Economic growth

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.[1]

Growth is usually calculated in real terms - i.e., inflation-adjusted terms – to eliminate the distorting effect of inflation on the price of goods produced. Measurement of economic growth uses national income accounting.[2] Since economic growth is measured as the annual percent change of gross domestic product (GDP), it has all the advantages and drawbacks of that measure. The economic growth rates of nations are commonly compared using the ratio of the GDP to population or per-capita income.[3]

The "rate of economic growth" refers to the geometric annual rate of growth in GDP between the first and the last year over a period of time. This growth rate is the trend in the average level of GDP over the period, which ignores the fluctuations in the GDP around this trend.

An increase in economic growth caused by more efficient use of inputs (increased productivity of labor, physical capital, energy or materials) is referred to as intensive growth. GDP growth caused only by increases in the amount of inputs available for use (increased population, new territory) is called extensive growth.[4]

Development of new goods and services also creates economic growth.[5]

Gdp accumulated change
Gross domestic product real growth rates, 1990–1998 and 1990–2006, in selected countries.

Measuring economic growth

The economic growth rate is calculated from data on GDP estimated by countries' statistical agencies. The rate of growth of GDP per capita is calculated from data on GDP and people for the initial and final periods included in the analysis of the analyst.

Differences between Long-Term Growth between Countries and the Power of Small Changes in Growth

Living standards vary widely from country to country, and furthermore the change in living standards over time varies widely from country to country.

Below is a table which shows GDP per Person and Annualized Per Person GDP growth for a selection of countries over a period of about 100 years. The GDP per Person data are adjusted for inflation, hence they are "Real". GDP per Person (more commonly called "Per Capita" GDP) is the GDP of the entire country divided by the number of people in the country; GDP per Person is conceptually analogous to "Average Income".

Economic Growth by Country[6]
Country Period Real GDP per Person at Beginning of Period Real GDP per Person at End of Period Annualized Growth Rate
Japan 1890-2008 $1,504 $35,220 2.71%
Brazil 1900-2008 $779 $10,070 2.40%
Mexico 1900-2008 $1,159 $14,270 2.35%
Germany 1870-2008 $2,184 $35,940 2.05%
Canada 1870-2008 $2,375 $36,220 1.99%
China 1900-2008 $716 $6,020 1.99%
United States 1870-2008 $4,007 $46,970 1.80%
Argentina 1900-2008 $2,293 $14,020 1.69%
United Kingdom 1870-2008 $4,808 $36,130 1.47%
India 1900-2008 $675 $2,960 1.38%
Indonesia 1900-2008 $891 $3,830 1.36%
Pakistan 1900-2008 $737 $2,700 1.21%
Bangladesh 1900-2008 $623 $1,440 0.78%

Seemingly small differences in yearly GDP growth lead to large changes in GDP when compounded over time. For instance, in the above table, GDP per Person in the United Kingdom in the year 1870 was $4,808. At the same time in the United States, GDP per Person was $4,007, lower than the United Kingdom by about 20%.

However, in 2008 the positions were reversed: GDP per Person was $36,130 in the United Kingdom and $46,970 in the United States, i.e. GDP per Person in the United States was 30% more than it was in the United Kingdom. As the above table shows, this means that GDP per Person grew, on average, by 1.80% per year in the United States and by 1.47% in the United Kingdom.

Thus, a difference in GDP growth by only a few tenths of a percent per year results in large differences in outcomes when the growth is persistent over a generation. This and other observations have lead some economists to view GDP growth as the most important part of the field of Macroeconomics:

...if we can learn about government policy options that have even small effects on long-term growth rates, we can contribute much more to improvements in standards of living than has been provided by the entire history of macroeconomic analysis of countercyclical policy and fine-tuning. Economic growth [is] the part of macroeconomics that really matters.[7]

Determinants of per capita GDP growth

In national income accounting, per capita output can be calculated using the following factors: output per unit of labor input (labor productivity), hours worked (intensity), the percentage of the working age population actually working (participation rate) and the proportion of the working-age population to the total population (demographics). "The rate of change of GDP/population is the sum of the rates of change of these four variables plus their cross products."[8]

Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. Generally, economists attribute the ups and downs in the business cycle to fluctuations in aggregate demand. In contrast, economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation.

Productivity

Increases in labor productivity (the ratio of the value of output to labor input) have historically been the most important source of real per capita economic growth.[9][10][11][12][13] "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."[14]

Increases in productivity lower the real cost of goods. Over the 20th century the real price of many goods fell by over 90%.[15]

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.[16] Further division of labour (specialization) is also fundamental to rising productivity.[17]

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.[18][19] 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.[20] 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 (less input per widget). 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.[21]

During the Industrial Revolution, mechanization began to replace hand methods in manufacturing, and new processes streamlined production of chemicals, iron, steel, and other products.[22] Machine tools made the economical production of metal parts possible, so that parts could be interchangeable.[23] See: Interchangeable parts.

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.[22] Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency.[24] Other major historical sources of productivity were automation, transportation infrastructures (canals, railroads, and highways),[25][26] new materials (steel) 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.[23]

Cost of chicken in time worked
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.[27][28] 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.[27]

Mass production of the 1920s created overproduction, which was arguably one of several causes of the Great Depression of the 1930s.[29] 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 (after 1950), creating enough new demand to stabilize the work week.[30] The building of highway infrastructures also contributed to post World War II growth, as did capital investments in manufacturing and chemical industries.[31] 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.[13]

Economic growth in the United States slowed down after 1973.[32] In contrast growth in Asia has been strong since then, starting with Japan and spreading to Korea, China, the Indian subcontinent and other parts of Asia. In 1957 South Korea had a lower per capita GDP than Ghana,[33] and by 2008 it was 17 times as high as Ghana's.[34] 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.[35][36][37][38][39] US 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.[40][41][42][43] After 2004 U.S. productivity growth returned to the low levels of 1972–96.[40]

Factor accumulation

Capital in economics ordinarily refers to physical capital, which consists of structures (largest component of physical capital) and equipment used in business (machinery, factory equipment, computers and office equipment, construction equipment, business vehicles, medical equipment, etc.).[2] 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.[44] In recent decades there have been several Asian countries with high rates of economic growth driven by capital investment.[45]

The work week declined considerably over the 19th century.[46][47] By the 1920s the average work week in the U.S. was 49 hours, but the work week was reduced to 40 hours (after which overtime premium was applied) 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.[9] 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.[9] See: Spending wave

