Literature review
Classical Theory of Economic Growth
Harrod Domar Growth Model
The Neoclassical growth Model
Empirical literature
2.1 Theoretical Literature
The long history of ideas on economic growth started from the classical economists like Adam Smith, Robert Malthus, Ricardo and Marx. For more than three decades the Neoclassical and the Endogenous Growth theories were arguing and forwarding economic reasons on trend of economic growth through investment as a general and private investment in particular. Though there are various theories, as mentioned above, regarding economic growth, in this section we will address the most commonly applied models: the classical theory of economic growth, Harrod–domar Growth model, The Neoclassical and Endogenous Growth Models.
2.1.1 Classical Theory of Economic Growth
The classical economists Adam Smith, David Ricardo and John Stuart Mill were primarily concerned with the dynamics of the economic growth of a capitalist economy. They argued that population growth and capital accumulation are the necessary conditions of growth (Denis and Paul, 2000). The forces of diminishing returns and technological advancements determine the pace of economic growth. Capital accumulation, which itself is determined by the rate of profits, has two effects: it creates demand for labor and it fosters technological improvements by facilitating the division of labor. The population, which tends to grow rapidly, increases the demand for food.
“The primary concern is that a world of over six billion people striving materialistic satisfaction is drawing ever more heavily from finite supplies of natural resources to fuel an economic growth model destined to lead to an ecological disaster and global poverty without precedence” (Harder and Harder 1). As Harder and Harder explain, we must find an economic way of life that is economically stable. There are many different perspectives that view economic growth in different aspects. Advocates of economic growth have a very optimistic viewpoint about the future of economic growth. “Their operational logic reflects their sense of duty to develop latent resources into their actualized state for the benefit of a global
Economic growth is a common term used by economists to describe in increase in production in the long run. According to Robinson (1972) economic growth is defined as increases in aggregate product, either total or per capita, without reference to changes in the structure of the economy or in the social and cultural value systems. The basic tool of measuring the economic growth includes the real GDP. It provides some quantitative measures in terms of the production volume.
The first key insight that I will be going over is from chapter 14 of How an Economy Grows. In this chapter we see how Peter and Andrew Schiff talk about a housing market on one of the islands often referred to. Everyone in the business of building, maintaining, and loaning money for a new hut wants to continue making money through their business. Nobody cares about the glut that is going on through hut building. Everyone just wants their money. They are being lied to by the media and hut builders and lenders that everything is fine. The key insight I took away from this is not to let the media fool you. Discernment in every aspect of life is important. Discernment is how you will be able to ignore false media news to ensure proper understanding of any given subject.
First of all, economic growth is one of the macroeconomic objectives that the government wants to achieve as a primary goal and it happens when there is a rise in the enlarged product of population and per capita consumption. According to Hoover (2011), economic growth is the total material output of good values and service values in the market, measured by Gross Domestic Product (GDP) in a specific period of time. The growth of GDP is measured by excluding intermediate consumptions (production and resale), purely financial transactions and second-hand sales, which prevents double counting. To obtain an accurate value of economic growth, GDP needs to include the total output of expenditures and incomes.
Not all aspects of economic growth are positive, for example when an economy is at, or near its full capacity of productivity prices can be driven up causing inflation and the devaluing of their currency, where each unit of currency buys fewer goods and services that it previously could have. It can increase the
Review of: Olson, Matthew S., Van Bever, Derek ,Verry, Seth. 2008. When Growth Stalls. Harvard Business Review, 51-62.
In general, the main cause for economic growth is the increase in mass demand. As the population demand for more goods and services, the more of it will be produced. Therefore, the demands will raise the level of real GDP (gross domestic product).
When a nation experiences a long-term economic growth, people have a positive attitude. There are opportunities for new jobs, new technology, and open doors for more capital for investment. The result of growth increases demand, supply, aiding the production of goods and services boosting consumers’ confidence. Economists believe the right type of growth that is stable and controllable is the best.
Economic growth is defined as an increase in the GDP and standard of living over a period of time, and as indicated by those numbers, our GDP has been pretty steady, which is why the economy is not growing. Some people may not be able to experience economic growth. For example, if a person inherits a house from a family member that passed away, they might not be able to actually enjoy that increase in the standard of living because they might experience property tax. Another indicator of economic growth is an ability to increase a person’s leisure time. With an increase in more efficient technology, output time can increase. Meaning that when it previously took eight hours to complete the day’s quota, it could now take four hours, and the workers are left with four hours to do something else, but still make the same amount of money. A third indicator of economic growth is a change in the social norms of the country. In 1920, women were given the right to vote. In the 1970’s, women started working.
In macroeconomics, a large portion of discussion is devoted to economic growth. The output of the national economy as a whole represents our average access to goods and services. The long-run growth of the recent past represents everything from increase in access to running water and electricity to development of personal computers and the Internet. In short, it describes the heightened standard of living we enjoy today. Endogenous growth theory postulates that human capital and technology are central to enabling this growth. Human capital describes the stock of knowledge, habits, and social and personality attributes, including creativity and innovative ability. Paul Romer has made significant contributions to developing endogenous growth
economic growth enables a society become more open, tolerant, and politically democratic, the societies are, in turn, more able to attract enterprise and creativity and therefore can
To start off I will begin by explaining how economic growth occurs. Economic growth occurs when there is an increase in output over time as well as the growth in the working population allows an economy to increase its output by having fewer people out of work and making an economy of full employment. For an economy to achieve this long-run growth it must have invested more in capital goods. This creates a better chance to produce more consumer goods in the long run. When doing this, living standards going down in the short run but
level of investment, capital, and productivity. This suggests that, in the long-term, an increase in
Eyeballing any cross sectional data on growth across countries shows that countries grow at different rates. Many theories try to explain this phenomenon with emphasis with capital accumulation being one of them. I will start by developing the standard neoclassical growth model as developed by Solow(1956)[1]. I will then proceed to discuss the extensions that have been made to this basic model in an attempt to better understand actual growth figures, for e.g. the standard neoclassical model cannot explain the magnitude of international differences in growth rates. Mankiw[2] points out that “the model can explain
This can be measured by the following formula; Per capita nominal GDP = Nominal GDP / Population, Per capita real GDP = Real GDP / Population. Seven factors determine economic growth. Natural resources such as land, mineral deposits, waterways; climatic conditions provide an essential foundation to economic growth. Combined with the other resources of capital, labor and enterprises, natural resources can be developed and organized to increase the productive capacity if the nation. Consequently the quality and size of the labor force is a major determinant of economic growth. Education and vocational training are essential the growth potential of a nation. The promotion of education and job training schemes increase the knowledge, skills and flexibility of the workforce that contributes to potentially higher levels of productivity and efficiency. Whether from natural increase or immigration population growth can cause a higher level of economic growth. An increasing population requires increased public spending on housing, education and other social needs while businesses expectations of