ECONOMIC GROWTH

Economic growth; refers to an increase in the capacity of the economy to produce goods and services over time. Economic growth is the single most powerful engine for generating long-term increases in standards of living than the removal of recessionary gaps, unemployment, or inefficiencies because growth can go indefinitely. In economic theory terms, it involves a shifting outwards of the production possibility frontier, showing that the economy as a whole can produce more goods and services than it could previously.

WHAT CAUSES THE CURVE TO SHIFT

1. Technology can increase the economys production capabilities. 2. Improvements in and greater stocks of land, labor, and capital can shift out the production possibilities curve. 3. Another way of saying that economic growth has shifted the production possibilities curve out is to say that growth has increased potential output.

TYPES OF ECONOMIC GROWTH

Real Economic Growth; is the increase in real GDP as a result of using previously unemployed resources, re-allocating existing resources to more productive sectors or using new or improved resources. Potential Economic Growth; is the increase in the productive capacity of the economy thus in the ability of the economy to produce goods. This occurs as a result of an increase in the quality and quantity of resources.

DETERMINANTS OF ECONOMIC GROWTH

Re-allocate resources from low productivity to high productivity activities/sectors- for instance from defence to health care Growth in the labour force- growth in the
population or participation rates in proportion to the total population.

Investment in human capital- HC is the

knowledge and skill embodied in people including formal education and on-the-job training. It involves improvement of health and longevity of the population, technical training depending on the current knowledge and literacy rates and contribution to growth and innovation..

 Technological changes- these are brought by

innovations that introduce new products and new ways of producing existing products. Technological progress can be divided into; capital saving technology, labour saving technology and neutral technical advance.

Investment in physical capital- such as

factories, machines, transportation and communication facilities.

It must be government policy government must formulate policies aimed at promoting efficient and effective use of the available natural resources for economic growth to occur.

COURSE WORK 1
1 (a) What is Economic growth? Examine the factors for economic growth. (b) Critically examine Rostows stages of Economic growth citing the criticisms/ limitations at each stage. Due date: Wednesday 15th June 2011
NB: (Font- Verdana, font size 12, spacing 1.5, not less than 5 pages + an extra page for references)

THE BENEFITS OF GROWTH

Increased levels of consumption; Provided economic growth outstrips population growth, it will lead to higher real income per head. This can lead to higher levels of consumption of goods and services. If human welfare is related to the level of consumption, then growth provides an obvious gain to society. It can help avoid other macroeconomic problems; People have aspirations of rising living standards. Without a growth in productive potential, peoples demands for rising incomes are likely to lead to higher inflation, balance of payments crises (as more imports are purchased), industrial disputes, etc. Growth in productive potential helps to meet these aspirations and avoid macroeconomic crises.

It can make it easier to redistribute incomes to the poor; If incomes rise, the government can redistribute incomes from the rich to the poor without the rich losing. For example, as peoples incomes rise, they automatically pay more taxes. These extra revenues for the government can be spent on programmes to alleviate poverty. Without a continuing rise in national income the scope for helping the poor is much more limited. Society may feel that it can afford to care more for the environment; As people grow richer, they may become less preoccupied with their own private consumption and more concerned to live in a clean environment. The regulation of pollution tends to be tougher in developed countries than in the developing world.

THE COSTS OF GROWTH

In practice, more consumption may not make people happier; economies may be no less crisis riden; incomes may not be redistributed more equally; the environment may not be better protected. More than this, some people argue that growth may worsen these problems and create additional problems besides. Some of the costs include;

The current opportunity cost of growth; To achieve faster growth, firms will probably need to invest more. This will require financing. The finance can come from a higher saving rate or higher taxes. Either way, there must be a cut in consumption. In the short run, therefore, higher growth leads to less consumption, not more. Growth may simply generate extra demands; The more people have, the more they want. If this is so, more consumption may not increase peoples happiness at all. (It is often observed that rich people tend to be miserable!)

social effects; Many people claim that an excessive pursuit of material growth by a country can lead to a more greedy, more selfish and less caring society. As society becomes more industrialised, violence, crime, loneliness, stress-related diseases, suicides, divorce and other social problems are likely to rise. Environmental costs; A richer society may be more concerned for the environment, but it is also likely to do more damage to it. The higher the level of consumption, the higher is likely to be the level of pollution and waste. What is more, many of the environmental costs are likely to be underestimated due to a lack of scientific knowledge. Acid rain and the depletion of the ozone layer have been two examples.

Non-renewable resources; If growth involves using a greater amount of resources, rather than using the same amount of resources more efficiently, certain non-renewable resources will run out more rapidly. Unless viable alternatives can be found for various minerals and fossil fuels, present growth may lead to shortages for future generations. Effects on the distribution of income; While some people may gain from a higher standard of living, others are likely to lose. If the means to higher growth are greater incentives (such as cuts in higher rates of income tax), then the rich might get richer, with little or no benefits trickling down to the poor. Growth involves changes in production: both in terms of the goods produced and in terms of the techniques used and the skills required. The more rapid the rate of growth, the more rapid the rate of change. People may find that their skills are no longer relevant. Their jobs may be replaced by machines. People may thus find themselves unemployed, or forced to take low-paid, unskilled work.