Other factors affecting growth

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.[48][49][50]

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 (average years) of school attainment in a country, building upon the data development of Robert Barro and Jong-Wha Lee.[51] 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.[52]

Eric Hanushek and Dennis Kimko introduced measures of students' mathematics and science skills from international assessments into growth analysis.[53] They found that this measure of human capital was very significantly related to economic growth. Eric Hanushek and Ludger Wößmann have extended this analysis.[54][55] 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.[52] 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.[56]

Political institutions

“As institutions influence behavior and incentives in real life, they forge the success or failure of nations.”[57]

In economics and economic history, the transition to capitalism from earlier economic systems was enabled by the adoption of government policies that facilitated commerce and gave individuals more personal and economic freedom. These included new laws favorable to the establishment of business, including contract law and laws providing for the protection of private property, and the abolishment of anti-usury laws.[58][59] When property rights are less certain, transaction costs can increase, hindering economic development. Enforcement of contractual rights is necessary for economic development because it determines the rate and direction of investments. When the rule of law is absent or weak, the enforcement of property rights depends on threats of violence, which causes bias against new firms because they can not demonstrate reliability to their customers.[60]

Much of this literature was built on the success story of the British state that after the Glorious Revolution of 1688 combined high fiscal capacity with constraints on the power of the king generating some respect for the rule of law.[61][62][63][57] However, others have questioned that this institutional formula is not so easily replicable elsewhere as a change in the Constitution—and the type of institutions created by that change—does not necessarily create a change in political power if the economic powers of that society are not aligned with the new set of rule of law institutions.[64] In England, a dramatic increase in the state's fiscal capacity followed the creation of constraints on the crown, but elsewhere in Europe, increases in state capacity happened before major rule of law reforms.[65]

There are many different ways through which states achieved state (fiscal) capacity and this different capacity accelerated or hindered their economic development. Thanks to the underlying homogeneity of its land and people, England was able to achieve a unified legal and fiscal system since the Middle Ages that enabled it to substantially increase the taxes it raised after 1689.[65] On the other hand, the French experience of state building faced much stronger resistance from local feudal powers keeping it legally and fiscally fragmented until the French Revolution despite significant increases in state capacity during the seventeenth century.[66][67] Furthermore, Prussia and the Habsburg empire—much more heterogeneous states than England—were able to increase state capacity during the eighteenth century without constraining the powers of the executive.[65] Nevertheless, it is unlikely that a country will generate institutions that respect property rights and the rule of law without having had first intermediate fiscal and political institutions that create incentives for elites to support them. Many of these intermediate level institutions relied on informal private-order arrangements that combined with public-order institutions associated with states, to lay the foundations of modern rule of law states.[65]

In many poor and developing countries much land and housing are held outside the formal or legal property ownership registration system. In many urban areas the poor "invade" private or government land to build their houses, so they do not hold title to these properties. Much unregistered property is held in informal form through various property associations and other arrangements. Reasons for extra-legal ownership include excessive bureaucratic red tape in buying property and building. In some countries it can take over 200 steps and up to 14 years to build on government land. Other causes of extra-legal property are failures to notarize transaction documents or having documents notarized but failing to have them recorded with the official agency.[68]

Not having clear legal title to property limits its potential to be used as collateral to secure loans, depriving many poor countries one of their most important potential sources of capital. Unregistered businesses and lack of accepted accounting methods are other factors that limit potential capital.[68]

Businesses and individuals participating in unreported business activity and owners of unregistered property face costs such as bribes and pay-offs that offset much of any taxes avoided.[68]

"Democracy Does Cause Growth", according to Acemoglu et al. Specifically, "democracy increases future GDP by encouraging investment, increasing schooling, inducing economic reforms, improving public goods provision, and reducing social unrest."[69]

According to Daron Acemoglu, Simon Johnson and James Robinson, the positive correlation between high income and cold climate is a by-product of history. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where these colonizers faced high mortality rates (e.g., due to the presence of tropical diseases), they could not settle permanently, and they were thus more likely to establish extractive institutions, which persisted after independence; in places where they could settle permanently (e.g. those with temperate climates), they established institutions with this objective in mind and modeled them after those in their European homelands. In these 'neo-Europes' better institutions in turn produced better development outcomes. Thus, although other economists focus on the identity or type of legal system of the colonizers to explain institutions, these authors look at the environmental conditions in the colonies to explain institutions. For instance, former colonies have inherited corrupt governments and geopolitical boundaries (set by the colonizers) that are not properly placed regarding the geographical locations of different ethnic groups, creating internal disputes and conflicts that hinder development. In another example, societies that emerged in colonies without solid native populations established better property rights and incentives for long-term investment than those where native populations were large.[70]

Entrepreneurs and new products

Policymakers and scholars frequently emphasize the importance of entrepreneurship for economic growth. However, surprisingly few research empirically examine and quantify entrepreneurship's impact on growth. This is due to endogeneity - forces that drive economic growth also drive entrepreneurship. In other words, the empirical analysis of the impact of entrepreneurship on growth is difficult because of the joint determination of entrepreneurship and economic growth. A few papers use quasi-experimental designs, and have found that entrepreneurship and the density of small businesses indeed have a causal impact on regional growth.[71][72]

Another major cause of economic growth is the introduction of new products and services and the improvement of existing products. New products create demand, which is necessary to offset the decline in employment that occurs through labor-saving technology (and to a lesser extent employment declines due to savings in energy and materials).[41][73] In the US by 2013 about 60% of consumer spending was for goods and services that did not exist in 1869. Also, the creation of new services has been more important than invention of new goods.[74]

Structural Change

Economic growth in the U.S. and other developed countries went through phases that affected growth through changes in the labor force participation rate and the relative sizes of economic sectors. The transition from an agricultural economy to manufacturing increased the size of the sector with high output per hour (the high-productivity manufacturing sector), while reducing the size of the sector with lower output per hour (the lower productivity agricultural sector). Eventually high productivity growth in manufacturing reduced the sector size, as prices fell and employment shrank relative to other sectors.[75][76] The service and government sectors, where output per hour and productivity growth is low, saw increases in their shares of the economy and employment during the 1990s.[9] The public sector has since contracted, while the service economy expanded in the 2000s.

