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Term-Paper
Theme:
Economic growth
Chishinau. 2011
Ecomic Growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs (labor, capital, material, energy, etc.) for a given amount of output. Lowered costs increase demand for goods and services. Economic growth is also the result of population growth and of the introduction of new products and services.
Economic growth can also be of interest without reference to per capita changes in standard of living. An example of this is the economic growth in England during the Industrial Revolution. Certainly, per capita increases in productivity occurred due to the replacement of hand labour by machines. However, economic growth during this period was in large part so dramatic because England's population simultaneously increased very rapidly (1700 A.D. 1860 A.D.). The two factors together, more production per worker combined with many more workers, resulted in a sixfold increase in production between 1700 and 1860. Population growth alone accounted for most of this increase.
"When civilization [population] increases, the available labor again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase. Crafts are created to obtain luxury products. The value realized from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before. And so it goes with the second and third increase. All the additional labor serves luxury and wealth, in contrast to the original labor that served the necessity of life." In the early modern period, some people in Western European nations developed the idea that economies could "grow", that is, produce a greater economic surplus, which could be expended on something other than mere subsistence. This surplus could then be used for consumption, warfare, or civic and religious projects. The previous view was that only increasing either population or tax rates could generate more surplus money for the Crown or country. Later, it was theorized that economic growth also corresponds to a process of continual rapid replacement and reorganization of human activities facilitated by investment motivated to maximize returns. This exponential evolution of our self-organized life-support and cultural systems is remarkably creative and flexible, but highly unpredictable in many ways. As there are difficulties in modelling complex self-organizing systems, various efforts to model the long term evolution of economies have produced mixed results. During much of the "Mercantilist" period, growth was seen as involving an increase in the total amount of specie, that is circulating medium such as silver and gold, under the control of the state. This "Bullionist" theory led to policies to force trade through a particular state, the acquisition of colonies to supply cheaper raw materials, which could then be manufactured and sold. Later, such trade policies were justified instead simply in terms of promoting domestic trade and industry. The post-Bullionist insight that it was the increasing capability of manufacturing, which led to policies in the 18th century to encourage manufacturing in itself, and the formula of importing raw materials and exporting finished goods. Under this system, high tariffs were erected to allow manufacturers to establish "factories". Local markets would then pay the fixed costs of capital growth, and then allow them to export abroad, undercutting the prices of manufactured goods. Under this theory of growth, to foster growth was to grant monopolies, which would give an incentive for an individual to exploit a market or resource, confident that he would make all of the profits when all other extra-national competitors were driven out of business. The "Dutch East India company" and the "British East India company" were examples of such state-granted trade monopolies. In this period, the view was that growth was gained through "advantageous" trade in which specie would flow into the country, but to trade with other nations on equal terms was disadvantageous. It should be stressed that Mercantilism was not simply a matter of restricting trade. Within a country, it often meant breaking down trade barriers, building new roads, and abolishing local toll booths, all of which expanded markets. This corresponded to the centralization of power in the hands of the Crown (or "Absolutism"). This process helped produce the modern nation-state in Western Europe. Internationally, Mercantilism led to a contradiction: growth was gained through trade, but to trade with other nations on equal terms was disadvantageous.
David Ricardo argued that trade was a benefit to a country, because if one could buy a good more cheaply from abroad, it meant that there was more profitable work to be done here. This theory of "comparative advantage" would be the central basis for arguments in favor of free trade as an essential component of growth.
these knowledge would determine further growth that leads to economic development of developing nations.
