Economics is a life force for every human being at a micro level and also for each country globally at a macro level.
It is an essential component in every human beings life as there is no denying it.
We are very much familiar with terminologies such as macroeconomics and microeconomics. If we are working in any sector, we have a brief understanding of terms like products and services and with it comes two other primary terminologies that we have to deal with, and they are markets and consumers.
Why some products have very high prices, and at the same time they are high in demand and are purchased regularly?
How a devaluation of products and services takes place?
Basic knowledge in economics can answer all these questions that arise in our mind. From Keynes’s classical theory to Ricardian rent and up to Rostow’s five stages of growth, there have been many topics of discussion that has been familiar to a student of economics across the world. These theories have laid a foundation for a better world and have found a place in daily lives of ordinary people at different eras.
Modern Economic Growth:
Growth of human population up until 1800 has been minimal. Population grew at a meagre rate of 0.10 % per year between time-period 5000 BC to 1800 AD. But it has to be kept in mind that cumulative magnitude population growth has been significant as population rose from 5 million people on our planet in 5000 BC to 900 million in 1800. Seven thousand years are quite some time.
Output per worker has seen absolutely no growth up until 1500 AD. Although up until 1800, material standard of living or so to say productivity level of that economy has risen considerably. All elites from 1800s lived a better life than their previous generations. There was no technological progress as such, but human beings were ingenious.
Level of standards of living soared higher remarkably after 1800’s. Population of world read 6 billion on the threshold of the last millennium. Rate of population growth is 1.75% in year 1999 as compared to a meagre 0.6% between1800 to 1900. The average price of material output per capita doubled during this period.
Advent of Technology:
With an upsurge in labour efficiency along with development of new technology, the issue of natural resource scarcity has been dealt with. There has been a steady increase in population and with inventions of printing technology communication became more comfortable. With sustained growth in society, productivity of labour also increased.
Transition in the demography and its pattern:
Initially, with rise in their standards of living, there has been in an upsurge in population growth. But a demographic transition happened when material standards of living rose far above subsistence level. Birth control came as a natural phenomenon where people can resort to number of issues they want to have, and that in turn, increased resources for every household. As a result, there is a sharp decline in birth rate, but availability of resources increased.
As a matter of fact, material standards of living also increased. In countries like Nigeria, Iraq, Pakistan and Congo their population growth rate is more than 2%, but, in developing countries like India, China, Thailand, South Africa and Korea population growth is expected to be less than 1% per year. Whereas in highly industrialized countries like Germany, Japan and Italy the population growth is expected to remain the same for the next few generations.
There was a significant upsurge in industrial revolution after 1750 with the advent of a steam engine, hydraulic press, power loom, railways, electric motor, water turbine, spinning jenny and many more inventions like photography, sewing machine, gas lighting and hot-air balloon. The industrial revolution was path-breaking in a way that it revolutionised innovation and made a transition from previous era. The period after 1850 saw even more path-breaking inventions.
Steel was invented along with typewriter and telephone. Pasteurization, cash register, aeroplane, automobile, tank, computer, highway, photocopier, pacemaker, combustion engine, to name a few. There were other things on the list such as superconductivity, human genome map, fingerprinting and nuclear weapons. Industrial revolution in a way is the period which marks the beginning of modern economic growth era.
In this era, technological innovations revolutionised industries, and there is noticeable growth in standards of living.
Britain was kingpin for industrial revolution, which is a reason why the industrial productivity of Britain was the highest between the periods of 1800 to 1900. British had a high standard of living, and it is for this reason that English as a language became most essential second de facto language of our world, leaving behind other important widely spoken languages. Their technology travelled to Western Europe and United States, and it was not confined only to British boundaries. It also spread to eastern and southern Europe and even to Japan although transfer of technology here is somewhat slow, but it blended thoroughly in the newest scenario.
Modern American Economic growth:
Centre of contemporary world economy and its industrial core lies in United States of America today. People of this country are mostly from the settler of colonies of people from north-western Europe. In the first half of the nineteenth century, the growth rate of productivity was at 0.5%, but it accelerated further in the last half of the century.
Pace of Economic Growth in USA from 1800 to 1973
US economy has been world’s premier economy for a long time now. The economy grew faster in and around the period of Civil war, more than that of the beginning of the nineteenth century.
With a second wave of industrialisation, it grew even faster catalysed by new inventions and innovations. People living in the USA today have a standard of living 14 to 25 times more in comparison to their counterparts in the nineteenth century owing to a high level of productivity.
