Types and factors, benefits and costs of economic growth

Types and factors of economic growth

To explain why some countries are developing faster than others; how to accelerate economic growth; what determines the rate of increase in GDP, that is, to understand the intercountry and intertemporal differences in the level of real GDP (and real GDP per capita) and in its growth rates, it is necessary to analyze the types and factors of economic growth. The increase in production capacity and the growth of potential GDP are associated with changes in either the amount of resources or the quality of resources.

Accordingly, there are two types of economic growth: extensive and intensive. Economic growth due to an increase in the amount of resources, the simple addition of factors, is an extensive type of economic growth. Economic growth associated with the improvement of the quality of resources, the use of the achievements of scientific and technological progress is an intensive type of growth.

Accordingly, the two types of economic growth are two groups of factors:

• factors that affect the amount of resources: labor, land, capital, entrepreneurial abilities. The factors of the extensive type of economic growth include: the use of more labor; construction of new enterprises; use more equipment; involvement in the economic turnover of additional land; discovery of new deposits and an increase in the extraction of minerals; foreign trade, allowing to increase the amount of resources, etc. However, the workers' qualifications and their labor productivity, the quality of equipment and technology do not change. Therefore, the return of products and income per unit of labor and capital remains the same.

• factors that affect the quality of resources. The factors of intensive type of economic growth are: the growth of the level of qualification and professional training of the labor force; use of more advanced equipment; the most advanced technologies (primarily, resource-saving); scientific organization of labor; most effective methods of state regulation of the economy.

The most important role among the intensive growth factors is played by scientific and technical progress (NTP), which is based on the accumulation and expansion of the knowledge that society possesses; on scientific discoveries and inventions that give new knowledge; on innovations that serve as a form of realization of scientific discoveries and inventions. It is scientific and technical progress that ensures the improvement of the quality of resources.

The main economic characteristic of the quality of resources is their performance. The most important factor determining the standard of living in the country is labor productivity. Labor productivity is the amount of goods and services created by an employee in one hour of working time.

The more goods and services each worker produces per hour, the higher the labor productivity and the greater the real GDP. Since the standard of living is determined by the amount of goods and services produced in the country, since total income is equal to total output (production), the higher the real GDP, the higher the standard of living and welfare. On labor productivity, and, consequently, on economic growth and its pace, the following factors influence:

• physical capital (or simply capital) is a stock of equipment, buildings and structures that are used to produce goods and services. Note that physical capital itself is the result of the production process. The more advanced and modern it is, the more goods (including investment, that is, new equipment) and services can be produced with its help.

• human capital is the knowledge and labor skills that workers receive in the learning process (at school, college, university, vocational training and refresher courses) and in the work process (the so-called “learning by doing”). Note that human capital, like physical capital, is also the result of production processes and also increases the ability of society to produce new goods and services.

• Natural resources are the factors provided by nature, such as land, rivers and minerals. Natural resources are divided into reproducible and non-replicable. An example of the first can be forest resources (instead of felled trees, new ones can be planted). Examples of non-renewable resources are oil, coal, iron ore, etc., which, under natural conditions, take thousands or even millions of years to form. Although the reserves of natural resources are very important factors of economic prosperity, their availability is by no means the main condition for high growth rates and high efficiency of the economy. Indeed, the rapid pace of development of the US economy was initially associated with an abundance of free land suitable for agricultural use, and Kuwait and Saudi Arabia became the richest countries in the world thanks to the huge proven reserves of oil.

However, for example, Japan has become one of the leading countries in the world, possessing very small raw materials reserves. The rapid economic growth in the countries of Southeast Asia (the so-called "Asian dragons", including Hong Kong, Taiwan, South Korea and Singapore) is not due to the abundance of natural resources. Natural resources are the only factor that is not produced by man. Due to the fact that the number of non-renewable natural resources is limited, the ideas that there are limits to the growth of the world economy have become widespread. However, the problem of increasing these limits can solve technological advances.

• Technological knowledge is an understanding of the best ways (methods) to produce goods and services). Technological knowledge differs from human capital in that technological knowledge is the development and understanding of these best methods (answering the question how to produce), and human capital means the degree to which people (labor force) are mastered by these methods, the transformation of knowledge into labor skills. New technologies make work more efficient and allow to increase the production of goods and services. Technological knowledge is extremely important, as they:

• allow you to solve the problem of limited resources;
• are the main factor in accelerating economic growth.

The main reason for the fact that today's standard of living is higher than it was 100 years ago is in new technological knowledge. A telephone, a computer, an internal combustion engine, a conveyor belt, are among the thousands of technical innovations that have increased the possibilities of producing goods and services.

