Economic growth
Economic growth has been defined as the quantitative increase in the volume of goods and services in the economy overtime. It is a positive change in the level of production of goods and services by a country over a certain period of time. It is often measured as a rate of change in the Growth Domestic Product (GDP) overtime. It can be viewed as either nominal or real economic growth.
Nominal growth can be defined as economic growth (GDP) including inflation. It just looks at the given period’s GDP figures without removing inflation.
Real growth is nominal growth minus inflation. It presents the real picture of the economy during a stated period of time. It presents the actual performance of the economy; without
inflation. It is real GDP that presents a good picture of economic performance.
Economic development
It refers the qualitative and quantitative increase in the level of goods and services in a country during a given period of time. It is a process whereby an economy’s real national income as well as per capita income increases over a long period of time.
It includes changes in resource supplies, in the rate of capital formation, in demographic composition, in technology, skills and efficiency, in institutional and organizational set-up. It also implies respective changes in the structure of demand for goods, in the level and pattern of income distribution, in size and composition of population, in consumption habits and living standards, and in the pattern of social relationships and religious dogmas, ideas and institutions.
Human Development Index (HDI)
To overcome the deficiencies of GDP as a measure of welfare, the United Nations has developed the Human Development Index (HDI) – that combines data on life expectancy, years of schooling, and income per capita in order to give a broader measure of a country’s development.
Prosperity index. The prosperity index looks at such variables as entrepreneurship, health, security, freedom, and governance. See Helliwell, J., Layard, R., and Sachs, J., (2013). World Happiness Index 2013; and Legatum Institute (2014). The Legatum 2014 Prosperity Index; others
Marginal propensity to consume (MPC)
Marginal propensity to consume (MPC): This is an important concept in Keynes’ work. The marginal propensity to consume is the extra amount and individual will if spend given an extra $1.
If mpc is 60 % (or 0.6), then from every extra dollar of income, the individual spends 60 cents.
This is to say that the more income an individual earns, the more they increase consumption expenditure but as Keynes said, ‘not as much as the increase in their income’.
See Keynes, J.M., (1939:96). The General Theory of Employment, Interest and money. New York:
MacMillan.
Factors for economic growth
Key ingredients for economic growth: Capital, labour and productivity
The sources of economic growth are known to be capital accumulation and utilization, technology and labour productivity. Traditionally, these sources included land.
All in all, growth is achieved by improvement in productive capacity (or increased productivity) and use of relevant technology, access to the markets for the products produced by the country, enabling environment for doing business (including political stability), and managing of population growth rates.
As the experience of China has shown, it is possible to achieve impressive levels of growth (and reduce poverty) in a period of 30 years. Populous China was able to get 300 million people out of absolute poverty within three decades – and to become the world’s leading exporter (overtaking Germany in 2009).
What should aspects increase or improve during growth?
- Improvement in the utilization of available natural resources (water resources, land, minerals, and forests). Idle resources are not good enough for the growth of the economy.
- An increase in capital accumulation in the economy. Capital can be accumulated increased savings by individuals, firms, and government; and accumulation of foreign exchange through more export receipts.
- A rise in the numbers of people becoming entrepreneurs (pioneering innovations and inventions locally) and increasing on the number of jobs in the economy. The reward for entrepreneurship is interest earned from investment (bonds, buildings, plot of land, etc.)
- Technical progress – inventions and innovations – which leads to creation of new products and increases productivity of capital. Better tools and
equipment is invented and used to speed up production – whether in industry, services, or agriculture.
- Increasing and improving the quantity and quality of labour through education and skills acquisition, improved health of the labour force through improved working conditions and employment policies.
- Emergence of specialization with skilled trades and professionals focusing on what they have learnt and specialized in. This tends to increase efficiency of factors of production which ultimately results in time saving, improved skills and experience by workers, and better products and services on the markets due to the foregoing.
- A reduction the population growth rate. This reduction is due to family planning; people begin to value the quality of their families (health and education).
- Markets should be available to buy the increased number of the products being produced by capital, efficient labour and technology. Without markets, entrepreneurs will be discouraged from investing. With markets, they invest, earn interest, expand, hire more workers and pay taxes.
- There will emerge a favourable environment for further growth. A favourable economic environment include stabilizing prices, better salaries for workers, a predictable tax regime, improving institutions to protect and promote investors, traders, workers, and visitors. political stability, and respect for life too.
Determinants of economic performance
- Investment. Both foreign and domestic investments are vital.
- Human capital – principally to workers’ acquisition of skills and know-how through education and training.
- Openness to trade
- Technology and innovation
- Institutional framework. Role of institutions in boosting economic performance been acknowledged since Lewis 1955 and Ayres 1962.
- Douglas North (1990) the term ‘institutions’ refers to the formal rules, informal constraints and their enforcement characteristics that together shape human interaction. Rodrik (2000) has highlighted five key institutions: property rights; regulatory institutions; institutions for macroeconomic stabilization; institutions for social insurance; and institutions of conflict management.
- Social capital
- Social–cultural factors
Benefits of economic growth
- Increase in material prosperity – with a lot of choices for consumers, services, capital goods, etc.
- With availability of goods and services, general price level likely to stabilize.
- There is a possible increase in levels of employment due to increasing levels of investment.
- There is likely an improvement in the BOP positions (a favourable trade balance) as there is increased production for domestic consumption and exports.
- Increase in government revenue due to the wide tax base that captures more tax revenue.
- Increased life expectancy for people – reduced mortality rates because people are educated and informed and about diseases and there are better health services.
- Retrogressive traditional cultures disappear and people enter the globalized world (using gadgets that are used in other parts of the globe cell phone; computers; cameras; etc.).
- Finally, democracy begins to emerge – autocratic leaders get repressed by progressive ones – as the middle class demands better service delivery from their governments.
“The Stages of Economic Growth” – Rostow 1960
