optimistic about the environmental
impactsof growth believe that, though localized environmentaleects
may occur, large-scale ecological eects are mi-nor. The argument,
as stated by commentator Julian Lin-coln Simon, states that if
these global-scale ecological ef-fects exist, human ingenuity will
nd ways to adapt tothem.[81]
4.2.1 Implications of global warming
see Economics of global warming
Up to the present there are close correlations of economicgrowth
with carbon dioxide emissions across nations, al-though there is
also a considerable divergence in carbonintensity (carbon emissions
per GDP).[82] Globally, TimGarrett observes that the emissions rate
is directly relatedto the historical accumulation of economic
wealth.[83]The Stern Review notes that the prediction that, Un-der
business as usual, global emissions will be sucientto propel
greenhouse gas concentrations to over 550ppmCO2 by 2050 and over
650700ppm by the end of thiscentury is robust to a wide range of
changes in modelassumptions. The scientic consensus is that
planetaryecosystem functioning without incurring dangerous
risksrequires stabilization at 450550 ppm.[84]
As a consequence, growth-oriented environmentaleconomists
propose massive government interventioninto switching sources of
energy production, favouringwind, solar, hydroelectric, and
nuclear. This wouldlargely conne use of fossil fuels to either
domesticcooking needs (such as for kerosene burners) or wherecarbon
capture and storage technology can be cost-eective and
reliable.[85] The Stern Review, publishedby the United Kingdom
Government in 2006, concludedthat an investment of 1% of GDP (later
changed to2%) would be sucient to avoid the worst eects ofclimate
change, and that failure to do so could riskclimate-related costs
equal to 20% of GDP. Becausecarbon capture and storage is as yet
widely unproven,and its long term eectiveness (such as in
containingcarbon dioxide 'leaks) unknown, and because of
currentcosts of alternative fuels, these policy responses
largelyrest on faith of technological change.On the other hand,
British conservative politician andjournalist Nigel Lawson claimed
that people in a hundredyears time would be seven times as well o
as we are to-
-
6.3 Endogenous growth theory 7
day, therefore it is not reasonable to impose sacrices onthe
much poorer present generation.[86]
5 Physical constraints on growthSome physical scientists like Al
Bartlett regard continu-ous economic growth as
unsustainable.[87][88] Several fac-tors may constrain economic
growth - for example: nite,peaked, or depleted resources.In 1972,
the The Limits to Growth study modeled lim-itations to innite
growth; originally ridiculed,[73][74][89]these models have been
validated and updated.[90][91][92]
SomeMalthusians, such as William R. Catton, Jr., authorof the
1980 book Overshoot, express skepticism of theidea that various
technological advancements will makepreviously inaccessible or
lower-grade resources moreavailable. Such advances and increases in
eciency, theysuggest, merely accelerate the drawing down of
niteresources. Catton refers to the contemporary increasesin rates
of resource extraction as, "...stealing ravenouslyfrom the
future.[93]
6 Theories and models
6.1 Classical growth theoryIn classical (Ricardian) economics,
the theory of produc-tion and the theory of growth are based on the
theory orlaw of variable proportions, whereby increasing either
ofthe factors of production (labor or capital), while holdingthe
other constant and assuming no technological change,will increase
output, but at a diminishing rate that even-tually will approach
zero. These concepts have their ori-gins in Thomas Malthuss
theorizing about agriculture.Malthuss examples included the number
of seeds har-vested relative to the number of seeds planted
(capital)on a plot of land and the size of the harvest from a
plotof land versus the number of workers employed.[94]
See:Diminishing returnsCriticisms of classical growth theory are
that technology,the most important factor in economic growth, is
heldconstant and that economies of scale are ignored.[95]
6.2 Solow-Swan modelRobert Solow[96] and Trevor Swan[97]
developed whateventually became the main model used in growth
eco-nomics in the 1950s. This model assumes that there
arediminishing returns to capital and labor. Capital accumu-lates
out of saving but its level per worker decreases dueto depreciation
and population growth. As a result of di-minishing returns to
capital economies eventually reacha point where, absent
technological progress, capital per
workers remains constant and economic growth ceases.This point
is called a steady state.The model also notes that countries can
overcome thissteady state and continue growing by using new
technol-ogy. In the long run, output per capita depends on therate
of saving, but the rate of output growth is indepen-dent of the
saving rate. The process by which countriescontinue growing despite
the diminishing returns is ex-ogenous and represents the creation
of new technologythat allows production with fewer resources.
