23.3: Determinants of Economic Growth
- Last updated
Save as PDF
- Discuss the sources of economic growth.
- Discuss possible reasons why countries grow at different rates.
The Sources of Economic Growth
Explaining Recent Disparities in Growth Rates
|Trend Growth of GDP per Capita |
|Country ||1980–1990 ||1990–2000 ||1996–2000 |
|United States ||2.1 ||2.3 ||2.8 |
|Japan ||3.3 ||1.4 ||0.9 |
|Germany ||1.9 ||1.2 ||1.7 |
|France ||1.6 ||1.5 ||1.9 |
|Italy ||2.3 ||1.5 ||1.7 |
|United Kingdom ||2.2 ||2.1 ||2.3 |
|Canada ||1.4 ||1.7 ||2.6 |
|Austria ||2.1 ||1.9 ||2.3 |
|Belgium ||2.0 ||1.9 ||2.3 |
|Denmark ||1.9 ||1.9 ||2.3 |
|Finland ||2.2 ||2.1 ||3.9 |
|Greece ||0.5 ||1.8 ||2.7 |
|Iceland ||1.7 ||1.5 ||2.6 |
|Ireland ||3.0 ||6.4 ||7.9 |
|Luxembourg ||4.0 ||4.5 ||4.6 |
|Netherlands ||1.6 ||2.4 ||2.7 |
|Portugal ||3.1 ||2.8 ||2.7 |
|Spain ||2.3 ||2.7 ||3.2 |
|Sweden ||1.7 ||1.5 ||2.6 |
|Switzerland ||1.4 ||0.4 ||1.1 |
|Turkey ||2.1 ||2.1 ||1.9 |
|Australia ||1.6 ||2.4 ||2.8 |
|New Zealand ||1.4 ||1.2 ||1.8 |
|Mexico ||0.0 ||1.6 ||2.7 |
|Korea ||7.2 ||5.1 ||4.2 |
|Hungary ||— ||2.3 ||3.5 |
|Poland ||— ||4.2 ||4.8 |
|Czech Republic ||— ||1.7 ||1.4 |
|OECD242 ||2.2 ||1.9 ||2.2 |
|Standard Deviation of OECD24 ||0.74 ||1.17 ||1.37 |
- In general, countries with accelerating per capita growth rates also experienced significant increases in employment, while those with stagnant or declining employment generally experienced reductions in per capita growth rates.
- Enhancements in human capital contributed to labor productivity and economic growth, but in slower growing countries such improvements were not enough to offset the impact of reduced or stagnant labor utilization.
- Information and communication technology has contributed to economic growth both through rapid technological progress within the information and communication technology industry itself as well as, more recently, through the use of information and communication technology equipment in other industries. This has made an important contribution to growth in several of the faster growing countries.
- Other factors associated with more growth include: investments in physical and human capital, sound macroeconomic policies (especially low inflation), private sector research and development, trade exposure, and better developed financial markets. Results concerning the impact of the size of the government and of public sector research and development on growth were more difficult to interpret.
- With qualifications, the study found that strict regulation of product markets (for example, regulations that reduce competition) and strict employment protection legislation (for example, laws that make hiring and firing of workers more difficult) had negative effects on growth.
- All countries show a large number of firms entering and exiting markets. But, a key difference between the United States and Europe is that new firms in the United States start out smaller and less productive than those of Europe but grow faster when they are successful. The report hypothesizes that lower start-up costs and less strict labor market regulations may encourage U.S. entrepreneurs to enter a market and then to expand, if warranted. European entrepreneurs may be less willing to experiment in a market in the first place.
- The main sources of growth for the United States from 1948 to 2002 were divided between increases in the quantities of labor and of physical capital (about 60%) and in improvements in the qualities of the factors of production and technology (about 40%). Since 1995, however, improvements in factor quality and technology have been the main drivers of economic growth in the United States.
- There has been a growing disparity in the rates of economic growth in industrialized countries in the last decade, which may reflect various differences in economic structures and policies.
- Its labor force increases in size by 3% per year compared to 2% per year.
- Its saving rate falls from 15% to 10%.
- It passes a law making it more difficult to fire workers.
- Its level of education rises more quickly than it has in the past.
Answer to Try It! Problem