The structural change could also be viewed from another angle. It is possible to divide real economic growth into two components: an indicator of extensive economic growth—the ‘quantitative’ GDP—and an indicator of the improvement of the quality of goods and services—the ‘qualitative’ GDP[77].

Growth theories

The Malthusian theory

The Malthusian theory proposes that over most of human history technological progress caused larger population growth but had no impact on income per capita in the long run. According to the theory, while technologically advanced economies over this epoch were characterized by higher population density, their level of income per capita was not different than those among technologically regressed society.

The conceptual foundations of the Malthusian theory were formed by Thomas Malthus,[78] and a modern representation of these approach is provided by Ashraf and Galor.[79] In line with the predictions of the Malthusian theory, a cross-country analysis finds a significant positive effects of the technological level on population density and insignificant effect on income per significantly over the years 1-1500.[79]

Classical growth theory

In classical (Ricardian) economics, the theory of production and the theory of growth are based on the theory or law of variable proportions, whereby increasing either of the factors of production (labor or capital), while holding the other constant and assuming no technological change, will increase output, but at a diminishing rate that eventually will approach zero. These concepts have their origins in Thomas Malthus’s theorizing about agriculture. Malthus's examples included the number of seeds harvested relative to the number of seeds planted (capital) on a plot of land and the size of the harvest from a plot of land versus the number of workers employed.[80] See also Diminishing returns.

Criticisms of classical growth theory are that technology, an important factor in economic growth, is held constant and that economies of scale are ignored.[81]

One popular theory in the 1940s was the big push model, which suggested that countries needed to jump from one stage of development to another through a virtuous cycle, in which large investments in infrastructure and education coupled with private investments would move the economy to a more productive stage, breaking free from economic paradigms appropriate to a lower productivity stage.[82] The idea was revived and formulated rigorously, in the late 1980s by Kevin Murphy, Andrei Shleifer and Robert Vishny.[83]

Solow–Swan model

Robert Solow and Trevor Swan developed what eventually became the main model used in growth economics in the 1950s.[84][85] This model assumes that there are diminishing returns to capital and labor. Capital accumulates through investment, but its level or stock continually decreases due to depreciation. Due to the diminishing returns to capital, with increases in capital/worker and absent technological progress, economic output/worker eventually reaches a point where capital per worker and economic output/worker remain constant because annual investment in capital equals annual depreciation. This condition is called the 'steady state'.

In the Solow–Swan model if productivity increases through technological progress, then output/worker increases even when the economy is in the steady state. If productivity increases at a constant rate, output/worker also increases at a related steady-state rate. As a consequence, growth in the model can occur either by increasing the share of GDP invested or through technological progress. But at whatever share of GDP invested, capital/worker eventually converges on the steady state, leaving the growth rate of output/worker determined only by the rate of technological progress. As a consequence, with world technology available to all and progressing at a constant rate, all countries have the same steady state rate of growth. Each country has a different level of GDP/worker determined by the share of GDP it invests, but all countries have the same rate of economic growth. Implicitly in this model rich countries are those that have invested a high share of GDP for a long time. Poor countries can become rich by increasing the share of GDP they invest. One important prediction of the model, mostly borne out by the data, is that of conditional convergence; the idea that poor countries will grow faster and catch up with rich countries as long as they have similar investment (and saving) rates and access to the same technology.

The Solow–Swan model is considered an "exogenous" growth model because it does not explain why countries invest different shares of GDP in capital nor why technology improves over time. Instead the rate of investment and the rate of technological progress are exogenous. The value of the model is that it predicts the pattern of economic growth once these two rates are specified. Its failure to explain the determinants of these rates is one of its limitations.

Although the rate of investment in the model is exogenous, under certain conditions the model implicitly predicts convergence in the rates of investment across countries. In a global economy with a global financial capital market, financial capital flows to the countries with the highest return on investment. In the Solow-Swan model countries with less capital/worker (poor countries) have a higher return on investment due to the diminishing returns to capital. As a consequence, capital/worker and output/worker in a global financial capital market should converge to the same level in all countries.[86] Since historically financial capital has not flowed to the countries with less capital/worker, the basic Solow–Swan model has a conceptual flaw. Beginning in the 1990s, this flaw has been addressed by adding additional variables to the model that can explain why some countries are less productive than others and, therefore, do not attract flows of global financial capital even though they have less (physical) capital/worker.

In practice, convergence was rarely achieved. In 1957, Solow applied his model to data from the U.S. gross national product to estimate contributions. This showed that the increase in capital and labor stock only accounted for about half of the output, while population increase adjustments to capital explained eighth. This remaining unaccounted growth out put is known as the Solow Residual. Here the A of (t) “technical progress” was the reason for increased output. Nevertheless, the model still had flaws. It gave no room for policy to influence the growth rate. Few attempts were also made by the RAND Corporation the non-profit think tank and frequently visiting economist Kenneth Arrow to work out the kinks in the model. They suggested that new knowledge was indivisible and that it is endogenous with a certain fixed cost. Arrow’s further explained that new knowledge obtained by firms comes from practice and built a model that "knowledge" accumulated through experience [87].

According to Harrod, the natural growth rate is the maximum rate of growth allowed by the increase of variables like population growth, technological improvement and growth in natural resources.

In fact, the natural growth rate is the highest attainable growth rate which would bring about the fullest possible employment of the resources existing in the economy.

Endogenous growth theory

Unsatisfied with the assumption of exogenous technological progress in the Solow–Swan model, economists worked to "endogenize" (i.e., explain it "from within" the models) productivity growth in the 1980s; the resulting endogenous growth theory, most notably advanced by Robert Lucas, Jr. and his student Paul Romer, includes a mathematical explanation of technological advancement.[16][88] This model also incorporated a new concept of human capital, the skills and knowledge that make workers productive. Unlike physical capital, human capital has increasing rates of return. Research done in this area has focused on what increases human capital (e.g. education) or technological change (e.g. innovation).[89]

On Memorial Day weekend in 1988, a conference in Buffalo brought together the great minds in economics the idea was to evaluate the conflicting theories of growth. Romer, Krugman, Barro, Becker were in attendance along many other rising star and high profiled economist of the time. Amongst many papers that day the one that stood out was Romer’s “ Micro Foundations for Aggregate Technological Change.” The Micro Foundation claimed that endogenous technological change had the concept of Intellectual Property imbedded and that knowledge is an input and output of production. Romer argued that outcomes to the national growth rates were significantly affected by public policy, trade activity, and intellectual property. He stressed that cumulative capital and specialization were key, and that not only population growth can increase capital of knowledge, it was human capital that is specifically trained in harvesting new ideas.[90]