Technologyimproves, the steady state level of capital increases,
andthe country invests and grows. One important predictionof the
model, mostly borne out by the data, is that of con-ditional
convergence ; the idea that poor countries willgrow faster and
catch up with rich countries as long asthey have similar saving
rates and technology.A major shortcoming of the approach is that it
does notexplain the sources of technological change.
6.3 Endogenous growth theory
Main article: Endogenous growth theory
Growth theory advanced again with theories of economistPaul
Romer and Robert Lucas, Jr. in the late 1980s andearly
1990s.Unsatised with the assumption of exogenous techno-logical
progress in the Solow-Swan model, economistsworked to endogenize
technology in the 1980s.They developed the endogenous growth theory
thatincludes a mathematical explanation of
technologicaladvancement.[98][99] This model also incorporated a
newconcept of human capital, the skills and knowledge thatmake
workers productive. Unlike physical capital, hu-man capital has
increasing rates of return. Researchdone in this area has focused
on what increases humancapital (e.g. education) or technological
change (e.g.innovation).[100]
6.4 Unied growth theory
Unied growth theory was developed by Oded Galorand his
co-authors to address the inability of endogenousgrowth theory to
explain key empirical regularities in thegrowth processes of
individual economies and the worldeconomy as a whole. Endogenous
growth theory was sat-ised with accounting for empirical
regularities in thegrowth process of developed economies over the
last hun-dred years. As a consequence, it was not able to
explainthe qualitatively dierent empirical regularities that
char-acterized the growth process over longer time horizons inboth
developed and less developed economies. Uniedgrowth theories are
endogenous growth theories that areconsistent with the entire
process of development, andin particular the transition from the
epoch of Malthusian
-
8 6 THEORIES AND MODELS
stagnation that had characterized most of the process
ofdevelopment to the contemporary era of sustained eco-nomic
growth.[101]
6.5 The big pushOne popular theory in the 1940s was the Big
Push, whichsuggested that countries needed to jump from one stage
ofdevelopment to another through a virtuous cycle, in whichlarge
investments in infrastructure and education cou-pled with private
investments would move the economyto a more productive stage,
breaking free from economicparadigms appropriate to a lower
productivity stage.[102]The idea was revived and formulated
rigorously, in thelate 1980s byKevinMurphy, Andrei Schleifer
andRobertVishny.[103]
6.6 Schumpeterian growthSchumpeterian growth is an economic
theory named af-ter the 20th-century Austrian economist Joseph
Schum-peter. The approach explains growth as a consequenceof
innovation and a process of creative destruction thatcaptures the
dual nature of technological progress: interms of creation,
entrepreneurs introduce new productsor processes in the hope that
they will enjoy temporarymonopoly-like prots as they capture
markets. In doingso, they make old technologies or products
obsolete. Thiscan be seen as an annulment of previous
technologies,which makes them obsolete, and "...destroys the
rentsgenerated by previous innovations. (Aghion 855)[104] Amajor
model that illustrates Schumpeterian growth is theAghion-Howitt
model.[105]
6.7 Institutions and growthAccording to Acemolu, Simon Johnson
and JamesRobinson, the positive correlation between high incomeand
cold climate is a by-product of history. Europeansadopted very
dierent colonization policies in dierentcolonies, with dierent
associated institutions. In placeswhere these colonizers faced high
mortality rates (e.g.,due to the presence of tropical diseases),
they could notsettle permanently, and they were thus more likely to
es-tablish extractive institutions, which persisted after
inde-pendence; in places where they could settle permanently(e.g.
