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Economic growth: Difference between revisions
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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. | 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 (economics)|capital]], [[labour (economics)|labour]]) and improvements in [[productivity]] (''e.g.'' new [[ | Growth in output can be divided into two major categories: growth through increases in input (''e.g.'' [[capital (economics)|capital]], [[labour (economics)|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 [[Robert Solow|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 ([[Government|governance]] and [[central bank]]s), aggregate [[Production theory basics|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. | The [[neo-classical growth model]], often called the [[Robert Solow|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 ([[Government|governance]] and [[central bank]]s), aggregate [[Production theory basics|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. | ||