Economic growth

Economic growth is defined as an increase in the real value of the goods and services that an economy produces. It is important to emphasize the word “real” in this definition, and to understand the difference when talking in nominal terms, as an increase in the money supply could increase the nominal value, without changing the real one.

In economics, economic growth is usually measured by the percentage change in the Gross Domestic Product (GDP) of a country. This variable gives us an idea on the growth of a determined economy, but not on its quality and its effects on welfare, which are closely examined by those who are concerned with the development of life quality. When dealing with development economics, the focus switches to GDP per capita and focuses on the processes involved in the development of low-income countries.

Economic growth can come as a result of three phenomena: demographic growth, increase in the quality and quantity of natural resources, and productivity growth. While with the two former ones economic growth comes as a result of an increase in one of the productive factors, labour and capital respectively, in the latter, with the same amount of factors there is an increase in production, which as a result implies an increase in efficiency.

Although there are many growth models, for a matter of simplification, we will only name the main ones, from which in any case the majority of the models derive from.

-Harrod-Domar model: this model was deeply inspired by Keynesianism and it was concerned with the persistence of situations that deviated from full employment. It postulated that there were measures to accelerate investment, along with growth which is why they advocated for government intervention policies;

-Solow-Swan model: this model follows a neoclassical production function of good behaviour but also considers technological progress. It’s probably the best-known growth model;

-Ramsey-Cass-Koopmans model: this dynamic model is developed from the neoclassical model, enriching it without differing from the basics. The model also analyses the optimal quantities of consumption and supply.

The biggest increase in productivity throughout humankind has come from specialization, technological progress and education. In fact the increase in productivity has had positive effects over demographic growth, increasing even more economic growth, as it occurred during the Industrial Revolution which allowed the population to escape the Malthusian trap.