Economic growth

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    Economic growth is defined as the increase in the value of goods and services produced by an economy.

    It is conventionally, but controversially, measured as the percent rate of increase in real Gross Domestic Product, or GDP. Net Domestic Product is another measure that accounts for capital losses more accurately. Both are however subject to productivism biases and the broken window fallacy - defined broadly in economics as the belief that paying for overcoming a problem is just as desirable as paying for pursuing an actual opportunity.

    Growth is usually calculated in real terms in order to net out the effect of inflation on the price of the goods and services produced. This is not however the only issue with measuring growth in a real service economy where both state services and nature's services are accounted for as contributors to wealth. An alternative is measuring well-being, which measures growth that is economic insofar as the goal of the economy is to maximize this well being. See human development theory and welfare economics for more on this approach.

    In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," rather than growth of aggregate demand. This is in part what leads to productivism bias.

    The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living. This approach is very strongly advised against by the creators of GDP itself - who are quite clear that GDP growth is not economic growth, period. They and other critics more recently argue that uneconomic growth is the inevitable result of treating GDP growth as equivalent to economic growth.

    Among the specific and serious problems in using growth in GDP per capita to measure increasing well-being are:

    • expenditure to offset the adverse environmental effects of economic growth such as pollution. (These are called defensive expenditure.)
    • economic 'bads' such as commuting costs - see public bad.
    • measurement of non-marketed output such as housework. (If an individual hires a cleaner instead of cleaning their house themselves, it adds to GDP, but welfare may not have risen.) See also feminist economics which focuses on this kind of valuation issue, notably work of Marilyn Waring.
    • some good output may not be included in GDP e.g. parents doing childcare, do-it-yourself, and volunteer work.
    • inequality (the uneven distribution of income). (If we assume diminishing marginal utility of income, extra income yields less utility for those with already-high incomes than for those with low incomes, so an increase in GDP may increase utility by different amounts depending upon individual's place in distribution.)

    Due to the controversies about economic growth and its measurement:

    Other measures of national income, such as the Index of Sustainable Economic Welfare or the Genuine Progress Indicator, have been developed in an attempt to give a more complete picture of the level of well-being, but there is no consensus as to which, if any, is a better measure than GDP:

    GDP still remains by far the most often-used measure, especially since, all else equal, a rise in real GDP is correlated with an increase in the availability of jobs, which are necessary to most individuals' survival in a wage economy. It is thus the growth in monetized activity, not the growth in well-being, that is actually being measured. For instance, if a wife were to cease providing sexual comforts to a husband without pay, and if the couple were to cease providing shelter and food to their children without pay, both of these transactions being monetized, wives and children would then be increasing GDP - the previously unmonetized comfort, shelter, cooking, and so on, being now paid for; If this situation is undesirable, then, so is the use of GDP to measure economic growth.

    Nonetheless the bias to measure growth in GDP terms persists, largely because it is strongly correlated to business interests:

    The short-run variation of economic growth is termed the business cycle, and almost all economies experience periodical recessions. The cycle can be a misnomer as the fluctuations are not always regular. Explaining these fluctuations is one of the main focuses of macroeconomics. There are different schools of thought as to the causes of recessions but some consensus- see Keynesianism, Monetarism, New classical economics and New Keynesian economics. Oil shocks, war and harvest failure are obvious causes of recession. Short-run variation in growth has generally dampened in higher income countries since the early 90's and this has been attributed, in part, to better macroeconomic management.

    The long-run path of economic growth is one of the central questions of economics;

    Despite the caveats given above, an increase in GDP of a country is still generally taken as an increase in the standard of living of its inhabitants (not the same issue as quality of life).

    Over long periods of time, even small rates of annual growth can have large effects through compounding. A growth rate of 2.5% per annum will lead to a doubling of GDP within 30 years, whilst a growth rate of 8% per annum (experienced by some East Asian Tigers) will lead to a doubling of GDP within 10 years.

    Growth in output can be divided into two major categories: growth through increases in input (e.g. capital, labour) and improvements in productivity (e.g. new technologies). In the long term, we need technological progress in order to increase our standard of living - we cannot forever keep increasing labour input, and we will encounter diminishing marginal returns if we forever keep adding capital to the production process (see production theory basics).

    The neo-classical growth model, often called the Solow growth model, was the first attempt to analytically model long-run growth. It predicts convergence to a steady state; at the steady state, all per-capita growth arises from technological progress. Given identical factors such as institutions (governance and central banks), aggregate production functions and savings ratios, all countries will converge to the same steady state. Given that not all countries possess the same characteristics, it is possible that all countries in the world will not eventually converge. Indeed, in empirical data, convergence is observed only in a limited way.

    In the neo-classical growth model growth is exogenous - it is set outside of the model i.e. it is not explained by the model but assumed to be a particular rate. This makes the model simple but does not explain how or why an economy grows. Endogenous growth theory attempts to endogenise growth. This means explaining growth within a model of the economy. Research done in this area has focussed on what increases human capital (e.g. education) or technological change (e.g. innovation).

    Analysis of recent economic success shows a close correlation between growth and climate, though the actual linkage between the two--and possible causal mechanisms--remains a topic of hot debate. Cold states like Sweden are much more successful economically than warm countries like Nigeria. In early human history, economic as well as cultural development was concentrated in warmer parts of the word, like Egypt. Today, however, cold, Northern states have much higher GDP per capita compared to the hot, tropical states. This aspect of economics (economic geography)--and its influence on human migration and political structures--was extensively studied by Ellsworth Huntington, a professor of Economics at Yale University in the early 20th century.

    The limits to growth[edit | edit source]

    The limits to growth debate considers the ecological impact of growth and wealth creation. Many of the activities required for economic growth use non-renewable resources. Many researchers feel these sustained environmental effects can have an effect on the whole ecosystem. They claim the accumulated effects on the ecosystem put a theoretical limit on growth. Some draw on archaeology to cite examples of cultures they claim have disappeared because they grew beyond the ability of their ecosystems to support them. The claim is that the limits to growth will eventually make growth in resource consumption impossible.

    Others are more optimistic and believe that, although localized environmental effects may occur, large scale ecological effects are minor. The optimists claim that if these global-scale ecological effects exist, human ingenuity will find ways of adapting to them.

    The rate or type of economic growth may have important consequences for the environment (the climate and natural capital of ecologies). Concerns about possible negative effects of growth on the environment and society lead some to advocate lower levels of growth, from which comes the idea of uneconomic 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 1.5-3% 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. Some think this argument can be applied even to more developed economies. Mainstream economists would argue that economies are driven by new technology — for instance, we have faster computers today than a year ago, but not necessarily physically more computers. We may have been able to break free from physical limitations by relying on more knowledge rather than more physical production.

    A concern for promoting economic growth over and above all less measurable considerations is a symptom of productivism--usually a pejorative term.

    See also[edit | edit source]

    External links[edit | edit source]

    • Green Accounting Bibliography contains a discussion and related material on green or environmental accounting, an effort to create more comprehensive measures of conventional national income statistics.