Economic Growth

In the contemporary world, economic growth has become a major benchmark of prosperity and well-being for people and nations. In the context of macro level and in simple terms, it can be defined as an increase in the magnitude of a country’s economy from one period of time to another. On the micro-level, it can be defined as an increase of the citizen’s real income so goods and services become more affordable for them and people become less poor. Here, real income can be defined as the ratio between the nominal income (income which is not adjusted for changes in purchasing power) of people and the prices that they have to pay for the goods and services. There are many economic growth causes like human capital, natural resources, population, law, technology, etc. but the two major ones are the size of the workforce and the growth in the productivity of that workforce.

To understand the different causes and the ways in which they influence, it is pertinent to understand the economic growth model. There are many models like the Basic Growth Model, Harrod-Domar Growth Model and Neo-Classical Growth Models like Solow Model, Meade Model, etc. but all of them primarily focus on the full utilization of the labour force, land availability, investment/savings and lack of government interference among many other economic growth factors. The models are based on economic theory to establish the basic fundamentals. They allow an interaction between the production factors so that the determinants of economic growth can be explained satisfactorily.

The aggregate production function is at the heart of every growth model as it is an extension of the national micro-economic production function or economy wide level. It helps in describing the relationship of the size of a country’s labour force and its available capital with the level of the nation’s Gross National Product (GNP). Thus, it is clearly evident that economic growth depends on the size and strength of an economy for which capital and manpower are the most important ingredients. Sometimes, some natural resources, like land are also incorporated

Economic growth examples can be a good way to understand the concept and a very simple example can be mentioned here. Let’s say there are two different countries – A and B. The production capacity of country A is five times that of country B but it dedicates only one-fourth of its resources while country B provides one-third of its resources towards capital accumulation. Thus, the expansion of production capacity of country B will be much quicker than country A and likewise there will be a faster economic growth of country B. Hence, this highlights that when countries dedicate their resources towards capital accumulation, there is rapid economic growth and when it is sustained for a few years, it can make a developing economy into a developed one.