Economic growth
In economics, economic growth is an increase in the quantity and quality of the economic goods and services that a society produces. It can be measured as the increase in the inflation-adjusted output of an economy in a given year or over a period of time.
The rate of growth is typically calculated as real gross domestic product growth rate, real GDP per capita growth rate or GNI per capita growth. The "rate" of economic growth refers to the geometric annual rate of growth in GDP or GDP per capita between the first and the last year over a period of time. This growth rate represents the trend in the average level of GDP over the period, and ignores any fluctuations in the GDP around this trend. Growth is usually calculated in "real" value, which is inflation-adjusted, to eliminate the distorting effect of inflation on the prices of goods produced. GDP per capita is the GDP of the entire country divided by the number of people in the country. Measurement of economic growth uses national income accounting.
Economists refer to economic growth caused by more efficient use of inputs as intensive growth. In contrast, economic growth caused only by increases in the amount of inputs available for use counts as extensive growth. Innovation also generates economic growth. In the U.S. about 60% of consumer spending in 2013 went on goods and services that did not exist in 1869.
Determinants of economic growth
In national income accounting, per capita output can be calculated using the following factors: output per unit of labor input, hours worked, the percentage of the working-age population actually working and the proportion of the working-age population to the total population. "The rate of change of GDP/population is the sum of the rates of change of these four variables plus their cross products."Short-term economic changes happen around long-term changes, though they are unpredictable. Recessions may occur, causing GDP to fall, along with productivity, causing unemployment to rise.
Productivity
Increases in labor productivity have historically been the most important source of real per capita economic growth. In a famous estimate, MIT Professor Robert Solow concluded that technological progress has accounted for 80 percent of the long-term rise in U.S. per capita income, with increased investment in capital explaining only the remaining 20 percent.Increases in productivity lower the real cost of goods. Over the 20th century, the real price of many goods fell by over 90%.
Economic growth has traditionally been attributed to the accumulation of human and physical capital and the increase in productivity and creation of new goods arising from technological innovation. Further division of labour is also fundamental to rising productivity.
Before industrialization, technological progress resulted in an increase in the population, which was kept in check by food supply and other resources, which acted to limit per capita income, a condition known as the Malthusian trap. The rapid economic growth that occurred during the Industrial Revolution was remarkable because it was in excess of population growth, providing an escape from the Malthusian trap. Countries that industrialized eventually saw their population growth slow down, a phenomenon known as the demographic transition.
Increases in productivity are the major factor responsible for per capita economic growth—this has been especially evident since the mid-19th century. Most of the economic growth in the 20th century was due to increased output per unit of labor, materials, energy, and land. The balance of the growth in output has come from using more inputs. Both of these changes increase output. The increased output included more of the same goods produced previously and new goods and services.
During the Industrial Revolution, mechanization began to replace hand methods in manufacturing, and new processes streamlined production of chemicals, iron, steel, and other products. Machine tools made the economical production of metal parts possible, so that parts could be interchangeable.
During the Second Industrial Revolution, a major factor of productivity growth was the substitution of inanimate power for human and animal labor. Also there was a great increase in power as steam-powered electricity generation and internal combustion supplanted limited wind and water power. Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency. Other major historical sources of productivity were automation, transportation infrastructures, new materials and power, which includes steam and internal combustion engines and electricity. Other productivity improvements included mechanized agriculture and scientific agriculture including chemical fertilizers and livestock and poultry management, and the Green Revolution. Interchangeable parts made with machine tools powered by electric motors evolved into mass production, which is universally used today.
File:Cost of chicken in time worked.jpg|thumb|upright=1.4|right|Productivity lowered the cost of most items in terms of work time required to purchase. Real food prices fell due to improvements in transportation and trade, mechanized agriculture, fertilizers, scientific farming and the Green Revolution.
Great sources of productivity improvement in the late 19th century were railroads, steam ships, horse-pulled reapers and combine harvesters, and steam-powered factories. The invention of processes for making cheap steel were important for many forms of mechanization and transportation. By the late 19th century both prices and weekly work hours fell because less labor, materials, and energy were required to produce and transport goods. However, real wages rose, allowing workers to improve their diet, buy consumer goods and afford better housing.
Mass production of the 1920s created overproduction, which was arguably one of several causes of the Great Depression of the 1930s. Following the Great Depression, economic growth resumed, aided in part by increased demand for existing goods and services, such as automobiles, telephones, radios, electricity and household appliances. New goods and services included television, air conditioning and commercial aviation, creating enough new demand to stabilize the work week. The building of highway infrastructures also contributed to post-World War II growth, as did capital investments in manufacturing and chemical industries. The post-World War II economy also benefited from the discovery of vast amounts of oil around the world, particularly in the Middle East. By John W. Kendrick's estimate, three-quarters of increase in U.S. per capita GDP from 1889 to 1957 was due to increased productivity.