One branch of endogenous growth theory was developed on the foundations of the Schumpeterian theory, named after the 20th-century Austrian economist Joseph Schumpeter.[91] The approach explains growth as a consequence of innovation and a process of creative destruction that captures the dual nature of technological progress: in terms of creation, entrepreneurs introduce new products or processes in the hope that they will enjoy temporary monopoly-like profits as they capture markets. In doing so, they make old technologies or products obsolete. This can be seen as an annulment of previous technologies, which makes them obsolete, and "destroys the rents generated by previous innovations".[92]:855[93] A major model that illustrates Schumpeterian growth is the Aghion–Howitt model.[94][92]

Unified growth theory

Unified growth theory was developed by Oded Galor and his co-authors to address the inability of endogenous growth theory to explain key empirical regularities in the growth processes of individual economies and the world economy as a whole.[95][96] Unlike endogenous growth theory that focuses entirely on the modern growth regime and is therefore unable to explain the roots of inequality across nations, unified growth theory captures in a single framework the fundamental phases of the process of development in the course of human history: (i) the Malthusian epoch that was prevalent over most of human history, (ii) the escape from the Malthusian trap, (iii) the emergence of human capital as a central element in the growth process, (iv) the onset of the fertility decline, (v) the origins of the modern era of sustained economic growth, and (vi) the roots of divergence in income per capita across nations in the past two centuries. The theory suggests that during most of human existence, technological progress was offset by population growth, and living standards were near subsistence across time and space. However, the reinforcing interaction between the rate of technological progress and the size and composition of the population has gradually increased the pace of technological progress, enhancing the importance of education in the ability of individuals to adapt to the changing technological environment. The rise in the allocation of resources towards education triggered a fertility decline enabling economies to allocate a larger share of the fruits of technological progress to a steady increase in income per capita, rather than towards the growth of population, paving the way for the emergence of sustained economic growth. The theory further suggests that variations in biogeographical characteristics, as well as cultural and institutional characteristics, have generated a differential pace of transition from stagnation to growth across countries and consequently divergence in their income per capita over the past two centuries.[95][96]

Inequality and Growth

Theories

The prevailing views about the role of inequality in the growth process has radically shifted in the past century.[97]

The classical perspective, as expressed by Adam Smith, and others, suggests that inequality fosters the growth process.[98][99] Specifically, since the aggregate saving increases with inequality due to higher property to save among the wealthy, the classical viewpoint suggests that inequality stimulates capital accumulation and therefore economic growth.[100]

The Neoclassical perspective that is based on representative agent approach denies the role of inequality in the growth process. It suggests that the while the growth process may affect inequality, income distribution has no impact on the growth process.

The modern perspective which has emerged in the late 1980s suggests, in contrast, that income distribution has a significant impact on the growth process. The modern perspective, originated by Galor and Zeira,[101][102]highlights the important role of heterogeneity in the determination of aggregate economic activity, and economic growth. In particular, Galor and Zeira argue that since credit markets are imperfect, inequality has an enduring impact on human capital formation, the level of income per capita, and the growth process.[103] In contrast to the classical paradigm, which underlined the positive implications of inequality for capital formation and economic growth, Galor and Zeira argue that inequality has an adverse effect on human capital formation and the development process, in all but the very poor economies.

Later theoretical developments have reinforced the view that inequality has an adverse effect on the growth process. Specifically, Alesina and Rodrik and Persson and Tabellini advance a political economy mechanism and argue that inequality has a negative impact on economic development since it creates a pressure for distortionary redistributive policies that have an adverse effect on investment and economic growth.[104][105]

In accordance with the credit market imperfection approach, a study by Roberto Perotti showed that inequality is associated with lower level of human capital formation (education, experience, apprenticeship) and higher level of fertility, while lower level of human capital is associated with lower growth and lower levels of economic growth. In contrast, his examination of the political economy channel found no support for the political economy mechanism.[106] Consequently, the political economy perspective on the relationship between inequality and growth have been revised and later studies have established that inequality may provide an incentive for the elite to block redistributive policies and institutional changes. In particular, inequality in the distribution of land ownership provides the landed elite with an incentive to limit the mobility of rural workers by depriving them from education and by blocking the development of the industrial sector.[107]

A unified theory of inequality and growth that captures that changing role of inequality in the growth process offers a reconciliation between the conflicting predictions of classical viewpoint that maintained that inequality is beneficial for growth and the modern viewpoint that suggests that in the presence of credit market imperfections, inequality predominantly results in under investment in human capital and lower economic growth. This unified theory of inequality and growth, developed by Oded Galor and Omer Moav,[108] suggests that the effect of inequality on the growth process has been reversed as human capital has replaced physical capital as the main engine of economic growth. In the initial phases of industrialization, when physical capital accumulation was the dominating source of economic growth, inequality boosted the development process by directing resources toward individuals with higher propensity to save. However, in later phases, as human capital become the main engine of economic growth, more equal distribution of income, in the presence of credit constraints, stimulated investment in human capital and economic growth.

In 2013, French economist Thomas Piketty postulated that in periods when the average annual rate on return on investment in capital (r) exceeds the average annual growth in economic output (g), the rate of inequality will increase.[109] According to Piketty, this is the case because wealth that is already held or inherited, which is expected to grow at the rate r, will grow at a rate faster than wealth accumulated through labor, which is more closely tied to g. An advocate of reducing inequality levels, Piketty suggests levying a global wealth tax in order to reduce the divergence in wealth caused by inequality.

Evidence: Reduced form

The reduced form empirical relationship between inequality and growth was studied by Alberto Alesina and Dani Rodrik, and Torsten Persson and Guido Tabellini.[104][105] They find that inequality is negatively associated with economic growth in a cross-country analysis.

