Macroeconomics Research Paper

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Colorado Technical University

Research Paper

Submitted in Partial Fulfillment of the Requirements for

Colorado Springs, Colorado
March 2012

The economic growth is the process by which per capita income rises over time. Growth theory attempts to model and understand the factors that are behind this process. It is a particularly challenging area of research because growth is extremely uneven in space as well as in time. Over the past millennium, world per capita income increased thirteen-fold, from $435 per person per year around the year 1000 to $5,700 nowadays. This contrasts sharply with the preceding millennia, when there was almost no advance in per capita income. Per capita income started to rise and accelerate around the year 1820 and it has sustained a steady rate of increase over the last two centuries (Beck, 2000). One of the main challenges for growth theory is to understand this transition from stagnation to growth and in particular to identify the main factor that triggered the take-off The paper will highlight the economic growth and the stimulating factors that give rise to the revenue of the country and improve the standard of living of the people. It will also highlight the effects of the monetary regimes on economic development in different parts of the world. The growth of the economy brings prosperity to the country and enhances the economy will inclining the GDP of the country. The economic growth can be stimulated through various factors that include the role of financial intermediaries, role of government ownership of the banks and the social factors. The role of all these factors is crucial in the economic development of the country. Discussion

Economic growth means an increase in economic activity compared to an earlier point for example previous year. The most commonly used indicator is the percentage increase in the gross national product (GNP) or gross domestic product (GDP) per capita over a given period of time. Economic growth is usually measured over a whole country. This is adjusted for inflation, so there is real growth. If not corrected for inflation, there is nominal growth. Also this does not necessarily mean that the purchasing power of the population is growing because the population may increase or decrease. The first key factor in the growth process is the accumulation of physical capital. For capital steadily to drive growth, the output of an economy needs to be proportional to the stock of capital used in production. In this case, growth will be proportional to investment. This accumulation through investment may come about either through local saving or by investment from abroad (Bassanini, 2004). A theoretical argument against this view claims that marginal returns to capital are decreasing, i.e. one cannot increase production per worker indefinitely simply by increasing the stock of capital per worker. If machines per employed person grow at a constant rate, the growth of output will eventually fall to zero. Workers, whose number is bounded by the active population, cannot deal with many machines with the same efficiency as they cope with fewer machines. The debate on this issue is still very lively Accumulating human capital is the other way to sustain a growth process. Even if a country cannot indefinitely increase its supply of labor, it can enhance the quality of labor. This quality is referred as 'human capital'. Human capital can be accumulated in two ways: during the early stage of life by going to school and spending on education; during the working life by accumulating experience or by on-the-job training. Investment in formal education has increased substantially all over the world. In England, for example, the number of years spent at school went from two on average in 1820 to more than fourteen today. In developing countries, school enrolments grew rapidly between 1960 and 2000. However, many poor countries...
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