Economic growth in the United States slowed down after 1973. In contrast, growth in Asia has been strong since then, starting with Japan and spreading to Four Asian Tigers, China, Southeast Asia, the Indian subcontinent and Asia Pacific. In 1957 South Korea had a lower per capita GDP than Ghana, and by 2008 it was 17 times as high as Ghana's. The Japanese economic growth has slackened considerably since the late 1980s.
Productivity in the United States grew at an increasing rate throughout the 19th century and was most rapid in the early to middle decades of the 20th century. U.S. productivity growth spiked towards the end of the century in 1996–2004, due to an acceleration in the rate of technological innovation known as Moore's law. After 2004 U.S. productivity growth returned to the low levels of 1972–96.
Factor accumulation
Capital in economics ordinarily refers to physical capital, which consists of structures and equipment used in business. Up to a point increases in the amount of capital per worker are an important cause of economic output growth. Capital is subject to diminishing returns because of the amount that can be effectively invested and because of the growing burden of depreciation. In the development of economic theory, the distribution of income was considered to be between labor and the owners of land and capital. In recent decades there have been several Asian countries with high rates of economic growth driven by capital investment.The work week declined considerably over the 19th century. By the 1920s the average work week in the U.S. was 49 hours, but the work week was reduced to 40 hours as part of the National Industrial Recovery Act of 1933.
Demographic factors may influence growth by changing the employment to population ratio and the labor force participation rate. Industrialization creates a demographic transition in which birth rates decline and the average age of the population increases.
Women with fewer children and better access to market employment tend to join the labor force in higher percentages. There is a reduced demand for child labor and children spend more years in school. The increase in the percentage of women in the labor force in the U.S. contributed to economic growth, as did the entrance of the baby boomers into the workforce.
Conventional growth domain
It has been observed that GDP growth is influenced by the size of the economy. The relation between GDP growth and GDP across the countries at a particular point of time is convex. Growth increases as GDP reaches its maximum and then begins to decline. There exists some extremum value. This is not exactly middle-income trap. It is observed for both developed and developing economies. Actually, countries having this property belong to conventional growth domain. However, the extremum could be extended by technological and policy innovations and some countries move into innovative growth domain with higher limiting values.Human capital
Many theoretical and empirical analyses of economic growth attribute a major role to a country's level of human capital, defined as the skills of the population or the work force. Human capital has been included in both neoclassical and endogenous growth models.A country's level of human capital is difficult to measure since it is created at home, at school, and on the job. Economists have attempted to measure human capital using numerous proxies, including the population's level of literacy, its level of numeracy, its level of book production/capita, its average level of formal schooling, its average test score on international tests, and its cumulative depreciated investment in formal schooling. The most commonly used measure of human capital is the level of school attainment in a country, building upon the data development of Robert Barro and Jong-Wha Lee. This measure is widely used because Barro and Lee provide data for numerous countries in five-year intervals for a long period of time.
One problem with the schooling attainment measure is that the amount of human capital acquired in a year of schooling is not the same at all levels of schooling and is not the same in all countries. This measure also presumes that human capital is only developed in formal schooling, contrary to the extensive evidence that families, neighborhoods, peers, and health also contribute to the development of human capital. Despite these potential limitations, Theodore Breton has shown that this measure can represent human capital in log-linear growth models because across countries GDP/adult has a log-linear relationship to average years of schooling, which is consistent with the log-linear relationship between workers' personal incomes and years of schooling in the Mincer model.
Eric Hanushek and Dennis Kimko introduced measures of students' mathematics and science skills from international assessments into growth analysis. They found that this measure of human capital was very significantly related to economic growth. Eric Hanushek and Ludger Wößmann have extended this analysis. Theodore Breton shows that the correlation between economic growth and students' average test scores in Hanushek and Wößmann's analyses is actually due to the relationship in countries with less than eight years of schooling. He shows that economic growth is not correlated with average scores in more educated countries. Hanushek and Wößmann further investigate whether the relationship of knowledge capital to economic growth is causal. They show that the level of students' cognitive skills can explain the slow growth in Latin America and the rapid growth in East Asia.
Joerg Baten and Jan Luiten van Zanden employ book production per capita as a proxy for sophisticated literacy capabilities and find that "Countries with high levels of human capital formation in the 18th century initiated or participated in the industrialization process of the 19th century, whereas countries with low levels of human capital formation were unable to do so, among them many of today's Less Developed Countries such as India, Indonesia, and China."