Robert Barro reexamined the reduced form relationship between inequality on economic growth in a panel of countries.[110] He argues that there is "little overall relation between income inequality and rates of growth and investment". However, his empirical strategy limits its applicability to the understanding of the relationship between inequality and growth for several reasons. First, his regression analysis control for education, fertility, investment, and it therefore excludes, by construction, the important effect of inequality on growth via education, fertility, and investment. His findings simply imply that inequality has no direct effect on growth beyond the important indirect effects through the main channels proposed in the literature. Second his study analyzes the effect of inequality on the average growth rate in the following 10 years. However, existing theories suggest that the effect of inequality will be observed much later, as is the case in human capital formation, for instance. Third, the empirical analysis does not account for biases that are generated by reverse causality and omitted variables.

Recent papers based on superior data, find negative relationship between inequality and growth. Andrew Berg and Jonathan Ostry of the International Monetary Fund, find that "lower net inequality is robustly correlated with faster and more durable growth, controlling for the level of redistribution".[111] Likewise, Dierk Herzer and Sebastian Vollmer find that increased income inequality reduces economic growth.[112]

Evidence: mechanisms

The Galor and Zeira's model predicts that the effect of rising inequality on GDP per capita is negative in relatively rich countries but positive in poor countries.[101][102] These testable predictions have been examined and confirmed empirically in recent studies.[113][114] In particular, Brückner and Lederman test the prediction of the model by in the panel of countries during the period 1970-2010, by considering the impact of the interaction between the level of income inequality and the initial level of GDP per capita. In line with the predictions of the model, they find that at the 25th percentile of initial income in the world sample, a 1 percentage point increase in the Gini coefficient increases income per capita by 2.3%, whereas at the 75th percentile of initial income a 1 percentage point increase in the Gini coefficient decreases income per capita by -5.3%. Moreover, the proposed human capital mechanism that mediate the effect of inequality on growth in the Galor-Zeira model is also confirmed. Increases in income inequality increase human capital in poor countries but reduce it in high and middle-income countries.

This recent support for the predictions of the Galor-Zeira model is in line with earlier findings. Roberto Perotti showed that in accordance with the credit market imperfection approach, developed by Galor and Zeira, inequality is associated with lower level of human capital formation (education, experience, apprenticeship) and higher level of fertility, while lower level of human capital is associated with lower levels of economic growth.[106] Princeton economist Roland Benabou's finds that the growth process of Korea and the Philippines "are broadly consistent with the credit-constrained human-capital accumulation hypothesis".[115] In addition, Andrew Berg and Jonathan Ostry[111] suggest that inequality seems to affect growth through human capital accumulation and fertility channels.

In contrast, Perotti argues that the political economy mechanism is not supported empirically. Inequality is associated with lower redistribution, and lower redistribution (under-investment in education and infrastructure) is associated with lower economic growth.[106]

Importance of long-run growth

Over long periods of time, even small rates of growth, such as a 2% annual increase, have large effects. For example, the United Kingdom experienced a 1.97% average annual increase in its inflation-adjusted GDP between 1830 and 2008.[116] In 1830, the GDP was 41,373 million pounds. It grew to 1,330,088 million pounds by 2008. A growth rate that averaged 1.97% over 178 years resulted in a 32-fold increase in GDP by 2008.

The large impact of a relatively small growth rate over a long period of time is due to the power of exponential growth. The rule of 72, a mathematical result, states that if something grows at the rate of x% per year, then its level will double every 72/x years. For example, a growth rate of 2.5% per annum leads to a doubling of the GDP within 28.8 years, whilst a growth rate of 8% per year leads to a doubling of GDP within 9 years. Thus, a small difference in economic growth rates between countries can result in very different standards of living for their populations if this small difference continues for many years.

Quality of life

One theory that relates economic growth with quality of life is the "Threshold Hypothesis", which states that economic growth up to a point brings with it an increase in quality of life. But at that point – called the threshold point – further economic growth can bring with it a deterioration in quality of life.[117] This results in an upside-down-U-shaped curve, where the vertex of the curve represents the level of growth that should be targeted. Happiness has been shown to increase with a higher GDP ''per capita'', at least up to a level of $15,000 per person.[118]

Economic growth has the indirect potential to alleviate poverty, as a result of a simultaneous increase in employment opportunities and increased labor productivity.[119] A study by researchers at the Overseas Development Institute (ODI) of 24 countries that experienced growth found that in 18 cases, poverty was alleviated.[119]

In some instances, quality of life factors such as healthcare outcomes and educational attainment, as well as social and political liberties, do not improve as economic growth occurs.[120]

Productivity increases do not always lead to increased wages, as can be seen in the United States, where the gap between productivity and wages has been rising since the 1980s.[119]

Equitable growth

While acknowledging the central role economic growth can potentially play in human development, poverty reduction and the achievement of the Millennium Development Goals, it is becoming widely understood amongst the development community that special efforts must be made to ensure poorer sections of society are able to participate in economic growth.[121][122][123] The effect of economic growth on poverty reduction – the growth elasticity of poverty – can depend on the existing level of inequality.[124][125] For instance, with low inequality a country with a growth rate of 2% per head and 40% of its population living in poverty, can halve poverty in ten years, but a country with high inequality would take nearly 60 years to achieve the same reduction.[126][127] In the words of the Secretary General of the United Nations Ban Ki-Moon: "While economic growth is necessary, it is not sufficient for progress on reducing poverty."[121]

Environmental impact

Critics such as the Club of Rome argue that a narrow view of economic growth, combined with globalization, is creating a scenario where we could see a systemic collapse of our planet's natural resources.[128][129]

Uneconomic Growth diagram
The marginal costs of a growing economy may gradually exceed the marginal benefits, however measured.

Concerns about negative environmental effects of growth have prompted some people to advocate lower levels of growth, or the abandoning of growth altogether. In academia, concepts like uneconomic growth, steady-state economy and degrowth have been developed in order to achieve this. In politics, green parties embrace the Global Greens Charter, recognising that "... the dogma of economic growth at any cost and the excessive and wasteful use of natural resources without considering Earth's carrying capacity, are causing extreme deterioration in the environment and a massive extinction of species."[130]:2

The 2019 Global Assessment Report on Biodiversity and Ecosystem Services published by the United Nations' Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services warned that given the substantial loss of biodiversity, society should not focus solely on economic growth.[131][132] Anthropologist Eduardo S. Brondizio, one of the co-chairs of the report, said "We need to change our narratives. Both our individual narratives that associate wasteful consumption with quality of life and with status, and the narratives of the economic systems that still consider that environmental degradation and social inequality are inevitable outcomes of economic growth. Economic growth is a means and not an end. We need to look for the quality of life of the planet."[133]