through a succession of stages, in each of which markets adjust differently, and in doing so, give rise to market pressures leading to innovations, which move the system to the next stage. In each stage, the working of markets will be governed in part by the structure of costs and the pattern of growth in demand, both of which depend on technology and innovation. The approach draws on the empirical work of Simon Kuznets, and makes use of Nicholas Kaldors notion of stylized facts; it also draws on the work of W. Arthur Lewis and Gunnar Myrdal in regard to stages of development. It is, however, consistent only in part with Robert Solows neo-Classical approach; as in that construction the substitution of capital for labor is crucial. However, transformational growth rejects the idea of a steady state and presents a model of multiple sectors regularly changing in size and importance. On the other hand, Douglass Norths emphasis on institutions is echoed here. Nell (1988, p. xiii) argued that We do not live in a Free Market system. This is not because such a system has become overburdened, or because labor unions and monopolies have usurped its functions, or because the market has become tangled in regulations and red tape. It is because the fundamental institutions of economic society have changed: crafts have become industries, firms have become corporations, and markets are administratered. These are not 'imperfections' or examples of 'market failure'; as the basic institutions changed, the market itself came to work differently. An economy of family firms and family farms might once have functioned like an Idealized Free Market. But the modern system of corporate industry does not. It behaves differently in regard both to output and employment and to pricing: output and employment are adjusted to current sales, but prices are planned with an eye to the financing of investment, so are governed by long-term considerations, and tend to be unresponsive to shot term changes. So, the automatic and anonymous rule of supply and demand in the market came to be replaced by a form of private administration. Moreover, where the earlier economic system had grown slowly, and by accretion, so that it functioned according to static principles, the corporate industry that replaced it depended on an internal dynamic. It either grew, or collapsed. But this Growth was not a simple expansion- it was developmental. The economic system was transformed. And then this Transformational Growth faltered, as it did in the 1930s, in the 1980s and again recently, the system malfunctioned in a wide variety of ways. Finally, the transformation from a craft economy to modern industry is worldwide. It cannot be understood and policy cannot be planned. This is especially true with the development of transnational corporations and international capital. The full development of the theory of transformational growth came in the 90s, and was published Edward J. Nell as The General Theory of Transformational Growth (Cambridge University Press, 1998), starting from a critique of equilibrium supporting creative destruction instead working through methodological and philosophical questions about the role of contracts and obligations in understanding the persistence of institutional structures, to the circulation of money, understanding productivity and the structure of production especially the relationship between the wage bill of capital goods and the capital requirements in consumer goods then going on to dynamics, and from there to aggregate demand and the business cycle. Nell has explored the move from Replicative growth, governed by the price mechanism, where growth proceeds by new firms replicating old, to Innovative growth, regulated by the multiplieraccelerator, where firms invest in expanding and improving their own facilities, and the role of prices is chiefly found in long-term capital planning. Replicative growth describes the result of investment in the same technology and same pattern of firms and firm sizes, where the new firms produce the same list of goods and services, with the same composition of labor and means of production. The economy simply replicates itself, following the incentives offered by the price system. In the short run a Marshallian production function is assumed applying additional labor to given plant and equipment yields diminishing returns, a more or less plausible idea in craft and agricultural conditions. The long-run is thus characterized by constant returns, but in the short run, adjustments of employment with given equipment will show diminishing returns. This is essentially the neo-Classical picture of the 19th Century economy.
By contrast, the standard neo-Classical growth model, based on Solow, 1956, (and also Swan, 1956) projects diminishing marginal returns into the long run without explanation assuming that each point on the function represents a different fully adjusted capital structure. It also fails to provide a role for prices in adjusting output to changes in demand. Indeed, aggregate demand plays no role at all; full employment, that is, full utilization of capacity, is explicitly assumed, rather than demonstrated, and prices are assumed to be constant. Saving governs investment. Banishing both prices and demand leaves the model hopelessly one-sided; it deals only with the growthconsumption- relative size aspect of the economy, ignoring the wages-prices-profits complex. But Solow assumed diminishing returns and that the marginal productivity conditions will be met in the absence of price flexibility! If marginal products diminish, marginal costs rise, and in competitive markets prices must change as output changes. And if prices change there should be effects on demand. There is a problem. To correct it we will study a simple system of growth as replication, based on a Keynesian-Marshallian price adjustment mechanism, operating in the short run. Replication means that, for theoretical purposes, this kind of growth can be measured in units of the optimal sized firm, which, if the technology is what we call Marshallian, will be the size indicated by the minimum of a U-shaped average cost curve. (Austin Robinson, 1931) Moreover, the economy replicates itself following the incentives generated by a price mechanism that puts the burden of adjustment to demand fluctuations on profits. In Hicks terms, this is a flexprice system. Such flexibility, in turn, creates pressures that lead to Transformational Growth, changing the system to one of Intensive Growth. Replicative growth displays what might be called the Victorian pattern of growth, in which shares are constant, as is the rate of profit, because the proportional change in the capital-output ratio just matches that in labor productivity, which, in turn, just equals the proportional change in the real wage. The move to innovative growth comes about as firms try to make their costs more flexible, to lighten the burden of adjustment. They invest in themselves. In the process they engage in innovation, reap economies of scale, and basically work their way beyond Craft technology to newly invented systems of Mass Production, and the Victorian pattern no longer holds. In the new system the assumption of generalized diminishing returns makes no sense; instead returns to and expanded level of employment appear to be constant over a broad range. In these circumstances there is no price mechanism; Kaldors effort to introduce price flexibility and adjustment at full employment appears to be misguided. Transformational growth and business cycles Transformational growth had a major impact on government and government policy, bringing about a countercyclical federal budget, and important changes in the agenda of government. To study these policy changes called for further development of the simple theory of effective demand. Changes in the flexibility of prices required study of pricing, and competition among corporations. Profits functioned as business saving, becoming more important in the US than household saving, and had to be understood in relation to prices (markups) and investment, to which they were closely linked, both in theory and in fact. Nell published in 1998 (Transformational Growth and the Business Cycle, London: Routledge, 1998). The book contained the work of a study group of New School students, testing the empirical validity of the approach, by examining the time series of prices, wages, employment, output, and productivity in six countries. About the same time Nell wrote a book in 1996 (Making Sense of a Changing Economy, London: Routledge, 1996) and laying out the paradoxes of individualism, and providing both a critique of the social philosophy of individualism and suggestions for a more satisfactory approach.