The purchasing power of people has risen immensely compared to people from the nineteenth century. However, for relatively weak section of the world and that includes poor people from United States as well as the income and material standards of living has not risen to such great heights it would not be reasonable to say that the invention and innovation has also been of great help to them as they would not be able to afford it.
The time required to earn a particular product has fallen considerably although we can also say that in those days however many hours you put in to buy a product, the availability of the product would be a cause of concern as it may not have been invented then.
There has been a structural change in the US economy from the past. During the period of the Civil war, more than half the American population were farmers as compared to today, where only less than 2% of the people are engaged in farming. The mode of transportation has gone through a drastic improvement. There has been a remarkable increase in the literacy rate.
The recent economic growth has paved the way for a significant shift in employment from agriculture to manufacturing and then to the service sector. Then there are all these big business organizations where people works.
The United States has this concept of mass production and mass distribution that helped them grew faster than other economies. It gave them leadership in technology and also complete industrial dominance. The United States has the edge over other economies because of its education system, having the largest market in the world and the country being rich in natural resources.
However, there was a slowdown in the economy after 1973, and the US economy grew at the rate o 0.6% until 1995. Other significant economies got affected. They were Canada, Japan, Britain, Germany (West), France and Italy. The four primary reasons that were cited for this to happen are oil prices, the baby boom, problems related to economic measurement and the expenditure on environmental protection.
Economists thought the computer boom could reverse the slowdown, but it did not, and it was called the “computer paradox”. However, the downturn did end in 1995. Since then it has accelerated to 2.1%. There has been a paradigm shift in the economy with computer and communications technology, and this phenomenon percolated to other economies as well.
In the era of post-liberalisation, two other economies that of India and China are moving at a breakneck pace, and their growth rate concerning GDP has been phenomenal. They have already broken into the list of the top 10 largest economies in the world. With a roaring population that is primarily young and with a very cost-effective labour force, it is no stopping India and China. They are still developing economies, but both these countries are on the threshold of coming into the top 3 largest economies by the middle of the 21st century.
China is already on the second place, and India is 5th on the list. Nobody thought that these two economies could ever make it to the top with so much poverty and corruption that has broken the back of their economy. But with liberalisation, an open global market, young and cost-effective labour force, they have become the hub for manufacturing necessary devices like smartphones and also cars that have significant share in the worldwide market. Although, there are some problems with regards to the per capita income of people from these two countries however they are catching up slowly but steadily and is becoming a force to reckon with shortly.
To measure the economic growth of any country, we must consider the determinants of the per capita GDP growth. They are mainly as follows:
The accumulation of human and physical capital helps in increasing productivity along with technological innovation.
- Factor Accumulation:
Money in economic terms is referred to as physical capital, and the accumulation of these can lead to more significant economic growth.
- Human Capital:
The skill of the workforce is called human capital, which augurs well for economic growth.
- Political Institutions:
The political institutions and their policies play a significant role in economic growth.
- Entrepreneurs and new products:
Entrepreneurs and the influx of new products in the economy helps in economic growth.
- Structural Changes:
Structural changes in the economy should be made to make the economy function in a better way.
Some of the significant growth theories are namely:
- The Malthusian Theory.
- Classical Growth theory.
- Solow-Swan Model.
- Endogenous Growth theory.
- Unified Growth theory.
Importance of long-run Growth
- Quality of life:
The “Threshold Hypothesis” states that economic growth is directly proportional to the happiness of people. Happiness is seen to be increasing with a higher GDP per capita.
- Equitable Growth:
With a reduction in poverty or through poverty alleviation programmes, we can reduce inequality at the current level. This ensures equitable growth.
- Global warming:
Although it is unfortunate, the amount of carbon emission has a direct correlation to the economic growth of a country. There has been a paradigm shift of balance from older economies to the new ones. As a result, the likes of carbon emission has become part and parcel for the modern economy.
- Resource constraint:
The resource quality is directly related to the capital as well as the operating cost of resource extraction. So, there is a correlation between economic growth and resource constraint.
The energy efficiency, as well as energy consumption, are linked to economic growth.
Huw Pill is a senior lecturer of business administration and he is working at the Harvard Business School. Huw Pill earned a doctorate in economics from Stanford University in 1995 and a bachelor’s degree from the University of Oxford in 1989. He is a prodigy in the field of Macroeconomics. You can contact an Economics expert by clicking here and take a homework help in economics today!