- Economic growth overview:
- Rule of law and economic growth:
- Labour productivity:
- Sources of economic growth: aggregate production function.
- The new economy controversy:
- The power of sustained economic growth:
- Factors of US economic growth:
- Economic convergence:
- Economic growth overview:
In the last two centuries, there has been a period of modern economic growth. Rapid and sustained economic growth is relatively recent experience for the human race. The Industrial Revolution refers to the widespread use of power-driven machines and the ability to perform tasks that therefore would have taken a vast number of workers to do. Industrial Revolution began in Great Britain, and soon spread for the US, Germany, and other countries.
The new jobs of the Industrial Revolution typically offered higher pay and a chance for new social mobility. A self-reinforcing cycle began: new inventions and investments generated profits, the profits provided funds for new investments and inventions, and the investments and innovations provided opportunities for further profits.
During the last two centuries, the average rate of growth of GDP per capita in the leading industrialised countries averaged about 2% per year.
Industrial Revolution led to increasing inequality among nations. Some economies took off, whereas others, like many of those in Africa or Asia, remained close to subsistence standard of living. However, by the middle of the twentieth century, some countries had shown that catching up was possible. Japan was an example of economic growth that took off in the 60s, and 70s, with growth averaging on 11% per year.
- Rule of law and economic growth:
Economic growth depends on many factors. Among those is adherence to the rule of law and protection of property rights and contractual rights, by governments so that markets can work effectively and efficiently.
Law must be clearly enforced, public, fair and equally applicable to all members of society. Property rights enables individuals or firms to own property, & enter into a contract.
Contractual rights, then are based on property rights & allow for individuals to enter into agreements with others regarding the use of their property providing recourse through the legal system in the event of non-compliance.
- Labour productivity:
Sustained long term economic growth comes from increase in worker productivity, which essentially means how well we do things. Labour productivity is the value that each employed person creates per unit of his or her input.
The first determinant of labour productivity is human capital. Human capital is the accumulated knowledge, skills, and expertise that the average worker in an economy possess. Higher levels of education in an economy, the higher the accumulated human capital and the higher the labour productivity.
Second factor: technological change is a combination of invention, advanced in knowledge and innovation, which is putting that advance to use in a new product or serve.
Third factor: economies of scale. Cost advantages that industries obtain due to size.
- Sources of economic growth: aggregate production function.
Aggregate production function refers to the connection from inputs to outputs for the entire economy.
To measure productivity, it is often closely relate to the growth rate of its GDP per capita, although the two are not identical. Over the long term, the only way that GDP per capita can grow, is if the productivity of the average worker rises or if there are complementary increases in capital.
A common measure of US productivity per worker is dollar value per hour the worker contributes to the employers output.
- The new economy controversy:
In recent years a controversy has been brewing among economists about the resurgence of US productivity in the second half of 1990s. One school of thought states that the US has developed a new economy based on the extraordinary advances in communications and information technology in the 1990s.
The most optimistic proponent argues that it would generate higher average productivity growth for decades to come.
The pessimists believe that even five or ten years of stronger productivity growth does not proved that higher productivity will alt for the long term.
Productivity growth is also dependant on average levels of wages. Over time, the amount that firms are willing to pay will depend on the output these workers produce. If a few employers tried to pay their workers less that what those workers produce, then those workers would receive higher offers and wages from other companies. Productivity per hour is the most important determinant of the average wage level of an economy.
- The power of sustained economic growth:
Nothing is more vital for peoples standard of living that sustained economic growth.
The key components to economic growth:
- Physical output: includes the plants and equipment used by firms. Greater physical capital implies more out.
- Technology: comprises all the advances that make the existing machines and other inputs produce more, and at higher quality, as well as altogether new products.
Capital deepening is when society increases the levels of capital per person.
Not only does US have better education of workers, with more improved physical capital that it did several years ago, but these workers have the access to more advanced technologies.
This recipe for economic growth, investing in labour productivity, with investments in human capital and technology, as well as increasing physical capital, also applies to other economies.
- Factors of US economic growth:
From the US economy, 3 lessons commonly emerged from growth accounting studies:
- Technology is typically the most important contributors to US economic growth. Growth in human capital and physical capital often explains only half or less than half of economic growth that occurs.
- Second, while investment in physical capital is essential to growth in labour productivity and GDP per capita, building human capital is at least as important. Economic growth isn’t just a matter of more machines and buildings. One vivid examples of the power of human capital and technological knowledge occurred after WW2. Europe lost an overwhelming amount of human capita, however the powerful combination of skilled workers & technological knowledge, working within a market oriented economic framework, rebuilt Europe productive capacity to an even higher level within less than two decades.
- Third lesson is that: human capital, physical and technology work together. Workers with higher education are better at creating new technology & innovations. These technological innovations are often ideas that cannot increase production until they become a part of a new investment in physical capital.
- Economic convergence:
There are arguments that state that low income countries might have an advantage in achieving greater worker productivity and economic growth in the future.
First argument based on diminishing marginal returns: even though deepening human and physical capital will increase GDP per capita, the law of diminishing returns states that as an economy continues to increase its human and physical capital, the marginal gains for economic growth will diminish. Low income countries like China and India tend to have lower levels of human capital and physical capital, so an investment in capital depending on should have a larger marginal effect in these countries than in high income countries, where levels of human and physical capital are already high. Diminishing returns implies that low income economies could converge to the levels achieved by high income countries.
Second argument is that: low income nations may find it easier to improve technologies, than higher income countries. The development of technology can provide a new way for an economy to sidestep the diminishing marginal returns of capital deepening. Improved technology means that with a given set of inputs, more output is possible,
Most healthy, growing economies are depending on their human and physical capital and increasing technology at the same time. With the combination of technology and capital depending, the rise of GDP per capita in a higher income country, does not need to fade away because of diminishing returns. The gains from technology can offset the diminishing returns involved with capital deepening.
One specific reason that technological ideas do not seem to run into diminishing returns is that ideas of new technology can often be widely applied at a marginal cost that is very low or even zero. A new innovation or technology can be used by many workers across the economy at a very low marginal cost.
The argument that it is easier for low income nations to copy and adapt existing technologies than it is for a high income country to invent new technologies is not true. When it comes to adapting and using new technology, a societies performance is a result of whether economic, education, and public policy institutions of the country are supportive. The slowness of convergence illustrates again that small difference in annual rates of economic growth become huge differences over time. The high income countries have been building their advantage of standard of living over decades. It will take decades for the low income countries of the world to catch up significantly.
