Economic Growth: Expanding Resources, Technological Change and the Sources of Economic Growth - Term Paper Example

 ABSTRACT The paper looks on economic growth in the globe and its impact on various resources. The paper has looked in detail understanding of Economic growth by various economists while explaining its effect on natural resources. Technological changes have been a major factor in determining economic growth in the modern world. This has been looked in to detail plus changes that has been experienced in sources of economic growth. Outline Introduction 3 Theories of Economic Growth 3 Technological changes influence on economic growth. 5 Effects of economic growth 7 Conclusion 7 References 9 Economic growth (expanding resources), (technological change) and (estimating the sources of economic growth) Introduction Economic growth refers to the increase in level of production of goods and services by an economy over a given period of time. Economic growth is measured in real terms, which is as the percent increase in real GDP (gross domestic product).Real growth is measured by adjusting inflation on nominal growth. Economic growth is brought on by technological innovation in use or production of resources plus positive external sources. There is difference between economic growth and economic development; economic development refers to aspects and process of development in low-income countries while economic growth refers to advancement of economies by countries (Erber, 2002). Economic growth focuses attention to long-term changes in an economy in spite of measurement problems. A positive change in GDP is taken as an increase in living standards of residents of a particular country. Various Governments advocate for policies that encourage economic activities without creating inflation (Barro, 1997). Theories of Economic Growth There have been different theories that explain how an economy grows. In 1377 an economic thinker Ibn Khaldun argued that when population increases, labor increases leading to an increase in luxury which is brought about by increased profits. The need for luxury increases thereby creating crafts production to get luxurious products. The value from luxuries increases and as result profits become multiplied in the city. Production thereby thrives than before and additional labor serves wealth and luxury (Erber, 2002). According to western European countries in early modern world, growth in economies occurs when a country produces surplus over the mere subsistence. It is clear that for economic growth to occur it has to correspond with continual reorganization of human activities backed up by investment focusing to maximize returns. In Mercantilists era economic growth was measured in terms of increase in amount of medium of exchange which was mostly gold and silver. This theory forced trade on particular state and acquiring of cheaper raw materials from colonies for manufacture and there after selling. Later mercantilists encouraged manufacturing and formula of importing raw materials of exporting finished goods, high tariffs erection encouraged establishment of factories. Fixed costs were paid by the local markets thus encouraging export abroad. Mercantilists hoped removal of competition abroad would increase the prices thus creating good environment for establishing business because of reduced costs. Growth under this theory was gained through advantageous trade and trading against level countries was discouraged as they regarded it as disadvantageous. They stressed breakdown of trade barriers and encouraged building of roads and abolishment toll booths in the host country (Barro, 1997). Classical growth theorists countered mercantilists by criticizing them. They argued that productive capacity was enough to promote growth. According to them increasing and improving capital would in itself create capacity which they referred to as “wealth of nations”. They viewed agriculture as an important resource and discouraged urban industry. They recognized manufacturing as the key point in any economy. David Ricardo, a classical growth theorist emphasized international trade based on comparative advantage. Thus each country was encouraged to produce what was cheap to them it terms of lower costs and sell such goods abroad. He favored free trade and they saw it as an essential tool for growth (Foley, 1999). During the industrial revolution, Thomas Malthus in his “Essay on the principle of population” argued that an economic growth would translate into population growth. He argued that aggregate income would increase but the income per capita would remain constant. The main stream economists have broken Malthusian regime by arguing that, with industrial development medicine production would be advanced, thereby increased life expectation and lower infant mortality rate. Need for quality in children would overtake quantity thus dropping fertility rates in industrialized countries leading to an increase in incomes per capital (Erber, 2002). Other theories that explain economic growth include “big push” which sees development in countries as going through virtuous cycle with investment in infrastructure and education. The theory puts forward the need of private investment in the economy growth as a major factor (Foley, 1999). Technological changes influence on economic growth. Entrepreneurship is seen by many economists as key component on society’s technological progress thus bringing economic growth. Joseph Schumpeter in his book “capitalism, socialism and democracy” (1942) defined an entrepreneur as person who is able and willing to change an invention into productive innovation. Entrepreneurship brings forth creative destruction which in return brings dynamism in industry’s development and long run growth in economies (Foley, 1999). Neo-classical growth theorists viewed the role of technological change as crucial in modern world more than capital accumulation. A model developed by Robert Solow and Trevor Swan in 1950s assumes use of resources efficiently and that there are diminishing returns to capital and increase in labor. The model makes three predictions; increasing capital with labor will create economic growth, secondly poor nations with less capital will produce higher returns with each investment in capital than rich countries with more capital. Thirdly because of decreasing returns of capital economies reach a steady state where an increase in capital will create no economic growth. The model formulates that to overcome this steady state, countries need to invent new technologies. The new technology allows production with less resource. Endogenous growth theorist includes mathematical explanation in technological advancement which incorporates human capital to production. In this theory capital may have constant return but countries never reach steady states because of human capital which has increasing rates of returns. Therefore the rate of growth in each country depends on the type of capital that is invested. In modern world Education and technological change is seen as major factors that explain economic variations and growth rates in the globe (Barro, 1997). Effects of economic growth Economic growth has many effects both positive and negative. On the positive side economic growth improves life of human beings by decreasing poverty. It is agued that economic growth is slow in countries that have high poverty levels and that happiness increase with increase in GDP (Erber, 2002). Those theorists that predicted depletion of resources like Thomas Malthus (1798) have been proven wrong in their views due to technological advancement and science, which has made use of few resources economically. Economic growth impact on environment has been viewed positively by some economists who argue that the effect that occurs is minor. Economists have further argued that economies grow due to increase in level of technology and efficiency given physical limitation of resources. Peak oil theory argues that the individual oil mines and wells may be depleted but their availability has continued to increase and their prices falling (Erber, 2002). On the negative side economic growth is seen as lowering the quality of life as some things like environment cannot be measured. Economic growth depletes non-renewable resource so fast due to the increased population which takes up a lot of available resources. Economic growth creates Imbalance between countries where the rich countries grow richer while the poor ones become poorer. Some criticize that economic growth plus globalization creates a situation where collapse of earth’s natural resources could be experienced (Barro, 1997). Conclusion Economic growth improves quality of life but it comes to a point where it leads its decline. Where environment becomes unstable it affects human beings way of life. Economic effect is seen in modern world as having a major impact on climate change. The carbon emissions affecting the global climate change is emitted by countries seeking to improve their economies. In 2006 United Kingdom government published that if a country undergoes a 1% annual increase in its GDP it would save on climate change experienced in the globe. Otherwise this would lead to 20% decline in the global GDP. References Barro, Robert J. (1997). Determinants of Economic Growth: A Cross-Country Empirical Study. MIT Press: Cambridge, MA. Erber, George, and Harald Hagemann, (2002) Growth, Structural Change, and Employment, in: Frontiers of Economics, Ed. Klaus F. Zimmermann, Springer-Verlag, Berlin – Heidelberg – New York pp 269-310. Foley, Duncan K. (1999). Growth and Distribution. Harvard University Press: Cambridge, MA. Read More