those with temperate climates), they established in-stitutions with
this objective in mind and modeled themafter those in their
European homelands. In these 'neo-Europes better institutions in
turn produced better de-velopment outcomes. Thus, although other
economistsfocus on the identity or type of legal system of the
col-onizers to explain institutions, these authors look at
theenvironmental conditions in the colonies to explain
insti-tutions. For instance, former colonies have inherited
cor-rupt governments and geo-political boundaries (set by the
colonizers) that are not properly placed regarding the
ge-ographical locations of dierent ethnic groups, creatinginternal
disputes and conicts that hinder development.In another example,
societies that emerged in colonieswithout solid native populations
established better prop-erty rights and incentives for long-term
investment thanthose where native populations were large.[106]
6.8 Human capital and growth
One ubiquitous element of both theoretical and empir-ical
analyses of economic growth is the role of humancapital. The skills
of the population enter into both neo-classical and endogenous
growth models.[107] The mostcommonly used measure of human capital
is the level ofschool attainment in a country, building upon the
data de-velopment of Robert Barro and Jong-Wha Lee.[108]
Thismeasure of human capital, however, requires the
strongassumption that what is learned in a year of schooling isthe
same across all countries. It also presumes that hu-man capital is
only developed in formal schooling, con-trary to the extensive
evidence that families, neighbor-hoods, peers, and health also
contribute to the develop-ment of human capital. To measure human
capital moreaccurately, Eric Hanushek and Dennis Kimko
introducedmeasures of mathematics and science skills from
interna-tional assessments into growth analysis.[109] They
foundthat quality of human capital was very signicantly re-lated to
economic growth. This approach has been ex-tended by a variety of
authors, and the evidence indicatesthat economic growth is very
closely related to the cogni-tive skills of the
population.[110]
6.9 Energy consumption and eciencytheories
For more details on Energy eciency, see Productivityimproving
technologies (historical) Energy eciency.
Energy economic theories emphasize the role of energyconsumption
and energy eciency as important histori-cal causes of economic
growth. Increases in energy ef-ciency were a portion of the
increase in Total factorproductivity.[14] Some of the most
technologically im-portant innovations in history involved
increases in en-ergy eciency. These include the great
improvementsin eciency of conversion of heat to work, the reuse
ofheat, the reduction in friction and the transmission ofpower,
especially through electrication.[111][112] Elec-tricity
consumption and economic growth are stronglycorrelated.[113] Per
capita electric consumption corre-lates almost perfectly with
economic development.[114]
-
97 See also Degrowth Export-oriented industrialization Growth
accounting List of countries by real GDP growth rate
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12 9 FURTHER READING
[98] D. Romer, 1986
[99] Lucas, 1988
[100] Elhanah Helpman, The Mystery of Economic Growth,Harvard
University Press, 2004.
[101] Galor O., 2005, From Stagnation to Growth: UniedGrowth
Theory. Handbook of Economic Growth, Else-vier
[102] Paul Rosenstein-Rodan
[103]
[104] Quote from Philippe Aghion, 2002, SchumpeterianGrowth
Theory and the Dynamics of Income Inequality,Econometrica, 70(3),
855882. Also see Wendy Carlin and David Soskice,
2006,Macroeconomics: Imperfections, Institutions &
Policies,specically chapter 14.
[105] Philippe Aghion and Peter Howitt, 1992, A Modelof Growth
Through Creative Destruction, Econometrica,60(2), 323351. Philippe
Aghion, 2002, Schumpeterian Growth Theoryand the Dynamics of Income
Inequality, Econometrica,70(3), 855882.
[106] Daron Acemolu, Simon Johnson and James A.Robinson.The
Colonial Origins of Comparative Develop-ment: An Empirical
Investigation. American EconomicReview 91(5): 1369401. 2001.
[107] Mankiw, N. Gregory, David Romer, and David Weil.1992. A
contribution to the empirics of economicgrowth. Quarterly Journal
of Economics 107, no. 2(May): 407437 Sala-i-Martin, Xavier, Gernot
Doppelhofer, and RonaldI. Miller. 2004. Determinants of long-term
growth: ABayesian Averaging of Classical Estimates (BACE)
ap-proach. American Economic Review 94, no. 4 (Septem-ber): 813835.
