Concept of Economic Growth

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This paper would seek to analyze an important concept; economic growth by examining its causes and the methods which are used by different governments in order to achieve this desirable goal. Different economic theories and models were examined in order to understand the means of achieving growth and in order to sustain that growth.

Economic growth is used to define the different activities which are undertaken by government and market forces in order to increase the national output level along with the overall state of development. The methods which are employed in order to do so vary from country to country. Development is a term that can be used to explain the way the resources are put to efficient use as the greater the positive usage of resources; the more the state of development.

Economic growth is normally perceived to be of a positive nature by people while in reality, it can be negative and positive. In a situation of falling output in a certain fiscal period along with other economic indicators such as employment, negative economic growth is said to be taking place. The output is measured by the Gross National Product of countries and hence, this figure is said to be a telling feature of any economy’s health. The higher the Gross National Product (GNP), the higher is the economic growth.

As for standards of living, they are also defined by GNP as greater output is used to indicate greater availability of the required goods and services to the general population. Ibn Khaldun; an Arabian economic analyst, provided an outline of economic growth;

When civilization [population] increases, the available labor again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase. Crafts are created to obtain luxury products. The value realized from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before. And so it goes with the second and third increase. All the additional labor serves luxury and wealth, in contrast to the original labor that served the necessity of life. (Khaldun,1995)

There are many theories that can be used to explain how growth takes place and the way governments make use of natural resources to effectively do so. The Classical growth theory propagated the notion that by developing the productive capacity, the government was effectively increasing its national wealth. This concept was highlighted in one of the most famous books to be ever written regarding economics; Wealth of Nations by Adam Smith.

Another famous economist, David Ricardo, stressed the importance of international trade as he believed that by establishing trade links countries could strongly benefit from comparative advantage, and gains from trade could be achieved. This concept of “Free Trade” has taken the global economy by storm.

It has resulted in Free Trade zones being established along with agreements being signed in order to allow different economies to benefit from trade benefits at lower costs. However, criticism still prevails as some belief it to favor the more developed nations in comparison to the developing nations (Jorgenson & Khuong,2005)

Another economic thinker; Joseph Schumpeter strongly asserted the importance of entrepreneurship as the way to achieve economic growth. According to this theory, through the process of creative destruction, the innovators would constantly strive to seek improvements and develop further. This very process of development and further development would allow a keen sense of competition amongst the varying people to effectively make use of resources and overall seek a higher level of output through efficient production means. Hence, allowing investment to take place in such areas would be putting it to the most efficient usage. (Schumpeter, 1942).

Another model which is more recent is the neo-classical growth model which states the relationship between the different resources. This theory asserts the importance of technological development as by doing so, the countries would be able to make more effective usage of third resources and produce more. This theory has three basic principles which state that as capital usage is increased, the economies benefit from higher returns, while those countries which are not as economically developed with be able to achieve even greater efficiency due to previous low levels of efficient usage. However, this theory highlights a state defined as a steady-state according to which the further development of capital would not result in more economic growth. (Helpman,2004)

However, if new technological methods were to be introduced that could allow the economies to overcome the issue of steady-state and achieve even more economic growth. Hence, the importance is clearly attached to a technological method and to what extent countries are able to achieve this. The more the countries stress on developing technological resources, the more growth would take place but this cannot be said to be the same rule for all countries. The differences in economic strength result in different technological achievements and hence, different levels of economic growth. While this theory does outline an important resource concern, what needs to be equally focused on is the rate of investment and human capital. These two factors hold equal importance in achieving economic growth.

One of the economic think-tanks of Harvard University, Dale Jorgenson, recently concluded that:

‘Griliches and I showed that changes in the quality of capital and labor inputs and the quality of investment goods explained most of the Solow residual. We estimated that capital and labor inputs accounted for 85 percent of growth during the period 1945–1965, while only 15 percent would be attributed to productivity growth… This has precipitated the sudden obsolescence of earlier productivity research employing the conventions of Kuznets and Solow”. (Jorgenson & Khuong,2005)

In the recent decade, another important concept has been given birth to; one which focuses more on the standards of developing economies and the concept of development economics as opposed to mere focus only on capitalistic-based economics.

Another famous theory to have come about in the recent decade; Endogenous economic theory focused on the idea of technological development but was more developed than the neoclassical model as it focused equally on human capital development through means to develop human skills and knowledge. It was discovered that human capital is always growing and does not have limits unlike other forms of capital and hence, by focusing on this particular form, economic growth would be a certainty. Thereby, explaining the recent development of the “service-based” industries around the globe and especially in the case of the more developed nations. (Solow,1956)

In conclusion, it can be seen that though there is a number of economic theories which provide the basic outline to achieving economic growth, what has to be seen is that whether the specific country’s resources are suited to doing that and which possible method would be most suited. For example, in the lesser developed countries, technological development would be more difficult to achieve than in the developed countries and hence, their economic growth priorities would also differ.

References

Khaldun, Muqaddimah (1995), “Ibn Khaldun on Economic Transformation”, International Journal of Middle East Studies 27 (1), p. 29-37

Jorgenson,D & Khuong Vu(2005) ‘Information Technology and the World Economy’, Scandinavian Journal of Economics

Schumpeter, J (1942). “Capitalism, Socialism, and Democracy” Harper Perennial.

Helpman,E(2004)” The Mystery of Economic Growth” Harvard University Press.

Solow,R (1956), “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics, 70(1), pp. 65-94.

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Concept of Economic Growth

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