LIMITATIONS OF GROWTH
Resource exhaustion Renewable resources Pollution Conflicts between many policies of government 5. External trade influences through improvements and deteriorations in the terms of trade. 1. 2. 3. 4.

PROBLEMS OF GROWTH IN LDCs

1. Low per capita income 2. Poverty reduces quality to save 3. Inefficient allocation of resources 4. Increasing rate of population growth 5. Lo quality land and labour 6. Abundant and untrained population 7. Lack of entrepreneur enterprise 8. Evasion of taxes 9. A tropical climate 10.Inefficient banking system- failure to mobilise savings 11.Wide spread under employment

PRIVATE STUDY
1. Chenery s patterns of Development(the ten basic development processes that describe the dimensions of structural transformation of LDCs.)

Chenery and colleagues examined patterns of development for developing countries at different percapita income levels during the post-war period. Major hypothesis is that development is an identifiable process of growth and change whose main features are similar in all countries. The empirical studies identified several characteristic features of economic development: Shift from agriculture to industrial production Steady accumulation of physical and human capital Change in consumer demands Increased urbanization Decline in family size Demographic transition

MEANING AND CHARACTERISTICS OF MODERN ECONOMIC GROWTH (MEG)

Modern Economic Growth (MEG) is the term applied by Simon Kuznets to describe the economic epoch of the last 250 years, distinguished by the pervasive application of science-based technology to production. Professor Simon Kuznets defines MEG as; a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it demands. MEG simply refers to the development of the developed countries of Western Europe, the USA, Canada, Australia, China, Korea, Hong Kong and Japan among others.

COMPONENTS OF MODERN ECONOMIC GROWTH

This definition brings forth 3 components 1. That Economic Growth is identified by the sustained increase in the supply of goods 2. That advancing technology is the permissive factor in Economic Growth which determines the growth of capacity in supplying a diverse range of good to the population. 3. That for an efficient and wide use of technology and its development, institutional and ideological adjustments must be made to effect the proper use of innovations generated by advancing stock of human knowledge.

CHARACTERISTICS OF MODERN ECONOMIC GROWTH

There are 6 characteristics identified by Prof. Kuznets. 2 of which are Quantitative (relating to national output and population) High rates of growth of per capita and population The rise in productivity 2 relate to Structural transformation High rate of structural transformation Urbanisation 2 relate to the International spread The outward expansion of developed countries International flows of men, goods and capital

High rates of growth per capita product and population; modern growth is characterised by high rates of increase in per capita product accompanied by substantial rates of population growth. That MEG meant a striking accelerated rise not only in product per capita but also in population does not imply that the latter was a necessary condition fro the former. In some countries, high rates of growth in per capita product were accompanied by high rates of population increase and in other low rates. The rise in productivity; MEG is characterised by a rise in the rate per capita product due to improvements in the quality of inputs which has led to greater efficiency or rise in the productivity per unit. Increase in efficiency implies greater output per unit of input. According to Kuznets we find that the rate of increase in productivity is large enough to account for almost the entire growth of product per capita in the developed countries.

High rate of structural transformation; structural transformations in MEG include, a shift away from agriculture to non agricultural activities an from industry to services, an increase in scale of productive units, shifts in organization (personal enterprises impersonal) and a corresponding change in the occupational the status of labor, shifts in the structure of consumption among others. These intersectoral shifts were accompanied by growth in the sacla of firma and changes in the type of organisation within sectors such as manufacturing or trade from incorporated firms to the large corporate units with rapid shifts in industrial structure and rapid changes in technology. There were also rapid shifts in the allocation of products among types and sizes of producing firms and consequently in the allocation of the labour force from blue-white collar jobs, from less to more skilled occupations and from small to large organs

Urbanisation ; MEG is characterised by the movement of an

increasing proportion of the population in developed countries from rural to urban areas. This is largely a product of industrialisation. However the changes in conditions of life suggested by "urbanization" clearly involves a variety of costs and returns that are not now included in economic measurement. Internal migration, from the countryside to the cities represents substantial costs in the pulling up of roots and the adjustment to the anonymity and higher costs of urban living. According to Kuznets, urbanisation affects the consumer expenditure in 3 ways: 1. Urbanisation led to an increasing division of labour, growing specialisation, and a shift of many activities from non market oriented to specialised market oriented firms. 2. It made the satisfaction of an increasing number of wants more costly i.e. urban life became costlier because of congestion and overcrowding. 3. The demonstration effect of the city life led to imitation of consumption patterns by the large immigrants which led to increased consumer expenditure.

The outward expansion of developed countries; the economically developed countries, by means of the increased power of technology, particularly in transport and communication (both peaceful and warlike), have the propensity to reach out to the rest of the world thus making for one world. Growth of developed countries has been uneven i.e. it occurred in some nations earlier than it did in others. This was largely due to the differences in Historical background for instance the industrial revolution first occurred in England the later spread to other countries in Europe. The outward expansion of developed countries with their European origin has bee primarily due to the technological revolution in transportation and communication. This led to more direct dominance over colonies, the opening up of previously closed areas like Japan and the partition of undivided areas like sub Saharan Africa.

International flows of men, goods and capital; the international flows of men, goods and capital increased from the 2nd quarter of the 19th century. It was charaterised by migration (international migrations), flows of goods and flows of capital across the world. It also involved extended application of science to problems of economic production and Politics.