Those more optimistic about the environmental impacts of growth believe that, though localized environmental effects may occur, large-scale ecological effects are minor. The argument, as stated by commentator Julian Lincoln Simon, states that if these global-scale ecological effects exist, human ingenuity will find ways to adapt to them.[134]

Global warming

Up to the present, there is a close correlation between economic growth and the rate of carbon dioxide emissions across nations, although there is also a considerable divergence in carbon intensity (carbon emissions per GDP).[135] Up to the present, there is also a direct relation between global economic wealth and the rate of global emissions.[136] The Stern Review notes that the prediction that, "Under business as usual, global emissions will be sufficient to propel greenhouse gas concentrations to over 550 ppm CO
2
by 2050 and over 650–700 ppm by the end of this century is robust to a wide range of changes in model assumptions." The scientific consensus is that planetary ecosystem functioning without incurring dangerous risks requires stabilization at 450–550 ppm.[137]

As a consequence, growth-oriented environmental economists propose government intervention into switching sources of energy production, favouring wind, solar, hydroelectric, and nuclear. This would largely confine use of fossil fuels to either domestic cooking needs (such as for kerosene burners) or where carbon capture and storage technology can be cost-effective and reliable.[138] The Stern Review, published by the United Kingdom Government in 2006, concluded that an investment of 1% of GDP (later changed to 2%) would be sufficient to avoid the worst effects of climate change, and that failure to do so could risk climate-related costs equal to 20% of GDP. Because carbon capture and storage are as yet widely unproven, and its long term effectiveness (such as in containing carbon dioxide 'leaks') unknown, and because of current costs of alternative fuels, these policy responses largely rest on faith of technological change.

British conservative politician and journalist Nigel Lawson has deemed carbon emission trading an 'inefficient system of rationing'. Instead, he favours carbon taxes to make full use of the efficiency of the market. However, in order to avoid the migration of energy-intensive industries, the whole world should impose such a tax, not just Britain, Lawson pointed out. There is no point in taking the lead if nobody follows suit.[139]

Resource constraint

Many earlier predictions of resource depletion, such as Thomas Malthus' 1798 predictions about approaching famines in Europe, The Population Bomb (1968),[140][141] and the Simon–Ehrlich wager (1980)[142] have not materialized. Diminished production of most resources has not occurred so far, one reason being that advancements in technology and science have allowed some previously unavailable resources to be produced.[142] In some cases, substitution of more abundant materials, such as plastics for cast metals, lowered growth of usage for some metals. In the case of the limited resource of land, famine was relieved firstly by the revolution in transportation caused by railroads and steam ships, and later by the Green Revolution and chemical fertilizers, especially the Haber process for ammonia synthesis.[143][144]

Resource quality is composed of a variety of factors including ore grades, location, altitude above or below sea level, proximity to railroads, highways, water supply and climate. These factors affect the capital and operating cost of extracting resources. In the case of minerals, lower grades of mineral resources are being extracted, requiring higher inputs of capital and energy for both extraction and processing. Copper ore grades have declined significantly over the last century.[145][146] Another example is natural gas from shale and other low permeability rock, which can be developed with much higher inputs of energy, capital, and materials than conventional gas in previous decades. Offshore oil and gas have exponentially increased cost as water depth increases.

Some physical scientists like Sanyam Mittal regard continuous economic growth as unsustainable.[147][148] Several factors may constrain economic growth – for example: finite, peaked, or depleted resources.

In 1972, The Limits to Growth study modeled limitations to infinite growth; originally ridiculed,[140][141][149] .[150][151][152]

Malthusians such as William R. Catton, Jr. are skeptical of technological advances that improve resource availability. Such advances and increases in efficiency, they suggest, merely accelerate the drawing down of finite resources. Catton claims that increasing rates of resource extraction are "...stealing ravenously from the future".[153]

Energy

Energy economic theories hold that rates of energy consumption and energy efficiency are linked causally to economic growth. The Garrett Relation holds that there has been a fixed relationship between historical rates of global energy consumption and the historical accumulation of global economic wealth.[154] Increases in energy efficiency were a portion of the increase in Total factor productivity.[13] Some of the most technologically important innovations in history involved increases in energy efficiency. These include the great improvements in efficiency of conversion of heat to work, the reuse of heat, the reduction in friction and the transmission of power, especially through electrification.[155][156] "Electricity consumption and economic growth are strongly correlated".[157] "Per capita electric consumption correlates almost perfectly with economic development."[158]

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Further reading

  • Acemoglu, Daron; Robinson, James A. (2012). Why Nations Fail: The Origins of Power, Prosperity, and Poverty. Crown Business division of Random House. ISBN 978 0 307 71922 5.
  • Argyrous, G., Forstater, M and Mongiovi, G. (eds.) (2004) Growth, Distribution, And Effective Demand: Essays in Honor of Edward J. Nell. New York: M.E. Sharpe.
  • Barro, Robert J. (1997) Determinants of Economic Growth: A Cross-Country Empirical Study. MIT Press: Cambridge, MA.
  • Galor, O. (2005) From Stagnation to Growth: Unified Growth Theory. Handbook of Economic Growth, Elsevier.
  • Halevi, Joseph; Laibman, David and Nell, Edward J. (eds.) (1992) Beyond the Steady State: Essays in the Revival of Growth Theory, edited with, London, UK:
  • Jones, Charles I. (2002) Introduction to Economic Growth 2nd ed. W. W. Norton & Company: New York, N.Y.
  • Lucas, Robert E., Jr. (2003) The Industrial Revolution: Past and Future, Federal Reserve Bank of Minneapolis, Annual Report online edition
  • Schumpeter, Jospeph A. (1912) The Theory of Economic Development 1982 reprint, Transaction Publishers
  • Weil, David N. (2008) Economic Growth 2nd ed. Addison Wesley.

External links

Articles and lectures

Data

Boomtown

A boomtown is a community that undergoes sudden and rapid population and economic growth, or that is started from scratch. The growth is normally attributed to the nearby discovery of a precious resource such as gold, silver, or oil, although the term can also be applied to communities growing very rapidly for different reasons, such as a proximity to a major metropolitan area, huge construction project, or attractive climate.

