36. Measuring economic growth

The U.S. Commerce Department's Bureau of Economic Analysis (BEA) provides economic statistics, including GDP. The BEA website conatins links to various documents that explain the concepts and methodology of national income and products accounts and GDP as well as historical tables.

• Economic growth is measured by two main indicators: growth rates of real GNP in absolute expression and growth rates of its volume per capita for a certain term.

• Growth rate = GNP1/GNP0 * 100%

GNP1 - gross national product of this year

GNP0 - gross national product of the base year – year with which comparison becomes

if average annual rate of a gain of GNP (ga) is known, that, knowing the GDP initial level (Y0) and using a formula of "difficult percent", it is possible to calculate size GDP through t of years (Yt):

Yt = Y0 (1 + ga)t

For the description of interrelation between quantity of the resources used in economy (expenses of factors of production), and volume of release the concept of production function which has an appearance is used:

Y = AF (L, K, H, N),

where Y – output;

F (...) – the function defining dependence of volume of production on values of expenses of factors of production; A – the variable depending on efficiency of production technologies and characterizing technological progress;

L – number of work;

K – quantity of the physical capital;

H – quantity of the human capital;

N – quantity of natural resources.

40 Endogenous growth theory

Growth theory advanced again with theories of economist Paul Romer and Robert Lucas, Jr. in the late 1980s and early 1990s.

Unsatisfied with Solow's explanation, economists worked to "endogenize" technology in the 1980s. They developed the endogenous growth theory that includes a mathematical explanation of technological advancement.  This model also incorporated a new concept of human capital, the skills and knowledge that make workers productive. Unlike physical capital, human capital has increasing rates of return. Therefore, overall there are constant returns to capital, and economies never reach a steady state. Growth does not slow as capital accumulates, but the rate of growth depends on the types of capital a country invests in. Research done in this area has focused on what increases human capital (e.g. education) or technological change (e.g. innovation)

41 Unified growth theory

Unified growth theory was developed by OdedGalor and his co-authors to address the inability of endogenous growth theory to explain key empirical regularities in the growth processes of individual economies and the world economy as a whole. Endogenous growth theory was satisfied with accounting for empirical regularities in the growth process of developed economies over the last hundred years. As a consequence, it was not able to explain the qualitatively different empirical regularities that characterized the growth process over longer time horizons in both developed and less developed economies. Unified growth theories are endogenous growth theories that are consistent with the entire process of development, and in particular the transition from the epoch of Malthusian stagnation that had characterized most of the process of development to the contemporary era of sustained economic growth.

37 Factors affecting economic growth

1.Capital

The amount of labor and equipment is an indicator of the country’s supply of capital. The amount of capital in the economy is one factor that determines its rate of economic growth. For example, Belize is limited in its economic growth because of the country’s small population, whereas China’s large population enables a larger economic output by virtue of its sheer size. The standard hours in the work week also affects output: Populations that value long work weeks, such as the United States, tend to yield a greater output than nations with fewer hours in the work week, such as France.

2.Technological Progress

The quantity of people working in a company or living in a country does not guarantee large economic growth. Even if a country is abundant in natural resources and a strong labor population, if the country is lacking the basic infrastructure for specific technology, such as electric towers for cell phone transmissions, they will be limited in their economic growth. The technological innovation in the county is a decisive factor of economic progress.

3.Investment

Governments are similar to businesses in the way that both need investment to grow. Just as a company gets investments from venture capitalists or shareholders to buy new equipment, governments sell shares of debt in the form of bonds to other nations as a means of raising revenue. An article in the "Concise Encyclopedia of Economics" explains foreign direct investment increases GDP in the short-run, though too much debt may be problematic in the long-run if the nation struggles to pay its debt.

• 4.Health

• Sickness, disease, high infant mortality rates and other health-related problems can detract from the population’s ability to produce goods and services. Therefore, the country’s standard of living is one factor of its economic output.

• The main economic characteristic of quality of resources – their productivity. The most important factor defining a standard of living in the country is average labor productivity – quantity of the goods and services created by the worker for one working hour i.e.

4

4.Health

Sickness, disease, high infant mortality rates and other health-related problems can detract from the population’s ability to produce goods and services. Therefore, the country’s standard of living is one factor of its economic output.

The main economic characteristic of quality of resources – their productivity. The most important factor defining a standard of living in the country is average labor productivity – quantity of the goods and services created by the worker for one working hour i.e.

Labor productivity = size release / number of hours of working hours.

38 Classical growth theory

In classical (Ricardian) economics, the theory of production and the theory of growth are based on the theory or law of variable proportions, whereby increasing either of the factors of production (labor or capital), while holding the other constant and assuming no technological change, will increase output, but at a diminishing rate that eventually will approach zero. These concepts have their origins in Thomas Malthus’s theorizing about agriculture. Malthus’s examples included the number of seeds harvested relative to the number of seeds planted (capital) on a plot of land and the size of the harvest from a plot of land versus the number of workers employed

39 The neoclassical model

The notion of growth as increased stocks of capital goods was codified as the Solow-Swan Growth and that there are diminishing returns to capital and labor increases. From these two premises, the neoclassical model makes three important predictions. First, increasing capital relative to labor creates economic growth, since people can be more productive given more capital. Second, poor countries with less capital per person grow faster because each investment in capital produces a higher return than rich countries with ample capital. Third, because of diminishing returns to capital, economies eventually reach a point where any increase in capital no longer creates economic growth. This point is called a steady state.

The model also notes that countries can overcome this steady state and continue growing by Model, which involved a series of equations that showed the relationship between labor-time, capital goods, output, and investment. According to this view, the role of technological change became crucial, even more important than the accumulation of capital. This model, developed by Robert Solow and Trevor Swan in the 1950s, was the first attempt to model long-run growth analytically.

• Criticisms of the neo-classical growth model are that it does not account for differing rates of return for different capital investments and that the economic life of capital assets has been declining

• Y = A · L^a· С^b

• Y– output in value terms;

• L – work expenses;

• C – capital expenses;

• a, b – the coefficients characterizing degree of increase in output at increase by 1%, respectively, expenses of work and the capital;

• A – the constant coefficient characterizing all qualitative, not expressed in work, production factors (is in the settlement way).

6. hort termld always equal 1.