ECONOMIC GROWTH

Economic Growth



Table of Contents

Problem3

Theory4

Determinants of Economic Growth5

Other Measures of Economic Growth7

Economic Growth, Social Welfare, and Environmental Responsibility9

Conclusion15

References17

Appendix: A18

Economic Growth

Problem

World poverty reduction is a central issue in today's growing global economy. However, the best approach to raising income levels of the poor on a sustainable basis is open to debate (Roemer, Gugerty, 2007, 69). Poverty reduction may come about through income growth, redistribution, or both. Changes in poverty are monitored by examining the relationship between growth in a country's per capita income and how the income share of the bottom 20 percent of the income distribution changes (that is, the Lorenz Curve). Advocates of reducing poverty through economic growth and development argue that economic growth—an increase in an economy's ability to produce goods and services resulting in growth of per capita income and a rise in the standard of living—must play a role in achieving sustained poverty reduction in developing countries.

Research shows that economic growth is associated with reductions in poverty, and most economists believe such growth benefits nearly all citizens of a country, even if not equally. The poverty impact of growth can differ substantially among countries (McKay, 2007, 79). The extent to which these benefits are realised by various groups is reflected as change (or lack of change) in the distribution of income. If economic growth raises the income of everyone in society in equal proportion, then the distribution of income will not change. An increase in mean income in a society, at an unchanged distribution, must necessarily lead to a reduction in poverty.

Theory

For growth to occur without a reduction in poverty, income distribution must become more unequal. Growth in household incomes is essential to poverty reduction (Dollar, Kraay, 2008, 44). However, if growth is skewed in favour of richer households, economic growth may have little impact on poverty reduction. In fact, much of the controversy in pursuing economic growth approaches to poverty reduction involves the relationship between inequality and growth.

Three aspects of the economy can cause growth: capital accumulation, which includes investment in all factors of production (such as land, people, and machinery); labor market growth; and technological progress (Danielson, 2006, 21). Total factor productivity (TFP) is a combination measure, which summarises changes in each of these three areas. However, there is considerable and continued controversy concerning exactly what sorts of changes are most effective in promoting Overall growth and how they can be managed. The Austrian economist Joseph Schumpeter added to the debate by pointing out the importance of entrepreneurs in stimulating growth.

The economist W.W. Rostow argued that the action of economic growth was to cause societies to move from a traditional stage to a transitional one in which the conditions are secured for the change to a mature society capable of much higher levels of growth (Bigsten, Levin, 2007, 85).

In any case, it is clear that economic growth leads to and is caused by transformation of the existing nature of the economy. Nobel Prize winner Simon Kuznets wrote that six factors characterise growth ...