Economic growth - American businessEconomic growth, in its most limited definition, is an increase in real gross domestic product (GDP), the primary measure of output in an economy. GDP comprises the total market value of final goods and services produced in an economy in a period of time, and increases in GDP are economic growth. Economies tend to go through periods of expansion and contraction of GDP.
Economic growth can be either extensive (resulting from greater quantity of labor, materials, and capital input) or intensive (resulting from technological advances and more efficient use of existing resources). Whether as a result of increasing quantities of resources or more efficient use of resources, output increases. Studies have documented growth in industrial economies as being largely attributable to intensive factors, while growth in developing economies tends to be derived from extensive sources. In an often-cited study, economist Edward Denison analyzed U.S. economic growth during the 20th century. He found that in the period from 1929 to 1948, over 50 percent of the growth in GDP was attributable to increases in the quantity of labor, with capital contributing to less than 5 percent of overall economic growth. From 1948 to 1973, the overall U.S. economic growth rate was 40-percent higher than the earlier period, but the contribution of labor to growth was almost unchanged. The quantity of capital accounted for over five times as much growth, and technological change accounted for three times as much growth in the later period. Denison attributed the added economic growth to the combination of increased capital, incorporating knowledge gains and technological advances in the period. Similarly, most economists attribute U.S. productivity gains in the 1990s to capital and human investment in computer technology.
Developing economies often face numerous obstacles in pursuit of economic growth. In many developing countries, resources for investment are concentrated among a small wealthy class and government. If these resources are spent on current consumption, future economic growth will be limited. In what economists call the circle of poverty, low investment leads to low levels of output, which results in low levels of saving, which leads to low levels of investment.
In The Stages of Economic Growth, economist Walt Rostow posited that economies go through a series of five stages of economic growth: traditional society, preconditions for takeoff, takeoff, drive to maturity, and mass consumption. In the traditional-society stage, well-established economic and social systems and customs limit economic change and growth. In the preconditions stage, traditional constraints are removed and new methods and technology introduced. In the takeoff stage, an economic growth begins and investment expands rapidly. The takeoff stage is a period of intensive development. Rostow dated the takeoff stage in the U.S. economy as the period from 1843 to 1860, when major railroad investment opened new markets and expanded access to resources throughout the country. In the drive to maturity stage, an economy shifts from its original industrial base to expanding into new products and services. In the fifth stage, mass consumption, an affluent population leads to a well-developed consumer goods and services economy.
Austrian economist Joseph Schumpeter argued that economic growth depends on creative destruction. Schumpeter suggested that, in competitive markets, businesses attempt to find new ways to produce goods and better products in order to survive and prosper. In the process, existing methods and products are constantly being replaced. During periods of rapid economic growth, new technologies and new products are constantly being introduced. During periods of economic stagnation, innovation and investment are low.
See also business cycles; supply-side economics; trickle-down economics.