As an area of study, economic growth is generally distinguished from development economics. The former is primarily the study of how countries can advance their economies. The latter is the study of the economic aspects of the development process in low-income countries. See also Economic development.
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.
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Economic growth versus the business cycle
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. The business cycle is made up of booms and drops in production that occur over a period of months or years. Generally, economists attribute the ups and downs in the business cycle to fluctuations in aggregate demand.In contrast, the topic of economic growth is concerned with the long-run trend in production due to structural causes such as technological growth and factor accumulation. The business cycle moves up and down, creating fluctuations around the long-run trend in economic growth.
Historical sources of economic growth
Main article: Productivity improving technologies (historical)
Economic growth has traditionally been attributed to the accumulation
of human and physical capital, and increased productivity arising from
technological innovation.[2] Economic growth was also the result of developing new products and services, which have been described as "demand creating".[3]Before industrialization technological progress resulted in an increase in 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.[4] 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.[5] Countries that industrialized eventually saw their population growth slow, a condition called demographic transition.
Increases in productivity are a 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 reduced inputs of labor, materials, energy, and land per unit of economic output (less input per widget). The balance of growth has come from using more inputs overall because of the growth in output (more widgets or alternately more value added), including new kinds of goods and services (innovations).[6]
During colonial times, what ultimately mattered for economic growth were the institutions and systems of government imported through colonization. There is a clear reversal of fortune between poor and wealthy countries, which is evident when comparing the method of colonialism in a region. Geography and endowments of natural resources are not the sole determinants of GDP. In fact, those that were blessed with good factor endowments experienced colonial extraction which only provided limited rapid growth; whereas, countries that were less fortunate in their original endowments experienced European settlement, relative equality, and demand for the rule of law. These initially poor colonies end up developing an open franchise, equality, and broad public education, which helps them experience greater economic growth than the colonies that had exploited their economies of scale.
During the Industrial Revolution, mechanization began to replace hand methods in manufacturing and new processes were developed to make chemicals, iron, steel and other products.[7] Machine tools made the economical production of metal parts possible, so that parts could be interchangeable.[8] See: Interchangeable parts.
During the Second Industrial Revolution, a major factor of productivity growth was the substitution of inaminate power for human and animal labor, to water and wind power with electrification and internal combustion.[7] Since that replacement, the great expansion of total power was driven by continuous improvements in energy conversion efficiency.[9] Other major historical sources of productivity were automation, transportation infrastructures (canals, railroads, and highways),[10][11] 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.[8]
Great sources of productivity improvement in the late 19th century were railroads, steam ships, horse-pulled reapers and combine harvesters, and steam-powered factories.[12][13] The invention of processes for making cheap steel were important for many forms of mechanization and transportation. By the late 19th century prices, as well as 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.[12]
Mass production of the 1920s created overproduction, which was arguably one of several causes of the Great Depression of the 1930s.[14] Following the Great Depression, economic growth resumed, aided in part by demand for entirely new goods and services, such as telephones, radio, television, automobiles, and household appliances, air conditioning, and commercial aviation (after 1950), creating enough new demand to stabilize the work week.[15] The building of highway infrastructures also contributed to post World War II growth, as did capital investments in manufacturing and chemical industries. The post World War II economy also benefited from the discovery of vast amounts of oil around the world, particularly in the Middle East.
Economic growth in Western nations slowed down after 1973. 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,[16] and by 2008 it was 17 times as high as Ghana's.[17] The Japanese economic growth has slackened considerably since the late 1980s. Read more »»»