Brundtland Commission

Formerly known as the World Commission on Environment and Development (WCED), the mission of the Brundtland Commission is to unite countries to pursue sustainable development together. The Chairperson of the Commission, Gro Harlem Brundtland, was appointed by United Nations Secretary-General Javier Pérez de Cuéllar in December 1983. At the time, the UN General Assembly realized that there was a heavy deterioration of the human environment and natural resources. To rally countries to work and pursue sustainable development together, the UN decided to establish the Brundtland Commission. Gro Harlem Brundtland was the former Prime Minister of Norway and was chosen due to her strong background in the sciences and public health. The Brundtland Commission officially dissolved in December 1987 after releasing Our Common Future, also known as the Brundtland Report, in October 1987. The document popularized (and defined) the term

"Sustainable Development". Our Common Future won the University of Louisville Grawemeyer Award in 1991. The organization Center for Our Common Future was started in April 1988 to take the place of the Commission.

Development economics

Development economics is a branch of economics which deals with economic aspects of the development process in low income countries. Its focus is not only on methods of promoting economic development, economic growth and structural change but also on improving the potential for the mass of the population, for example, through health, education and workplace conditions, whether through public or private channels.Development economics involves the creation of theories and methods that aid in the determination of policies and practices and can be implemented at either the domestic or international level. This may involve restructuring market incentives or using mathematical methods such as intertemporal optimization for project analysis, or it may involve a mixture of quantitative and qualitative methods.Unlike in many other fields of economics, approaches in development economics may incorporate social and political factors to devise particular plans. Also unlike many other fields of economics, there is no consensus on what students should know. Different approaches may consider the factors that contribute to economic convergence or non-convergence across households, regions, and countries.

Economic Growth and Tax Relief Reconciliation Act of 2001

The Economic Growth and Tax Relief Reconciliation Act of 2001 was a major piece of tax legislation passed by the 107th United States Congress and signed by President George W. Bush. It is also known by its abbreviation EGTRRA (often pronounced "egg-tra" or "egg-terra"), and is often referred to as one of the two "Bush tax cuts".

Bush had made tax cuts the centerpiece of his campaign in the 2000 presidential election, and he introduced a major tax cut proposal shortly after taking office. Though a handful of Democrats supported the bill, most support came from congressional Republicans. The bill was passed by Congress in May 2001, and signed into law by Bush on June 7, 2001. Due to the narrow Republican majority in the United State Senate, EGGTRA was passed using the reconciliation process, which bypasses the Senate filibuster.

EGGTRA lowered federal income tax rates, reducing the top tax rate from 39.6 percent to 35 percent and reducing rates for several other tax brackets. The act also reduced capital gain taxes, raised raised pre-tax contribution limits for defined contribution plans and Individual Retirement Accounts, and eliminated the estate tax. In 2003, Bush signed another bill, the Jobs and Growth Tax Relief Reconciliation Act of 2003, which contained further tax cuts and accelerated certain tax changes that were part of EGGTRA. Due to the rules concerning reconciliation, EGGTRA contained a sunset provision that would end the tax cuts in 2011, but most of the cuts were made permanent with the passage of the American Taxpayer Relief Act of 2012.

Economic development

Economic development is the process in which a nation is being improved in the sector of the economic, political, and social well-being of its people. The term has been used frequently by economists, politicians, and others in the 20th and 21st centuries. The concept, however, has been in existence in the West for centuries. "Modernization, "westernization", and especially "industrialization" are other terms often used while discussing economic development. Economic development has a direct relationship with the environment and environmental issues. Economic development is very often confused with industrial development, even in some academic sources.

Whereas economic development is a policy intervention endeavor with aims of improving the economic and social well-being of people, economic growth is a phenomenon of market productivity and rise in GDP. Consequently, as economist Amartya Sen points out, "economic growth is one aspect of the process of economic development".

Economy of India

The economy of India is a developing mixed economy. It is the world's seventh-largest economy by nominal GDP and the third-largest by purchasing power parity (PPP). The country ranks 139th in per capita GDP (nominal) with $2,134 and 122nd in per capita GDP (PPP) with $7,783 as of 2018. After the 1991 economic liberalisation, India achieved 6-7% average GDP growth annually. Since 2014 with the exception of 2017, India's economy has been the world's fastest growing major economy, surpassing China.The long-term growth perspective of the Indian economy is positive due to its young population, English proficiency, corresponding low dependency ratio, healthy savings and investment rates, and increasing integration into the global economy. India topped the World Bank's growth outlook for the first time in fiscal year 2015–16, during which the economy grew 7.6%. Despite previous reforms, economic growth is still significantly slowed by bureaucracy, poor infrastructure, and inflexible labor laws (especially the inability to lay off workers in a business slowdown).India has one of the fastest growing service sectors in the world with an annual growth rate above 9% since 2001, which contributed to 57% of GDP in 2012–13. India has become a major exporter of IT services, Business Process Outsourcing (BPO) services, and software services with $154 billion revenue in FY 2017. The IT industry continues to be the largest private-sector employer in India. India is the second-largest start-up hub in the world with over 3,100 technology start-ups in 2018–19. The Indian automobile industry is one of the largest in the world with an annual production of 21.48 million vehicles (mostly two and three-wheelers) in 2013–14. India had $600 billion worth of retail market in 2015 and one of world's fastest growing e-commerce markets.

Endogenous growth theory

Endogenous growth theory holds that economic growth is primarily the result of endogenous and not external forces. Endogenous growth theory holds that investment in human capital, innovation, and knowledge are significant contributors to economic growth. The theory also focuses on positive externalities and spillover effects of a knowledge-based economy which will lead to economic development. The endogenous growth theory primarily holds that the long run growth rate of an economy depends on policy measures. For example, subsidies for research and development or education increase the growth rate in some endogenous growth models by increasing the incentive for innovation.

Exploitation of natural resources

The exploitation of natural resources is the use of natural resources for economic growth, sometimes with a negative connotation of accompanying environmental degradation. It started to emerge on an industrial scale in the 19th century as the extraction and processing of raw materials (such as in mining, steam power, and machinery) developed much further than it had in preindustrial areas. During the 20th century, energy consumption rapidly increased. Today, about 80% of the world’s energy consumption is sustained by the extraction of fossil fuels, which consists of oil, coal and gas. Another non-renewable resource that is exploited by humans is subsoil minerals such as precious metals that are mainly used in the production of industrial commodities. Intensive agriculture is an example of a mode of production that hinders many aspects of the natural environment, for example the degradation of forests in a terrestrial ecosystem and water pollution in an aquatic ecosystem. As the world population rises and economic growth occurs, the depletion of natural resources influenced by the unsustainable extraction of raw materials becomes an increasing concern.