LudRomer, Paul. 1990. Human capital and growth:Theory and evidence.
Carnegie-Rochester ConferenceSeries on Public Policy 32:
251286.
[108] Barro, Robert J., and Jong-Wha Lee. 2001. Interna-tional
data on educational attainment: Updates and impli-cations. Oxford
Economic Papers 53, no. 3 (July): 541563.
[109] Hanushek, Eric A., and Dennis D. Kimko. 2000.Schooling,
labor force quality, and the growth of na-tions. American Economic
Review 90, no. 5 (December):11841208
[110] Hanushek, Eric A., and Ludger Woessmann. 2008.The role of
cognitive skills in economic development.Journal of Economic
Literature 46, no. 3 (September):607668 . Hanushek, Eric A., and
Ludger Woessmann. 2011.How much do educational outcomes matter in
OECDcountries?" Economic Policy, 26, no. 67: 427491.
[111] Landes, David. S. (1969). The Unbound
Prometheus:Technological Change and Industrial Development
inWestern Europe from 1750 to the Present. Cambridge,New York:
Press Syndicate of the University of Cam-bridge. pp. 289, 293. ISBN
0-521-09418-6.
[112] Devine, Jr., Warren D. (1983). From Shafts to
Wires:Historical Perspective on Electrication, Journal of Eco-nomic
History, Vol. 43, Issue 2 (PDF). p. 355.
[113] Committee on Electricity in Economic Growth En-ergy
Engineering Board Commission on Engineering andTechnical Systems
National Research Council (1986).Electricity in Economic Growth.
Washington, DC: Na-tional Academy Press. pp. 16, 40. ISBN
0-309-03677-1
[114] Paepke, C. Owen (1992). The Evolution of Progress: TheEnd
of Economic Growth and the Beginning of HumanTransformation. New
York, Toronto: Random House. p.109. ISBN 0-679-41582-3.
9 Further reading Argyrous, G., Forstater, M and Mongiovi, G.
(eds.)(2004) Growth, Distribution, And Eective Demand:Essays in
Honor of Edward J. Nell. NewYork: M.E.Sharpe.
Barro, Robert J. (1997) Determinants of EconomicGrowth: A
Cross-Country Empirical Study. MITPress: Cambridge, MA.
Galor, O. (2005) From Stagnation to Growth: Uni-ed Growth
Theory. Handbook of EconomicGrowth, Elsevier.
Grier, Kevin (2008). Empirics of Economic Growth.The Concise
Encyclopedia of Economics (2nd ed.).Library of Economics and
Liberty. ISBN 978-0865976658. OCLC 237794267.
Halevi, Joseph; Laibman, David and Nell, EdwardJ. (eds.) (1992)
Beyond the Steady State: Essays inthe Revival of Growth Theory,
edited with, London,UK:
Hueting, Roe (2011) The future of the Environ-mentally
sustainable national income. kologischesWirtschaften, 4/2011,
30-35
Jones, Charles I. (2002) Introduction to EconomicGrowth 2nd ed.
W. W. Norton & Company: NewYork, N.Y.
Kirzner, Israel. (1973) Competition and En-trepreneurship
Lucas, Robert E., Jr. (2003) The Industrial Revo-lution: Past
and Future, Federal Reserve Bank ofMinneapolis, Annual Report
online edition
-
10.2 Data 13
Mises, Ludwig E. (1949) Human Action 1998reprint by the Mises
Institute
Paepke, C. Owen. The Evolution of Progress: TheEnd of Economic
Growth and the Beginning of Hu-man Transformation. New York,
Toronto: RandomHouse. ISBN 0-679-41582-3.
Puthenkalam, John Joseph, Integrating Freedom,Democracy and
Human Rights into Theories ofEconomic Growth, Manila, 1998.
Romer, Paul M. (2008). Economic Growth. TheConcise Encyclopedia
of Economics (2nd ed.).Library of Economics and Liberty. ISBN
978-0865976658. OCLC 237794267.