To describe the relationship between the amount of resources used in the economy (costs of production factors) and output, the concept of production function is used, which has the form: Y = AF (L, K, H, N), where Y is the volume of output, F ( ...) is a function that determines the dependence of the volume of output on the values ​​of the inputs of production factors, A is a variable depending on the efficiency of production technologies and characterizing technological progress, L is the amount of labor, K is the amount of physical capital, H is the number of people human capital are, N - number of natural resources. Macroeconomic models typically use production functions that have the property of constant returns to scale. If the production function has this property, then at the same time changing all factors of production by the same value, it itself changes by the same value. Mathematically, this means that for any positive number x the condition is satisfied: xY = AF (xL, xK, xH, xN).

So, if x = 2, then this means that by doubling all the factors of production, the volume of output doubles. With the help of the production function with constant returns to scale, you can get a curious result. If we assume that x = 1 / L, then the equation takes the form: Y / L = AF (1, K / L, H / L, N / L). Y / L reflects the number of products per worker, that is, it is an indicator of labor productivity. Thus, the resulting equation expresses the dependence of labor productivity on the amount of physical and human capital per worker (K ​​/ L, respectively, called capital-labor ratio, and H / L), the amount of natural resources per worker (N / L), and the level of technology A, that is, from the four main factors of economic growth. Thus, the standard of living in a country is determined by the economy’s ability to produce goods and services, and productivity depends on the size of physical and human capital, natural resources and technological knowledge.

The benefits and costs of economic growth

The value of economic growth lies in the fact that it expands the possibilities of increasing the level of well-being. On its basis, conditions are created for the implementation of social programs, the elimination of poverty, the development of science and education, and the solution of environmental problems. Economic growth increases the productive capacity of the economy, allows us to solve the problem of limited resources. Thanks to him, new types of resources are created, new efficient technologies of production processes, allowing to increase and diversify the production of goods and services, improve the quality of life. However, by itself, it is not able to solve many economic, social, environmental, and other problems.

Moreover, economic growth has significant costs:

• Alternative costs, i.e. the need to sacrifice current consumption (consumption in the present) to ensure economic growth and be able to increase consumption (welfare) in the future. The basis of economic growth are investments that increase the stock of capital. The problem of investment is the problem of intertemporal choice (between the present and the future). On the one hand, an increase in investment in the production of investment goods (equipment, buildings, structures) that contribute to economic growth and prosperity leads to a reduction in resources allocated to the production of goods and services used for current consumption. On the other hand, the basis of investment is savings, which is part of disposable income (RD = C (consumption) + S (savings)). With a given amount of disposable income, the growth of savings to ensure an increase in investment and, consequently, an increase in consumption in the future, requires a reduction in current consumption.

• Costs associated with diminishing returns on investment (capital). As the stock of capital grows, the additional output produced by an additional unit of capital, i.e. additional investment decreases. Due to diminishing returns on capital, higher savings and investments will lead to higher growth only for a certain initial period of time, but growth will slow down as the economy accumulates a higher level of capital stock. Thus, the growth of the savings rate gives only a temporary effect of accelerating economic growth. Consequently, in the long run a higher rate of savings leads to a higher level of labor productivity and higher income, but not at all to an accelerated growth of these indicators. This can only provide technological progress. In addition, taking into account the phenomenon of diminishing returns to capital, another important conclusion can be made: an additional increase in capital in a poor country increases growth more than a similar increase in capital in a rich country, i.e. countries with low levels of development have prerequisites for faster economic growth. This phenomenon, as already noted, is called the “quick start effect” (catch-up-effect). In developed countries, the technical equipment of production is very high. As a result, even a significant increase in capital per worker results in a very small increase in labor productivity. Therefore, with an equal share of GDP directed at investment, poor countries achieve higher rates of development than rich ones. For example, over the past 30 years, the United States and South Korea have invested about the same share of GDP. However, US GDP growth averaged 2%, while in South Korea this figure reached 6%.

• Costs associated with environmental pollution. Only technological progress based on the use of inventions and scientific discoveries can ensure a constant high rate of economic growth. However, the use of many of the inventions and innovations (internal combustion engine, jet engine, the production of plastics, synthetic fibers, chemical fertilizers, obtaining atomic energy), on the one hand, accelerated economic growth, provided a higher level of well-being and comfort, but, on the other hand , led to environmental pollution and even the threat of environmental disaster. (At the same time, the paradox is that the solution of environmental problems can only be found along the lines of further development of technological progress).