Industrialisation

Industrialisation is the period of social and economic change that transforms a human group from an agrarian society into an industrial society, involving the extensive re-organisation of an economy for the purpose of manufacturing.As industrial workers' incomes rise, markets for consumer goods and services of all kinds tend to expand and provide a further stimulus to industrial investment and economic growth.

List of U.S. states by economic growth rate

This article includes a list of U.S. states and federal district sorted by economic growth, the percentage change in real GDP for the first quarter of 2018, using the most recent data available from the U.S. Bureau of Economic Analysis.

Macroeconomics

Macroeconomics (from the Greek prefix makro- meaning "large" + economics) is a branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole. This includes regional, national, and global economies. Macroeconomists study aggregated indicators such as GDP, unemployment rates, national income, price indices, and the interrelations among the different sectors of the economy to better understand how the whole economy functions. They also develop models that explain the relationship between such factors as national income, output, consumption, unemployment, inflation, saving, investment, international trade, and international finance.

While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the business cycle), and the attempt to understand the determinants of long-run economic growth (increases in national income). Macroeconomic models and their forecasts are used by governments to assist in the development and evaluation of economic policy.

Macroeconomics and microeconomics, a pair of terms coined by Ragnar Frisch, are the two most general fields in economics. In contrast to macroeconomics, microeconomics is the branch of economics that studies the behavior of individuals and firms in making decisions and the interactions among these individuals and firms in narrowly-defined markets.

Productivity

Productivity describes various measures of the efficiency of production. Often (yet not always), a productivity measure is expressed as the ratio of an aggregate output to a single input or an aggregate input used in a production process, i.e. output per unit of input. Most common example is the (aggregate) labour productivity measure, e.g., such as GDP per worker. There are many different definitions of productivity (including those that are not defined as ratios of output to input) and the choice among them depends on the purpose of the productivity measurement and/or data availability. The key source of difference between various productivity measures is also usually related (directly or indirectly) to how the outputs and the inputs are aggregated into scalars to obtain such a ratio-type measure of productivity. Productivity is a crucial factor in production performance of firms and nations. Increasing national productivity can raise living standards because more real income improves people's ability to purchase goods and services, enjoy leisure, improve housing and education and contribute to social and environmental programs. Productivity growth can also help businesses to be more profitable.

Prosperity

Prosperity is the state of flourishing, thriving, good fortune or successful social status. Prosperity often encompasses wealth but also includes other factors which can be independent of wealth to varying degrees, such as happiness and health.

Rat race

A rat race is an endless, self-defeating, or pointless pursuit. The phrase equates humans to rats attempting to earn a reward such as cheese, in vain. It may also refer to a competitive struggle to get ahead financially or routinely.

The term is commonly associated with an exhausting, repetitive lifestyle that leaves no time for relaxation or enjoyment.

Rostow's stages of growth

Rostow's Stages of Economic Growth model is one of the major historical models of economic growth. It was published by American economist Walt Whitman Rostow in 1960. The model postulates that economic growth occurs in five basic stages, of varying length:

Traditional society

The Pre Conditions of take-off

Take-off

Drive to technological maturity

High mass consumptionRostow's model is one of the more structuralist models of economic growth, particularly in comparison with the "backwardness" model developed by Alexander Gerschenkron, although the two models are not mutually exclusive.

Rostow argued that economic take-off must initially be led by a few individual economic sectors. This belief echoes David Ricardo's comparative advantage thesis and criticizes Marxist revolutionaries' push for economic self-reliance in that it pushes for the "initial" development of only one or two sectors over the development of all sectors equally. This became one of the important concepts in the theory of modernization in social evolutionism.

Simon Kuznets

Simon Smith Kuznets (; Russian: Семён Абра́мович Кузне́ц, IPA: [sʲɪˈmʲɵn ɐˈbraməvʲɪtɕ kʊzʲˈnʲɛts]; April 30, 1901 – July 8, 1985) was an American economist and statistician who received the 1971 Nobel Memorial Prize in Economic Sciences "for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development."

Kuznets made a decisive contribution to the transformation of economics into an empirical science and to the formation of quantitative economic history.

Solow–Swan model

The Solow–Swan model is an economic model of long-run economic growth set within the framework of neoclassical economics. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress. At its core is a neoclassical (aggregate) production function, often specified to be of Cobb–Douglas type, which enables the model "to make contact with microeconomics". The model was developed independently by Robert Solow and Trevor Swan in 1956, and superseded the Keynesian Harrod–Domar model.

Mathematically, the Solow–Swan model is a nonlinear system consisting of a single ordinary differential equation that models the evolution of the per capita stock of capital. Due to its particularly attractive mathematical characteristics, Solow–Swan proved to be a convenient starting point for various extensions. For instance, in 1965, David Cass and Tjalling Koopmans integrated Frank Ramsey's analysis of consumer optimization, thereby endogenizing the saving rate, to create what is now known as the Ramsey–Cass–Koopmans model.

Supply-side economics

Supply-side economics is a macroeconomic theory arguing that economic growth can be most effectively created by lowering taxes and decreasing regulation, by which it is directly opposed to demand-side economics. According to supply-side economics, consumers will then benefit from a greater supply of goods and services at lower prices and employment will increase.The Laffer curve is one of the main theoretical constructs of supply-side economics, the idea that lower tax rates when tax level is too high will actually boost government revenue because of higher economic growth.The term "supply-side economics" was thought for some time to have been coined by journalist Jude Wanniski in 1975, but according to Robert D. Atkinson the term "supply side" was first used in 1976 by Herbert Stein (a former economic adviser to President Richard Nixon) and only later that year was this term repeated by Jude Wanniski. Its use connotes the ideas of economists Robert Mundell and Arthur Laffer.

Under Secretary of State for Economic Growth, Energy, and the Environment

The Under Secretary for Economic Growth, Energy, and the Environment is an undersecretary position within the United States Department of State. The Under Secretary for Economic Growth, Energy, and the Environment serves as senior economic advisor at the State Department and advises the Secretary of State on international economic policy. The Under Secretary also leads the work of the Department on trade, agriculture, aviation, and bilateral trade relations with America's economic partners.

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