efficiency of electrical generation is a good proxy for the Solow residual, or technological progress, that is, the portion of economic growth that is not attributable to capital, labor, or materials. Useful work theory provides a greatly improved explanation of economic growth over previous production functions. The theory relates the slowing of economic growth to energy conversion efficiencies approaching thermodynamic limits, and cautions that declining resource quality could bring an end to economic growth in a few decades. The useful work theory is part of a body of economic research and analysis sponsored by the International Institute for Applied Systems Analysis (IIASA) and INSEAD and is cited by the International Energy Agency.
Evidence
Perotti (1996) examines of the channels through which inequality may affect economic growth. He shows that in accordance with the credit market imperfection approach, inequality is associated with lower level of human capital formation 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 refutes the political economy mechanism. He demonstrates that inequality is associated with lower levels of taxation, while lower levels of taxation, contrary to the theories, are associated with lower level of economic growth The effect of growth on inequality Economist Xavier Sala-i-Martin argues that global income inequality is diminishing, and the World Bank argues that the rapid reduction in global poverty is in large part due to economic growth. The decline in poverty has been the slowest where growth performance has been the worst (i.e. in Africa).
that finance had a positive impact on economic growth as a result of its effects on productivity growth and technological change. As early as 1989 the World Bank also endorsed the view that financial deepening matters for economic growth "by improving the productivity of investment". A number of case studies on Asia and Southern African countries show the positive nexus between development of financial intermediation and economic growth.
increase in output per worker was associated with a reduction in employment growth of 0.07%, by the first decade of this century the same productivity increase implies reduced employment growth by 0.54%. Increases in employment without increases in productivity leads to a rise in the number of "working poor", which is why some experts are now promoting the creation of "quality" and not "quantity" in labour market policies. This approach does highlight how higher productivity has helped reduce poverty in East Asia, but the negative impact is beginning to show. In Viet Nam, for example, employment growth has slowed while productivity growth has continued. Furthermore, productivity increases do not always lead to increased wages, as can be seen in the US, where the gap between productivity and wages has been rising since the 1980s. The ODI study showed that other sectors were just as important in reducing unemployment, as manufacturing. The services sector is most effective at translating productivity growth into employment growth. Agriculture provides a safety net for jobs and economic buffer when other sectors are struggling. This study suggests a more nuanced understanding of economic growth and quality of life and poverty alleviation.
Consumerism
Growth may lead to consumerism by encouraging the creation of what some regard as artificial needs: Industries cause consumers to develop new taste, and preferences for growth to occur. Consequently, "wants are created, and consumers have become the servants, instead of the masters, of the economy."
Resource depletion
Many earlier predictions of resource depletion, such as Thomas Malthus' 1798 predictions about approaching famines in Europe, The Population Bomb (1968), Limits to Growth (1972), and the SimonEhrlich wager (1980) did not materialize, nor has diminished production of most resources occurred so far, one reason being that advancements in technology and science have allowed some previously unavailable resources to be produced. 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. M. King Hubbert's prediction of worldpetroleum production rates. Virtually all economic sectors rely heavily on petroleum. 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. An 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. Another example is offshore oil and gas, which has exponentially increasing cost as water depth increases. However, some "Malthusians", such as William R. Catton, Jr., author of the 1980 book "Overshoot," are skeptical of these various advancements in technology which make available previously inaccessible or lower grade resources. The counter-argument is that such advances as well as increases in efficiency merely accelerate the drawing down of finite resources. Catton has referred to the contemporary increases in rates of resource extraction as "stealing ravenously from
the future." The apparent and temporary "increase" of resource extraction with the use of new technology leads to the popular perception that resources are infinite or can be substituted without limit, but this perception fails to consider that ultimately, even lower quality resources are finite and become uneconomic to extract when the ore quality is too low. Because of cultural lag, the perception of infinite resources and substitutes may linger on for generations, and may not change, since the inevitable resource bankruptcy is passed on to posterity. Catton has called the faith in technology a form of "cargoism," which takes its meaning from various "Cargo Cults" in Melanesia and Micronesia. Furthermore, Joseph Tainter, anthropologist, historian and author of the book "The Collapse of Complex Societies," has pointed out that each new addition of complexity to technology can only be sustained if there is a good enough return to justify the technology, and that over time, increases in complexity have improved productivity at an ever decreasing rate. As an example, in the early 1900's when much of the world's oil was untapped, it was sufficient to drill a few metres into the ground and install inexpensive rigs to extract oil at rapid rates. At the beginning of the 21st century, in order to achieve the same flowrates or less, oilfields must be drilled much deeper and managed with sophisticated techniques and equipment costing many hundreds of millions of dollars. If such trends continue, there may arrive a time when it becomes uneconomic to increase complexity in order to access lower grade resources with no net improvement in productivity.
