Economic growth

Economic growth is the increase in the value of goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. 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.

Origins of the concept of Economic Growth

In the early modern period, some people in Western European nations began conceiving of the idea that economies could "grow", that is, produce a greater economic surplus which could be expended on something other than religious or governmental projects (such as war). The previous view was that only increasing either population or tax rates could generate more surplus money for the Crown or country.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

During much of the "Mercantilist" period, growth was seen as involving an increase in the total amount of specie, that is circulating medium such as silver and gold, under the control of the state. This "Bullionist" theory led to policies to force trade through a particular state, the acquisition of colonies to supply cheaper raw materials which could then be manufactured and sold.

Related Topics:
"Mercantilist" - "Bullionist"

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Later, such trade policies were justified instead simply in terms of promoting domestic trade and industry. The post-Bullionist insight that it was the increasing capability of manufacturing which led to policies in the 1700's to encourage manufacturing in itself, and the formula of importing raw materials and exporting finished goods. Under this system high tariffs were erected to allow manufacturers to establish "factories". (The word comes from "factor", the term for someone who carried goods from one stage of production to the next.) Local markets would then pay the fixed costs of capital growth, and then allow them to export abroad, undercutting the prices of manufactured goods elsewhere. Once competition from abroad was removed, prices could then be increased to recoup the costs of establishing the business.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Under this theory of growth, the road to increased national wealth was to grant monopolies, which would give an incentive for an individual to exploit a market or resource, confident that he would make all of the profits when all other extra-national competitors were driven out of business. The "Dutch East India company" and the "British East India company" were examples of such state-granted trade monopolies.

Related Topics:
Dutch East India company - British East India company - Monopolies

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

It should be stressed that Mercantilism was not simply a matter of restricting trade. Within a country, it often meant breaking down trade barriers, building new roads, and abolishing local toll booths, all of which expanded markets. This corresponded to the centralization of power in the hands of the Crown (or "Absolutism"). This process helped produce the modern nation-state in Western Europe.

Related Topics:
Absolutism - Nation-state

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Internationally, Mercantilism led to a contradiction: growth was gained through trade, but to trade with other nations on equal terms was disadvantageous. This – along with the rise of nation-states –encouraged several major wars.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The modern conception of economic growth began with the critique of Mercantilism, especially by the physiocrats and with the Scottish Enlightenment thinkers such as David Hume and Adam Smith, and the foundation of the discipline of modern political economy. The theory of the physiocrats was that productive capacity, itself, allowed for growth, and the improving and increasing capital to allow that capacity was "the wealth of nations". Whereas they stressed the importance of agriculture and saw urban industry as "sterile", Smith extended the notion that manufacturing was central to the entire economy.

Related Topics:
Physiocrats - David Hume - Adam Smith - Political economy

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

David Ricardo would then argue that trade was a benefit to a country, because if one could buy a good more cheaply from abroad, it meant that there was more profitable work to be done here. This theory of "comparative advantage" would be the central basis for arguments in favor of free trade as an essential component of growth.

Related Topics:
David Ricardo - Comparative advantage - Free trade

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

This notion of growth as increased stocks of capital goods (means of production) was codified as the Solow-Swann Growth Model, which involved a series of equations which showed the relationship between labor-time, capital goods, output, and investment. In this modern view, the role of technological change became crucial, even more important than the accumulation of capital.

Related Topics:
Solow-Swann Growth Model - Technological change - Accumulation of capital

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The late 20th century, with its global economy of a few very wealthy nations, and many very poor nations, led to the study of how the transition from subsistence and resource-based economies, to production and consumption based economies occurred, leading to the field of Development economics, including the work of Amartya Sen and Joseph Stiglitz.

Related Topics:
Development economics - Amartya Sen - Joseph Stiglitz

~ ~ ~ ~ ~ ~ ~ ~ ~ ~