Concept of Economic Growth

Concept of Economic Growth

Economic growth is concerned with the expansion of an economy’s ability to produce (potential GDP) over time. Expansion of potential output occurs when there is an increase in natural resources, human resources, or capital, or when there is a technological advance. The two most common
measures of economic growth are an increase in real GDP and an increase in output per capita. Of these two measures, an increase in output per capita is more meaningful since it indicates there are more goods and services available per person and hence a rise in the economy’s standard of living. An increase in potential Copyright 2003 by The McGraw-Hill Companies, Inc. Click Here for Terms of Use. output can be conceptualized by an outward shift of an economy’s production-possibility frontier. In our discussion of economic growth, we assume that increases in potential output are matched by equal increases in aggregate spending so that full-employment growth is assured.
Growth through Population and Capital Accumulation
An increase in the labor supply, ceteris paribus, expands potential output. The law of diminishing returns shows that the incremental output from an additional labor input decreases when other economic resources and technology are unchanged. Thus, the possibility exists that aggregate
output could increase while output per capita decreases. Expecting rapid population growth, economists in the early nineteenth century predicted such growth would result in declining output per capita. Thomas Malthus, in particular, held that the population would increase at such a rapid rate that the economy would increasingly be unable to grow enough food to feed its population; eventually output per capita would fall to a subsistence level. While technology has allowed highly industrialized countries to avoid these gloomy projections, rapid population growth is a problem
for many developing countries.
The neoclassical model of economic growth maintains that, in the absence of technological change, an economy reaches a steady state—where there are no further increases in output per capita. In the steady state, capital deepening ceases, although capital widening can occur because of growth in the labor supply. Capital widening exists when capital is added to keep the ratio of capital per worker constant due to increases in the supply of labor. Capital deepening occurs when there is an increase in the ratio of capital to labor. With no technological advance, capital additions that are capital widening do not change output per worker; however, capital additions that are capital deepening increase output per worker. When there is no
change in the labor force, capital additions result in diminishing returns and have decreased rates of return.
Capital additions cease—and the economy reaches a steady state—when the rate of return from
capital additions equals the economy’s real rate of interest. Since there is a limit to capital deepening when there is no change in technology, there must also be a limit to output per worker and therefore to the economy’s standard of living. An economy’s steady-state position can be pushed to a higher level of output per worker by an increase in its rate of saving, by improved technology, and/or by better education of its population.
Productivity is measured by dividing real GDP by the total number of hours worked by labor. Over time, the growth of labor productivity in the U.S. has slowed. Economists have been unable to empirically establish the cause of this productivity growth slowdown, but some potential factors may be: (1) an increase in environmental regulations; (2) high energy costs, resulting in the substitution of more labor and capital for energy; and (3) an increase in the number of less skilled workers in the labor force.
A productivity growth slowdown has implications for a country’s standard of living. Standard of living is measured by an economy’s real GDP per capita (total output divided by population), whereas productivity is measured as real GDPper hour of labor input (output divided by the
number of hours worked to produce this output). Suppose an economy’s labor force is always 50 percent of its population. Increases in labor’s output per hour will result in higher GDP per capita and therefore raise the economy’s standard of living. When output per hour is unchanged, there
will be no increase in output per capita and therefore no improvement in the economy’s standard of living.

Tulisan di atas di ambil dari buku berjudul Principles of economics Karya Dominick Salvatore Ph.D. dan Eugene diulio, Ph.D

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