Growth Population

Topics: Economic growth, Economics, Exogenous growth model Pages: 7 (2598 words) Published: December 12, 2012
Economic Growth is the increase per capita gross domestic product (GDP). There is a distinction between nominal and real economic growth, where the first is the growth rate including inflation, while the second is the nominal rate adjusted for inflation. Moreover economic theorists distinguish short-term economic stabilization and long-term economic growth. The topic of economic growth is mainly related to the long run. Short-run variation of economic growth is termed the business cycle. The long-run path of economic growth is one of the central questions of economics. In 1377, the Arabian economic thinker Ibn Khaldun provided one of the earliest descriptions of economic growth in his Muqaddimah (known as Prolegomena in the Western world) (cited in Weiss, 1995): When civilization [population] increases, the available labor again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase. Crafts are created to obtain luxury products. The value realized from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before. And so it goes with the second and third increase. All the additional labor serves luxury and wealth, in contrast to the original labor that served the necessity of life. Economic growth is an important part of economic theory and one of the most significant problems economists tried to explain is the differences of growth rates of countries. Economic growth has been discussed since the time of physiocrats and Adam Smith. In his book “Wealth of Nations” (1776), Adam Smith mentioned economic growth as the improving and increasing of capital. David Ricardo in “The Theory of Comparative Advantage” (1817) emphasized on the benefits of trade and its role in the expansion of economies. Modern economic growth theory was developed more than a century later during the mid-20th century. Based on Harrod and Domar model (1946), Solow and Swan (1956) introduced a model that included the term productivity growth. Assuming technological progress exogenous the neo-classical growth model shows that in case of no technological progress, economic growth will at some point ceases due to the effect of diminishing returns. Solow’s model also includes a parameter that measures productivity, which describes the knowledge in the economy. The model implications where that in the short run policies are able to affect the steady state of the total production, but not the long run growth rate since growth is determined exogenous by the growth of labor force and technological progress. Neo-Classical Growth Model: Y=AK^α L^(1-α)

Where Y represents the total production in an economy, A represents the productivity factor (often generalized as technology), K is he capital and L is the labor. Despite its simplicity and the model gave the first insights in the importance of technological progress in the process of economic growth through the productivity factor, since a technological improvement which would increase A would eventually lead the economy to a higher level of output. Due to the disadvantages of Solow’s model and the need for a more {{{{effective}}}} theory explaining growth in the long run and technological progress, the endogenous growth theory were developed in the 1980s. Romer (1986) based on microeconomic assumptions, households maximizing utility and firms maximizing profits, built macroeconomic models introducing technological progress and human capital – the skills and knowledge that make the labor force productive – which contrary to physical capital has increased rates of return. This model gave to policy makers for the first time the theoretical framework in order to influence long run growth rates depending on the type of capital they wanted to invest in. Lucas (1988), Grossman and Helpman and Aghion and Howitt (1992) developed this idea further by including innovation and...
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