Economic Growth and Structural Change

Economic growth and structural change

Index:

1. Introduction

2. The Economic Dynamics

3. The Harrod-Domar Model

4. The neoclassic model

5. Endogenous growth

6. Growth and Structural Change

7. Innovations and Growth

8. The Economic Convergence

1. Introduction

1.1. Definition:

Economic growth implies an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries.

Sustained economic growth should lead higher real living standards and rising employment.

1.2. Overview:

One of the most obvious and present problems concerning the world economy is the inequality of the economic growth and the income distribution. The economies of the countries grew at very different rates leading to huge disparities between developed and developing nations. There are several reasons for this development, which are going to be elaborated further during the next seven chapters.

2. The Economic Dynamics

The economic and social development is one of the most important tasks of every government. Especially, less developed countries with poor performance and vulnerable economies have to focus on that. Due to the international environment, developing countries encounter difficult conditions such as agrarian protectionism in the industrial markets, restricted access to innovative technologies and problems to access the global capital markets. It is a very complicated task but not impossible as the following examples show:

For instance, according to the data of MADDISON (British economist), in 1960, Spain and Peru had almost the same GDP per capita of 3000 dollars (in prices of 1990). They grew at very different rates leading Spain to have approximately a four times higher GDP per capita of 19.706 Dollars compared to Peru's GDP per capita of 5.388 dollars in 2008 (both in prices of 1990). This means that Spain grew with a yearly accumulated rate of 4% whereas Peru's GDP per capita increased by only 1 %.

Another example includes 4 countries, two Asian ones, Taiwan and Malaysia, one south American one, Bolivia, and an African one, Congo which all had a similar GDP per capita of 1500 dollars in 1960. Between 1960 and 2008, Taiwan grew at an annual accumulated rate of 5,8% and Malaysia at 4,1% while Bolivia's and Congo's GDP per capita increased by mild 1% per year.

A third example compares the growth of the GDP per capita of two Asian countries, China and Bangladesh, and two African ones, Botswana and Mali. In 1960, all of them had an approximately equal GDP per capita of 500 dollars (in prices of 1990), being situated at the last places in the international development. Botswana experienced an enormous growth, starting at the beginning of the 1970s, increasing it's GDP per capita by an annual accumulated rate of 5,4% whereas Mali's and Bangladesh's GDP per capita rose by 1,4% or 1,5%. China grew at a steady annual rate of 4,9% leading to a 4 to 5 times higher GDP per capita compared to Mali or Bangladesh in the year 2008 (in prices of 1990); IN GRAPHIC 1c the graphs of China and Mali were labelled wrong!

The fourth and last example approaches the very different growth rates of the GDP per capita of South Korea, Mexico and Argentina. In 1960, the GPD per capita of Mexico was about 2 times and the GDP per capita of Argentina about 4 times higher than the GDP per capita of South Korea. Due to a tremendous accumulated annual growth rate of 6% the situation changed completely and so in 2008, South Korea's GDP per capita was more than double the GDP per capita of Argentina or Mexico. IN GRAPHIC 1d the graphs of Mexico and Corea del Sur were labelled wrong!

The previous examples show that it is not impossible for underdeveloped countries to enhance their economic performance. There are many nations, which managed to grow at very high rates, reaching the economic and social levels of "developed countries" over the past decades whereas others with similar starting conditions failed to reach these objectives.

However, the governments of the different nations cannot control all, but some, of the factors that are causing economic growth. The established institutional frame and the adapted political and social norms influence the opportunities for economic growth. Therefore it is crucial to understand and manipulate the factors affecting the dynamic economic development of a country.

3. The Harrod-Domar Model

The Harrod-Domar model was developed in the 1930s by Roy HARROD (British economist) and Evsey DOMAR (North American economist) and suggests that savings provide the funds, which are borrowed for investment purposes.

It consists mainly on two supposes:

The first one is that households are saving a certain proportion of their income. As their income increases they are saving more money. The second one is that the stock of capital is proportional to the output which is obtained with it, the more capital available, the more output can be achieved:

Growth in the Harrod-Domar model depends on three factors:

a) the savings rate

b) the relation capital-product (capital needed to reach a desired volume of production)

c) and