Economic growth is the percentage annual increase in real
GNP or per capita real GNP in the long run. It is an imperfect measure of
the rate of increase of economic well-being.
Measured GNP omits the value of leisure and of untraded goods and bads
that have an impact on the quality of life. Differences in income distribution
make per capita real GNP a shaky basis for comparisons of the welfare of the
typical individual in different countries.
Significant rates of growth of per capita GNP occurred
only in the last two centuries in the advanced economies. In other countries
persistent growth is even more recent.
Potential output can be increased either by increasing the inputs of land,
labour, capital and raw materials, or by increasing the output obtained from
given input quantities. Technical advances are an important
source of productivity gains.
An apparently fixed supply of a production input, such
as a particular raw material, need not make growth impossible in the long
run. As the input becomes scarce, its price rises. This makes producers substitute
other inputs, increases incentives to discover new supplies and encourages
inventions that economize on the use of that resource.
The simplest theory of growth has a steady state in which
capital, output and labour all grow at the same rate. Whatever its initial
level of capital, the economy converges on this steady-state path. This theory
can explain output growth but not productivity growth.
Labour-augmenting technical progress allows permanent
growth of labour productivity and enables the simple growth theory to fit
many of the facts.
There is a tendency of economies to converge, both because
capital-deepening is easier when capital per worker is low
and because of catch-up in technology. Implementing technical
change may depend on how well society is organized to buy off (or defeat)
the losers.
Thatcherism did induce an identifiable rise in UK productivity growth,
even after controlling for factor accumulation and catch-up opportunities.
It is difficult to be sure whether Thatcherism changed the growth rate forever.
Theories of endogenous growth are built on constant returns
to accumulation. If aggregate investment does not encounter diminishing returns
to capital, choices about saving and investment can affect the long-run growth
rate of productivity. An externality on a giant scale provides a powerful
rationale for government intervention to encourage education, training and
physical capital formation.
Nevertheless, endogenous growth rests on the presence of constant returns
to accumulation. Nobody has yet explained why this should hold.