Environmental impact
Some critics 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.[58] Other critics draw on archaeologyto cite examples of cultures they claim have disappeared because they grew beyond the ability of their ecosystems to support them.[59] Concerns about possible negative effects of growth on the environment and society led some to advocate lower levels of growth, from which comes the ideas of uneconomic growth and de-growth, and Green parties which argue that economies are part of a global society and a global ecology and cannot outstrip their natural growth without damaging them. Canadian scientist, David Suzuki stated in the 1990s that ecologies can only sustain typically about 1.53% new growth per year, and thus any requirement for greater returns from agriculture or forestry will necessarily cannibalize the natural capital of soil or forest.[citation needed] Some think this argument can be applied even to more developed economies. Those more optimistic about the environmental impacts of growth believe that, although localized environmental effects may occur, large scale ecological effects are minor. The argument as stated by commentators Julian Lincoln Simon states that if these global-scale ecological effects exist, human ingenuity will find ways of adapting to them.
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. 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. In the words of the Secretary General of the United
private sector to create new jobs as the economy grows (as opposed to jobless growth) and seek to employ people from disadvantaged groups. Implications of global warming Up to the present there are close correlations of economic growth with carbon dioxide emissions across nations, although there is also a considerable divergence in carbon intensity (carbon emissions per GDP). The Stern Review notes that the prediction that "under business as usual, global emissions will be sufficient to propel greenhouse gas concentrations to over 550ppm CO2e by 2050 and over 650700ppm 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 450550 ppm. As a consequence, growth-oriented environmental economists propose massive 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. The Stern Review, published by the United Kingdom Government in 2006, concluded that an investment of 1% of GDP 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 is 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. On the other hand, Nigel Lawson claimed that people in a hundred years' time would be "seven times as well off as we are today", therefore it is not reasonable to impose sacrifices on the "much poorer present generation".
Definitions :
Economics (, ) is the social science that analyzes the production, distribution, and consumption of goods and services. Productivity () is a measure of the efficiency of production. In economics, demand () is the desire to own anything, the ability to pay for it, and the willingness to pay. The term business cycle ( ) (or economic cycle) refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession). Industrialisation () (or industrialization) is the process of social and economic change that transforms a human group from an agrarian society into an industrial one. It is a part of a wider modernisation process, where social change and economic development are closely related with technological innovation, particularly with the development of largescale energy and metallurgy production. Gross National Product ( ) (GNP) is the market value of all products and services produced in one year by labor and property supplied by the residents of a country. Unlike Gross Domestic Product (GDP), which defines production based on the geographical location of production, GNP allocates production based on ownership. Gross domestic product ( ) (GDP) refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country's standard of living. Standard of living is generally measured by standards such as real (i.e. inflation adjusted) income per person and poverty rate. In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. In economics, purchasing power parity (PPP) is a condition between countries where an amount of money has the same purchasing power in different countries. In economics, nominal value refers to a value expressed in money terms (that is, in units of a currency) in a given year or series of years. By contrast, real value adjusts nominal value to remove effects of price changes over time. Mass production (also flow production, repetitive flow production, series production, or serial production) is the production of large amounts of standardized products, including and especially on assembly lines. A factory (previously manufactory) or manufacturing plant is an industrial building where laborers manufacture goods or supervise machines processing one product into another.
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. In economics, the term economic efficiency refers to the use of resources so as to maximize the production of goods and services. An economic system is said to be more efficient than another (in relative terms) if it can provide moregoods and services for society without using more resources. Innovation is the creation of better or more effective products, processes, services, technologies, or ideas that are accepted by markets, governments, and society. Innovation differs from inventionin that innovation refers to the use of a new idea or method, whereas invention refers more directly to the creation of the idea or method itself. In economics, physical capital or just 'capital' refers to any already-manufactured asset that is applied in production, such as machinery, buildings, or vehicles. In economic theory, physical capital is one of the three primary factors of production, also known as inputs in the production function. Human capital is the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. Entrepreneurship is the act of being an entrepreneur, which can be defined as "one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods".
Summary
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