Economic Growth & Development Structure

This Chapter provides an introduction to economic growth and development, seeking to clarify the nature of the Gross Domestic Product (GDP) and how this is used as a comparative measure of growth. The concept of “purchasing power parity” (PPP) is also defined, noting the importance of considering how cost of living factors within different national/regional contexts are likely to shape such GDP comparisons.

The basic tenets of short term economic growth are discussed, outlining how actual growth is the percentage annual increase in national output actually produced, whilst potential growth refers to the speed at which the economy could grow. This review introduces the reader to the concept of the output gap and the importance of understanding the difference between actual and potential output when considering growth. They way in which short-term growth fluctuations can be attributed to aggregate demand is examined, explaining how aggregate demand is comprised of consumption, investment, Government spending and exports less imports. This provides some clarification around the issues likely to sustain long-term growth emphasizing how potential output must increase. If this does not occur, then actual output will only rise to levels that utilise spare capacity.

The Chapter also explores the impact of human factors and how these have economic impacts. Issues such a social stability, population growth and immigration are highlighted, along with the impact of new and emerging technologies in economic terms. The concept of diminishing returns is explained (where a single factor of production expands in supply whilst others remain fixed) clarifying the importance of trying to secure increases across the components of production if development and growth are to be maintained. 

The Chapter introduces the Solow Growth Model (Solow, 1956) to illustrate how growth can occur from individual savings, investment and productivity, assuming a closed economy with no government expenditure affecting GDP. Having considered the basic tenets, the Chapter then suggests a further consideration of the Solow-Swan model (Swan, 1956) which seeks to address the economic complexities introduced by technology.

Endogenous growth theory is also outlined to emphasise how knowledge, innovation and increases in personal productivity (through education, perfection of technological skills and processes) are significant contributors to economic growth. This then provides the basis to examine the AK model which seeks to capture the importance of new technologies, labor productivity and efficiency. The Chapter notes how sustained economic growth required a process of continual transformation, with the Industrial Revolution cited as the clearest example. The importance of entrepreneurs in sustaining the innovation and drive required to deliver this transformation is emphasised.

The concept of economic development (improving national economic efficiency) is also introduced in the Chapter. This provides the context to examine the importance of trade policies, income/wealth inequality and comparative measures between national economies. The importance of effective national and international institutions is considered to be a key determinant, since lower costs of social cooperation and doing business tend to lead to greater economic growth and development. Growth benefits and costs are also summarised.


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