Schumpeter, Jospeph A. (1912) The Theory of Eco-nomic
Development 1982 reprint, Transaction Pub-lishers
VladimirN. Pokrovskii (2011)Econodynamics. TheTheory of Social
Production, Springer, Berlin.
Weil, David N. (2008) Economic Growth 2nd ed.Addison Wesley.
10 External links
10.1 Articles and lectures Economic growth. Encyclopdia
Britannic.2007. Encyclopdia Britannica Online. 17November 2007.
Beyond Classical and Keynesian MacroeconomicPolicy. Paul Romer's
plain-English explanation ofendogenous growth theory.
Does Economic Growth increase Living Standards? CEPR Economics
Seminar Series Two seminars onthe importance of growth with
economists DeanBaker and Mark Weisbrot
On global economic history by Jan Luiten van Zan-den. Explores
the idea of the inevitability of the In-dustrial Revolution.
The Economist Has No Clothes essay by RobertNadeau in Scientic
American on the basic assump-tions behind current economic
theory
World Growth Institute. An organization dedicatedto helping the
developing world realize its full po-tential via economic
growth.
Economics for Everyone- Evaluating EconomicGrowth
Understanding the world today Multiple reports oneconomic
growth
Research and Degrowth network Academic associ-ation dedicated to
research, awareness raising, andevents organization around the
topic of degrowth.
10.2 Data Angus Maddisons Historical Dataseries Series foralmost
all countries on GDP, Population and GDPper capita from the year 0
up to 2003
OECD Economic growth statistics multinational data sets easy to
use data set showinggdp, per capita and population, by country and
re-gion, 1970 to 2008. Updated regularly.
-
14 11 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES
11 Text and image sources, contributors, and licenses11.1
Text
Economic growth Source:
http://en.wikipedia.org/wiki/Economic_growth?oldid=665667560
Contributors: Mav, Tarquin, Youssefsan,Enchanter, SimonP,
Quasar~enwiki, Edward, Michael Hardy, Modster, Kku, Gabbe, Extro,
Notheruser, Kingturtle, Mydogategodshat,Charles Matthews, Viz,
Dysprosia, Wik, Tpbradbury, Philopp, Fvw, Pakaran, Phil Boswell,
Robbot, Korath, Geordieandy, Meelar, Spell-Bott, Alan Liefting,
David Gerard, Stirling Newberry, Nikodemos, Everyking, Andris,
Guanaco, Khalid hassani, Jackol, Bobblewik,Wmahan, Andycjp,
Jdevine, Beland, Phil Sandifer, The Land, Gsociology, Sam Hocevar,
Klemen Kocjancic, Discospinster, Mani1,Stereotek, Bender235,
Jensbn, Mwanner, RoyBoy, Cretog8, Per Olofsson, BrokenSegue,
Giraedata, Jerryseinfeld, Nk, Rajah, AppleJug-gler, Alansohn, Andy
L, John Quiggin, Martinship, DreamGuy, Sciurin, Guo, Dennis
Bratland, Ultramarine, Oleg Alexandrov, Bobrayner,Woohookitty,
Bluemoose, DL5MDA, Driftwoodzebulin, Sapin~enwiki,
ArchCarrier~enwiki, Rjwilmsi, Bob A, Yamamoto Ichiro,
Naraht,RobertG, Old Moonraker, LAk loho, RexNL, DaGizza, Volunteer
Marek, Bgwhite, Clinton Boys, Wjfox2005, Shaggyjacobs, Yurik-Bot,
Wavelength, RobotE, Hairy Dude, RussBot, Polluxian, Gaius
Cornelius, Morphh, Afelton, NawlinWiki, Fabhcn, Grafen,
Voyevoda,Mhartl, Thiseye, Daniel Mietchen, Odddmonster, Lajiri,
PhilipO, Farmanesh, Obey, Aaron Schulz, M3taphysical, Fenrith, CLW,
Lapafrax,Maunus, Leptictidium, Closedmouth, Arthur Rubin, Spliy,
Martinku, AndrewWTaylor, Erik Sandberg, SmackBot, YellowMonkey,
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