Economic Growth and Productivity
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Table of Contents
This section covers the following topics:
- The nature of economic growth
- Costs and benefits of growth
- Drivers of growth
- The production function
- Classical and modern growth theories
Section Summary
Economic growth, whether it is measured in terms of GDP, GDP per capita or some other measure, is generally a powerfully beneficial force. Economic growth shifts the production possibility curve and long-run aggregate supply curve outward, allowing for the production of more goods. Benefits of growth include higher standards of living and lower unemployment and government debts. There are costs, however, such as increased income inequality, inflation and environmental damage.
The main drivers of growth are the availability of natural resources and productivity. Shortages of natural resource can be overcome through trade or innovation. Productivity can be increased through investment in physical or human capital, as well as technology. In addition, institutions that align individual incentives with growth and promote entrepreneurship help the economy expand.
The production function relates total output to land, labor, capital and technological advancement.
The classical theory of growth argued that output would eventually level off. Since the population would continue growing, output per capita could be reduced to the subsistence level. That wouldn’t be fun.
New growth theory demonstrates how technology can significantly increase productivity and output. The benefits from learning by doing and technology’s positive externalities may allow growth to accelerate in the long run.
The government can promote growth by using fiscal and monetary policy to keep the economy near potential output. It can also provide a stable legal and political system and promote saving, investment, entrepreneurship, technological advancement and other drivers of growth.
