economic growth - Encyclopedia Britannica

economic growth, the process by which a nation's wealth increases over time. Although the term is often used in discussions of short-term economic ... economicgrowth TableofContents IntroductionTheanalysisofgrowthQualityimprovementsintheinputsEntrepreneurshipTheplayofinfluencesTheroleofgovernmentThesocialcostofgrowthTheoriesofgrowthRoleoftheentrepreneurTheroleofinvestmentDemandandsupplyEconomicstagnationForeigntradeMathematicalgrowththeories FastFacts 2-MinSummary RelatedContent Media Images More AdditionalReading MoreArticlesOnThisTopic Contributors ArticleHistory Home Politics,Law&Government Economics&EconomicSystems economicgrowth Print print Print Pleaseselectwhichsectionsyouwouldliketoprint: TableOfContents Cite verifiedCite Whileeveryefforthasbeenmadetofollowcitationstylerules,theremaybesomediscrepancies. Pleaserefertotheappropriatestylemanualorothersourcesifyouhaveanyquestions. 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ExternalWebsites TheLibraryofEconomicsandLiberty-EconomicGrowth By JohnL.Cornwall • EditHistory JohnMaynardKeynes Seeallmedia KeyPeople: PaulRomer WilliamNordhaus AdamSmith RobertE.Lucas,Jr. RobertSolow ...(Showmore) RelatedTopics: economicdevelopment productivity foreignaid capital-outputratio Harrod-Domarequation ...(Showmore) Seeallrelatedcontent→ economicgrowth,theprocessbywhichanation’swealthincreasesovertime.Althoughthetermisoftenusedindiscussionsofshort-termeconomicperformance,inthecontextofeconomictheoryitgenerallyreferstoanincreaseinwealthoveranextendedperiod.Growthcanbestbedescribedasaprocessoftransformation.Whetheroneexaminesaneconomythatisalreadymodernandindustrializedoraneconomyatanearlierstageofdevelopment,onefindsthattheprocessofgrowthisunevenandunbalanced.Economichistorianshaveattemptedtodevelopatheoryofstagesthroughwhicheacheconomymustpassasitgrows.Earlywriters,giventometaphor,oftenstressedtheresemblancebetweentheevolutionarycharacterofeconomicdevelopmentandhumanlife—e.g.,growth,maturity,anddecadence.Laterwriters,suchastheAustralianeconomistColinClark,havestressedthedominanceofdifferentsectorsofaneconomyatdifferentstagesofitsdevelopmentandmodernization.ForClark,developmentisaprocessofsuccessivedominationbyprimary(agriculture),secondary(manufacturing),andtertiary(tradeandservice)production.FortheAmericaneconomistW.W.Rostow,growthproceedsfromatraditionalsocietytoatransitionalone(inwhichthefoundationsforgrowtharedeveloped),tothe“take-off”society(inwhichdevelopmentaccelerates),tothematuresociety.Varioustheorieshavebeenadvancedtoexplainthemovementfromonestagetothenext.Entrepreneurshipandinvestmentarethetwofactorsmostoftensingledoutascritical.Economicgrowthisusuallydistinguishedfromeconomicdevelopment,thelattertermbeingrestrictedtoeconomiesthatareclosetothesubsistencelevel.Thetermeconomicgrowthisappliedtoeconomiesalreadyexperiencingrisingpercapitaincomes.InRostow’sphraseologyeconomicgrowthbeginssomewherebetweenthestageoftake-offandthestageofmaturity;orinClark’sterms,betweenthestagedominatedbyprimaryandthestagedominatedbysecondaryproduction.Themoststrikingaspectinsuchdevelopmentisgenerallytheenormousdecreaseintheproportionofthelabourforceemployedinagriculture.Thereareotheraspectsofgrowth.Thedeclineinagricultureandtheriseofindustryandserviceshasledtoconcentrationofthepopulationincities,firstinwhathascometobedescribedasthe“corecity”andlaterinthesuburbs.Inearlieryearspublicutilityinvestment(includinginvestmentintransportation)wasmoreimportantthanmanufacturinginvestment,butinthecourseofgrowththisrelationshipwasreversed.Therehasalsobeenariseintheimportanceofdurableconsumergoodsintotaloutput.IntheU.S.experience,therateofgrowthofcapitalgoodsproductionatfirstexceededtherateofgrowthoftotaloutput,butlaterthistoowasreversed.Likewise,businessconstructionorplantexpendituresloomedlargeintheearlierperiodasanobjectofbusinessinvestmentcomparedtotherecentera.Whetherothercountrieswillgothroughthesameexperienceatsimilarstagesintheirgrowthremainstobeseen.Comparativegrowthratesforagroupofdevelopedcountriesshowhowuneventheprocessofgrowthcanbe.Partlythisunevennessreflectstheextraordinarynatureofthe1913–50period,whichincludedtwomajorwarsandasevereandprolongeddepression.Therearesizabledifferences,however,inthegrowthratesofthevariouscountriesasbetweenthe1870–1913and1950–73periodsandtheperiodsince1973.Forthemostpart,thesedifferencesindicateanaccelerationinratesofgrowthfromthefirsttothesecondperiodandamarkedslowdowningrowthratesfromthesecondtothecurrentperiod.Manywritershaveattributedthistothemorerapidgrowthofbusinessinvestmentduringthemiddleofthethreeperiods.TherelativelyhighratesofgrowthforWestGermany,Japan,andItalyinthepost-WorldWarIIperiodhavestimulatedagooddealofdiscussion.Itisoftenarguedthat“latestarters”cangrowfasterbecausetheycanborrowadvancedtechnologyfromtheearlystarters.Inthiswaytheyleapfrogsomeofthestagesofdevelopmentthattheearlystarterswereforcedtomovethrough.Thisargumentisnothingmorethantheassertionthatlatestarterswillgrowrapidlyduringtheperiodwhentheyaremodernizing.ItalydidnotsucceedingrowingrapidlyandtherebymodernizinguntilafterWorldWarII.TogetherwithJapanandGermanyitalsoexperiencedalargeamountofwardamage.Thishasaneffectsimilartostartinglate,sincerecoveryfromwarentailsbuildingastockofcapitalthatwill,otherthingsbeingequal,embodythemostadvancedtechnologyandthereforebemoreproductiveandallowfastergrowth.Theotherpartofthisargumentistheassertionthatearlystartersareactuallydeterredfromintroducingonabroadfrontthenewtechnologytheythemselveshavedeveloped.Forexample,firmsinacountrythatindustrializedearlymaybeinhibitedfromintroducingamoremodernandefficientmeansoftransportationonabroadscalebecausethereisnoguaranteethatotherfirmshandlingtheancillaryloadingandunloadingtaskswillalsomodernizetomakethechangeprofitable.Relatedtothisistheproblemofwhetherornotpercapitaincomelevelsandtheirratesofgrowthindevelopedeconomieswilleventuallyconvergeordiverge.Forexample,aspercapitaincomesoffastgrowersliketheItaliansandJapaneseapproachthoseofeconomiesthatdevelopedearlier,suchastheAmericanandBritish,willthegrowthratesoftheformerslowdown?Economistswhoanswerintheaffirmativestressthesimilaritiesinthechangingpatternsofdemandaspercapitaincomerises.Thisemphasisinturnimpliesthatthereislessandlesschancetoborrowtechnologyfromtheindustrialleadersastheincomelevelsofthelatestartersapproachthoseofthemoreaffluent.Moreover,risingpercapitaincomesinanaffluentsocietyusuallyareaccompaniedbyashiftindemandtowardservices.Therefore,sothisargumentgoes,differencesinincomelevelsandgrowthratesbetweencountriesshouldeventuallynarrowbecauseofthelowgrowthinproductivityintheservicesector.Theevidenceisinconclusive.Ontheonehand,growthisafunctionofsomethingmorethantheabilitytoborrowthelatesttechnology;ontheotherhand,itisnotclearthatproductivitymustalwaysgrowataslowerrateintheserviceindustries.Arapidlyincreasingpopulationisnotclearlyeitheranadvantageoradisadvantagetoeconomicgrowth.TheAmericanSimonKuznetsandotherinvestigatorshavefoundlittleassociationbetweenratesofpopulationgrowthandratesofgrowthofGNPpercapita.Someofthefastestgrowingeconomieshavebeenthosewithstablepopulations.AndintheUnitedStates,wheretherateofgrowthofpopulationhasshownadownwardhistoricaltrend,therateofgrowthofGNPpercapitahasincreasedoverthelastcenturyandahalf.AnotherfindingbyKuznetsisthatwhileGNPpercapitain1960wassubstantiallyhigherintheUnitedStatesthaninanyEuropeancountry,therewasnosignificantdifferenceinthepercapitagrowthratesofallthesecountriesovertheperiod1840to1960asawhole.TheconclusionisthattheUnitedStatesstartedfromahigherpercapitabase;thismayhavebeentheresultofitssuperiornaturalresources,especiallyitsfertileagriculturalland. 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