Economic growth

Economic growth:

 Is the increase in the amount of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, "economic growth" or "economic growth theory" typically refers to growth of potential output, i.e., production at "full employment," which is caused by growth in aggregate demand or observed output.

Economic growth versus the business cycle:

Economists distinguish between short-run economic changes in production and long-run economic growth. Short-run variation in economic growth is termed the business cycle. Briefly, the business cycle is made up of booms and busts in production that occur over a period of months or years. The most recent example of a business cycle was the global boom starting in approximately 2002 that ended with the bust of 2008–9. As discussed in the article on the business cycle, economists attribute the ups and downs in the business cycle to a number of causes including: overproduction of goods followed by large inventories that can't be readily sold, over expansion of credit resulting in piling up of debt that inhibits purchasing; speculative bubbles, and shocks—like wars, political upheavals, and so on.

In contrast, the topic of economic growth is concerned with the long-run trend in production due to basic causes such as industrialization. The business cycle moves up and down, creating fluctuations in the long-run trend in economic growth

Historical sources of economic growth:

Increases in productivity are a major factor responsible for per capita economic growth, especially since the mid 19th century. Most of the economic growth in the 20th century was due to reduced inputs of labor, materials, energy, and land per unit of economic output (less input per widget). The balance of growth has come from using more inputs overall because of the growth in output (more widgets), including new kinds of goods and services Opening up new territories was considered a growth factor in the past, not being important since the late 19th century, except in a few areas areas such as Latin America, where forests were cleared in the 20th century for agriculture and in sub-Saharan Africa

 The power of annual growth:

The large impact of a relatively small growth rate over a long period of time is due to the power of compounding (also see exponential growth). A growth rate of 2.5% per annul leads to a doubling of GDP within 29 years, whilst a growth rate of 8% per annul (an average exceeded by China between 2000 and 2010) leads to a doubling of GDP within 10 years. Thus, a small difference in economic growth rates between countries can result in very different standards of living for their populations if this small difference continues for many years.

The effect of inequality on economic growth:

1.The classical theory.

2.The neoclassical theory

3.The modern theory