Class Notes: Economic Growth
1. Definition
● Economic growth: Increase in the output of goods and services in an economy over
time.
● Usually measured by Gross Domestic Product (GDP) or Gross National Product
(GNP).
● Can be real (adjusted for inflation) or nominal (current prices).
2. Importance of Economic Growth
● Improves living standards and income per capita.
● Reduces unemployment and poverty.
● Generates government revenue for public services.
● Encourages investment and innovation.
3. Factors of Economic Growth
1. Physical Capital: Machinery, infrastructure, technology.
2. Human Capital: Education, skills, and labor productivity.
3. Natural Resources: Availability of land, minerals, energy.
4. Technological Progress: Innovation, research, and development.
5. Institutions and Governance: Rule of law, property rights, political stability.
6. Trade and Investment: Access to markets, foreign direct investment (FDI).
4. Types of Economic Growth
● Extensive growth: More inputs (labor, capital) → higher output.
● Intensive growth: More efficient use of existing resources → higher
productivity.
● Sustainable growth: Maintains growth without depleting resources or harming the
environment.
5. Measurement
● GDP: Total value of all goods and services produced in a country.
● GNP: GDP + net income from abroad.
● Per Capita GDP: GDP divided by population → measures standard of living.
● Growth rate formula:
Growth rate (%)=GDPt−GDPt−1GDPt−1×100\text{Growth rate (\%)} = \frac{\
text{GDP}_{t} - \text{GDP}_{t-1}}{\text{GDP}_{t-1}} \times 100Growth rate
(%)=GDPt−1GDPt−GDPt−1×100
6. Theories of Economic Growth
1. Classical Theory (Adam Smith, David Ricardo): Growth through capital accumulation
and free markets.
2. Harrod-Domar Model: Growth depends on savings and investment.
3. Solow-Swan Model: Long-term growth driven by technological progress.
4. Endogenous Growth Theory: Innovation, human capital, and knowledge drive growth.
7. Determinants of Long-Term Growth
● Capital accumulation: Investment in infrastructure, machinery.
● Labor force growth: Population growth, migration, workforce participation.
● Technological advancement: Increases productivity.
● Institutional quality: Legal system, property rights, political stability.
● Openness to trade: Access to larger markets and technology transfer.
8. Challenges to Economic Growth
● Resource depletion and environmental damage.
● Income inequality and uneven regional development.
● Political instability and corruption.
● Inflation, debt, and financial crises.
9. Examples
● Rapid growth: China (reforms + investment), South Korea (technology + education).
● Slow growth: Sub-Saharan Africa (infrastructure gaps, political instability).
