Economic growth is defined by, among other things, material capital formation, human capital formation and the creation of innovation. Put another way, economic growth is determined by the amounts and types of capital and labor that are invested, and how they are utilized for production. The objective of economic growth through economic policy is not necessarily GDP or GNP maximization but maybe enhancing and improving quality of life or other values that cannot be measured by GDP. If we limit our outlook to economic growth itself, the questions of what to assume as the objective of economic growth and how to measure it is decided by people. It is possible and desirable, to have a scheme wherein issues that are not easy to quantify, such as quality of life, are taken into account when policy choices are prepared and decisions carried out. The idea here is only that no matter what kind of economic society one visualizes, the issues of investment of capital and available resources are of extreme importance. This is to say while the objective of economic policy is improving the welfare of citizens, it will primarily be dependent on resource investment and productivity, no matter how that improvement may be defined. Whether looking at GDP or quality of life, different levels of attainment have been achieved from nation to nation.
The enormous cross-country differences in economic development and growth have led to research interest in the determinants of economic growth. Three main competing explanations exist with regards to stunted economic development and growth. The first explanation centers on the role of increased international trade. The basic idea here is that an economy struggling to increase development and growth should become more actively involved in the larger global economy. By integrating with the larger global economy, a nation hopes to increase trade that drives productivity change and income growth. Unfortunately, this explanation relies on a dependency of a particular economy to be logistically connected to the global economy. In other words, trade must have some way of getting to and from the developing economy.
The second view emphasizes the role of quality institutions, or rather the lack thereof, as the reason for low economic growth and development. According to Daron Acemoglu, a proponent of this view, some societies have good institutions that encourage investment in machinery, human capital, and better technologies, and, consequently, these countries achieve economic prosperity. In other words, economic development and growth are products of good institutions. Concentrate on establishing good institutions and economic growth and development will follow.
The final view revolves around the geography of a nation and economy, specifically its resource constraints and physical location, which can impact transportation costs, technological productivity and disease, all that directly influence its ability to integrate with the larger global economy. Economists such as Jeffrey Sachs argue that the role of geography in the growth and development of an economy is often underestimated as an explanation for poverty stricken nations. The geography view emphasizes the need for struggling economies to receive direct interventions, backed by donor assistance, to address disease, geographic isolation, low technological productivity, and resource limitations that trap them in poverty.
The first of the views to stimulate stagnant economic development and growth by way of increased trade derives its main ideas from David Ricardo. Ricardo was a nineteenth century economist who developed the idea of comparative advantage (Ricardean Theory). In short, the theory sets out that all nations can increase their standard of living through specialization and trade. Further, the theory concedes that raising a nation’s standard of living can be accomplished though it...