Economic growth is the increase in the production of goods and services in a country over time. Economic growth is measured by the Gross Domestic Product (GDP), which is the total value of all goods and services produced within a country in a given year. Economic growth is important for countries as it creates job opportunities, increases income levels, and improves the standard of living. In this blog post, we will explore the economic growth of nations and the factors that contribute to it.
Factors that Contribute to Economic Growth
- Human Capital
Human capital refers to the skills, knowledge, and abilities of the workforce in a country. A well-educated and trained workforce is essential for economic growth as it increases productivity and innovation. Countries that invest in education and training have a competitive advantage in the global economy as they can produce higher-quality goods and services.
- Natural Resources
Natural resources such as oil, gas, minerals, and timber are important for economic growth. Countries that are rich in natural resources have the potential to generate significant revenue from exports. However, the over-dependence on natural resources can lead to a decline in economic growth as it can create a Dutch Disease, where the currency appreciates and other sectors of the economy become uncompetitive.
Infrastructure includes transportation, communication, and energy systems. A well-developed infrastructure is important for economic growth as it facilitates the movement of goods and people, reduces transaction costs, and attracts investment. Countries that invest in infrastructure have a competitive advantage in the global economy as they can move goods and services quickly and efficiently.
- Technological Innovation
Technological innovation refers to the creation and adoption of new technologies. Countries that invest in research and development (R&D) have a competitive advantage in the global economy as they can produce higher quality and more innovative products. Technological innovation also leads to productivity gains and cost reductions, which can increase economic growth.
- Political Stability
Political stability is important for economic growth as it creates a favourable environment for investment and economic activity. Countries that have political instability are less attractive to investors as they pose a higher risk of expropriation, civil unrest, and policy changes. A stable political environment creates certainty for investors and promotes economic growth.
Trade is important for economic growth as it allows countries to specialize in the production of goods and services in which they have a comparative advantage. Trade can lead to productivity gains, increased innovation, and cost reductions, which can increase economic growth. However, protectionism can hinder economic growth by reducing competition and innovation.
Economic Growth Models
There are several economic growth models that explain the factors that contribute to economic growth.
- Harrod-Domar Model
The Harrod-Domar model suggests that economic growth is determined by the level of savings and investment in an economy. The model suggests that a higher level of savings and investment leads to a higher level of economic growth. The model assumes that the production function is linear and that there are no technological advances.
- Solow Model
The Solow model suggests that economic growth is determined by the level of technological progress and the accumulation of physical capital. The model suggests that a higher level of technological progress leads to a higher level of economic growth. The model also assumes that there are diminishing returns to physical capital, meaning that as the level of physical capital increases, the marginal product of capital decreases.
- Endogenous Growth Model
The Endogenous Growth model suggests that economic growth is determined by the level of technological progress and the accumulation of human capital. The model suggests that a higher level of investment in R&D and education leads to a higher level of growth. The model assumes that there are increasing returns to scale, meaning that as the level of investment in R&D and education increases, the marginal product of
At the end of this chapter, students should be able to:
- Explain the concept of economic development and distinguish between growth and development
- Explain the characteristics of an underdeveloped economy.
- Explain the factors which influence economic development.
DEFINITION OF ECONOMIC DEVELOPMENT
Economic development may be defined as the process whereby the level of national production (that is national income) or per capita income increases over a period of time. The main purpose of economic development is to raise the standard of living and the general well-being of the people in an economy.
ECONOMIC GROWTH PROCESS
Definition: Economic process of growth may be defined as the process by which the productive capacity of an economy increases over a given period, leading to a rise in the level of the national income. When there is economic growth, it shows in the form of an increase in income level, an expansion in the labour force, an increase in the total capital stock of the country, and a higher volume of trade and consumption.
DISTINCTION BETWEEN ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT
There is a greater emphasis on the increase in output and less emphasis on economic welfare in the case of economic growth, whereas economic development lays more emphasis on improvements in the general welfare as a result of more equitable distribution of the increased output of goods and services among individuals.
While economic growth is mainly concerned with the growth of income, economic development reveals all aspects of economic activities and emphasizes a more even distribution of facilities between various areas.
In economic development, there must be a meaningful increase in real income whereas, in economic development, a measure of it can be achieved by a fairer distribution of existing goods and services even if there is no substantial increase in output.
Economic growth can take place under the condition of mass unemployment while economic development implies a reduction in the level of unemployment.
ALTERNATIVE EXPLANATIONS OF ECONOMIC DEVELOPMENT
Many theories have been put forward to explain why some nations are developed while others are underdeveloped. The main theories are:
- Sociological Theory: This school of thought believes that economic growth and development is linked to certain characteristics of the people. It emphasized that countries may become underdeveloped due to some negative characteristics such as lack of inventiveness, laziness, high rate of absenteeism and negative attitude to work. A nation may be classified as being developed if it has the positive characteristics mentioned above.
- Colonial background theory: This school of thought believes that nations become underdeveloped because they were at one time or another colonized. While the colonial masters prosper, leading to developed nations as a result of continued exploitation, the colonized nations become poorer resulting in under-development.
- Climatic development theory: This school of thought believes that climate has a certain influence on the development of a nation. It emphasized that countries associated with temperature climate are cool, giving rise to meaningful thinking, resulting in developed nations while those associated with too cold or too hot climates generally lead to underdevelopment.
- Puritanical ethic theory: This theory was propounded by Weber. It believes that puritanical ethics is the brain behind the industrialised nations of the world. It emphasised that self-discipline, abstinence, thriftiness, etc strengthened the incentive to work and save. The absence definitely leads to underdevelopment.
- factors affecting the expansion of industries
- mineral resources and the mining industries
- demand and supply
- types of demand curve and used
- advertising industry
- factors of production
- joint stock company
153. FUNGAL DISEASES
The Quantity Theory of Money (QTM) is a theory that attempts to explain the relationship between the supply of money in an economy and the price level of goods and services. The theory is based on the assumption that money is neutral, meaning that changes in the supply of money will only affect nominal variables, such as prices, and not real variables, such as output and employment.
The QTM is based on the equation of exchange, which is:
MV = PQ
Where M is the supply of money, V is the velocity of money, P is the price level, and Q is the real output of goods and services. The equation of exchange can be rearranged to solve for the price level:
P = MV/Q
This equation shows that the price level is directly proportional to the supply of money and the velocity of money, and inversely proportional to the real output of goods and services.
The QTM assumes that the velocity of money is relatively constant in the short run, which means that changes in the money supply will have a proportional effect on the price level. For example, if the money supply increases by 10%, the price level will also increase by 10%.
The QTM also assumes that the real output of goods and services is determined by factors such as technology, labour productivity, and the availability of capital, and is not affected by changes in the money supply.
The QTM has been the subject of much debate among economists. Some economists argue that the theory is too simplistic and does not take into account the many factors that can affect the price level, such as changes in consumer preferences, technological advances, and government policies.
Others argue that the QTM is a useful tool for understanding the relationship between the money supply and the price level and that it can be used to predict inflation and guide
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