Economic Growth

  

Categories: Econ, Tax

An economy grows when its capacity to produce goods increases, or when the market value of the goods and services it produces increases.

This can be a result of two things: inflation or real economic growth.

If the value of the goods and services produced increases by 1% from one year to the next, has the economy grown? Maybe, maybe not. If inflation is greater than or equal to 1%, then everything is valued at least 1% more, so the economy hasn't really grown. But if inflation is less than 1%, then the economy has grown.

Related or Semi-related Video

Econ: What are Determinants of Economic ...2 Views

00:00

And finance Allah Shmoop What are the determinants of economic

00:04

growth Shmoop let's talk money And specifically let's talk The

00:10

reason some countries have a lot of money and some

00:13

countries have well less This is pretty much the oldest

00:16

question in economics Aside from the one about you know

00:19

why the Kinsey in cross the road anyway this guy

00:22

this guy's Adam Smith He's the godfather of economics He'll

00:25

make you an offer You can put on a supply

00:28

and demand curves Well his first best selling book was

00:31

as you probably know everybody poops Yeah you confined it

00:34

today in your local book suppository But here we're talking

00:37

about macro economics Yeah his second big hit It was

00:41

published in seventeen seventy six and was called the Wealth

00:44

of Nations Sort of a tale of two cities only

00:47

with countries The book covers question of Well why some

00:50

countries that had a lot of money and others had

00:52

last and well here we are almost two hundred fifty

00:54

years later on everything's been solved and people are all

00:57

happy around the world and every economic issue of inequality

01:01

and someone is clear now right Yeah I know Pretty

01:03

much the absolute opposite So what are the determinants of

01:07

economic growth Or set another way What makes some countries

01:11

wealthy and what makes some poor eye what determines economic

01:15

success You know what A countrywide level Okay let's think

01:17

about how economic growth is measured Well the main measure

01:20

of economic growth in most of the world is GDP

01:23

I eat gross domestic product which is what you used

01:27

to clean up that crowd that started growing on the

01:29

floor of your bathtub last week Yeah your little brother

01:31

Trevor claims he had nothing to do with actually GDP

01:34

As a measure of an economies output it represents the

01:36

sum total of all the stuff people make and all

01:39

the services they provide Well there's nothing economist love more

01:43

than when GDP well grows you know like a kid

01:46

from the eighties taking care of their Chia pet Well

01:48

the same is true with GDP Constant growth is seen

01:51

as a sign that an economy is Elfi Think of

01:53

it like a tree If there's enough rain and sunlight

01:56

even giant sequoias are going to get a little bigger

01:58

each year until they're chopped down and used to make

02:00

packaging material Another thing to keep in mind Economies come

02:04

in different sizes The U S Economy is like that

02:06

giant sequoia you know pre chain sawing annual GDP Around

02:11

eighteen trillion dollars Biggest economy in the world Other countries

02:15

economies are smaller Some of them are much smaller This

02:18

thing here Yeah this country It's Lichtenstein It's a tiny

02:22

country In Europe the GDP of Liechtenstein is six point

02:25

seven billion dollars If the U S is a sequoia

02:28

Well Lichtenstein is Ah bonzai tree while Lichtenstein's GDP is

02:32

basically the change found in the couch cushions of the

02:36

U S But remember we're talking about GDP growth here

02:39

not just the overall aggregate number that comprises GDP For

02:43

instance Lichtenstein had a good run of GDP growth back

02:46

in the nineties and Lichtenstein has also had a pretty

02:48

good run lately Like Ramon I know fourteen GDP The

02:51

country grew four point five billion dollars to that six

02:54

point seven billion dollars figure there That's an annual average

02:57

growth of eight point one percent over that six year

02:59

span Pretty good Well Lichtenstein's GDP is driven by resort

03:03

skiing and the production of helmets and the production of

03:06

Well Lichtenstein Ian's Yeah of which they're the number one

03:09

producer in the world So how does this all happen

03:12

What makes GDP grow Whether an economy is bigger small

03:15

Well Lichtenstein for instance benefits from its strong banking and

03:19

financial sector It's no surprise that it saw big growth

03:22

in the go go nineties Lots of sudden dot com

03:24

millionaires looking for offshore places Teo you know store their

03:28

cash and avoid taxes presumably And then there's Saudi Arabia

03:31

Well for generations this was just a sandy homeland for

03:34

wondering nomadic tribes Not much growth Then oil was discovered

03:38

And while suddenly one of the biggest economic growth spots

03:41

on the glove right there well how about China Well

03:44

during the early communist days the country was isolated and

03:46

pour It had trouble feeding everybody much less leading the

03:50

world in economic exuberance Well then the country opened itself

03:53

up to trade made itself the world's leading manufacturer Of

03:56

all the trinkets and commemorative plates that we all order

03:59

every night from Amazon it has become the growth story

04:02

of the last thirty years So what do these examples

04:05

have in common Well that question brings us to the

04:08

determinants of economic growth Like we said economists have been

04:12

thinking about this stuff for a long time Exactly how

04:14

many determinants you list depends on how specific you want

04:17

to be Some economists get more specific than others but

04:20

the list breaks down into some general categories here for

04:23

major ones that contribute to GDP growth Access to natural

04:27

resource is right access to labor intellectual capital in a

04:30

stable society right Well first on our list a country

04:33

that control's important or scarce resource is that everybody wants

04:37

everybody cares about Well if Khun generate a lot of

04:39

growth by mining that resource recall Saudi Arabia same goes

04:43

for you a United Arab Emirates and a bunch of

04:46

other Middle Eastern countries In the second half of the

04:48

twentieth century they discovered oil and well They stopped riding

04:51

camels and started driving Lam Bo's a natural resource had

04:54

become a determinant of their economic growth Up next on

04:58

the list access to labor countries with a lot of

05:00

people can provide an important economic contributor right Lots of

05:04

cheap man hours Well sometimes this is just labor in

05:07

general Like with China When it opened itself up for

05:10

trade and put its billion plus people to work while

05:12

it basically became the unskilled labour capital of the world

05:16

Everyone's factory floor labor force which has driven growth in

05:19

the country for decades and made it a superpower well

05:22

Countries with big populations tend to have an edge in

05:24

this area but just having a lot of people are

05:26

a lot of valuable resource is doesn't always lead to

05:29

economic growth There are other elements involved that matters what

05:32

kind of labor you have So what kind of labor

05:35

Well let's think Intellectual capital Someone who can engineer a

05:38

self driving car has a lot more value than a

05:41

worker who can you know drive a car as another

05:44

example Well let's look at South Korea The country famously

05:47

has one of the world's most elaborate cellphone networks No

05:51

trouble getting a superfast data coverage there Even though it's

05:54

a relatively small country both in terms of population Natural

05:57

resource is it's able to grow its economy by staying

05:59

on The technological cutting edge aren't also helpful Yeah a

06:02

strong education system It can be true within countries as

06:06

well that you have this this cultural edge Look at

06:09

Silicon Valley High tech companies thrive here because well they

06:12

can draw from the PhDs that air cranked out from

06:15

Stanford and UC Berkeley And you know they're right around

06:17

the corner Or country might have a strong court system

06:20

that can enforce patents and intellectual property if it chooses

06:24

Teoh right If you came up with a new baldness

06:26

cure would you go found a company in the U

06:28

K Where they can enforce your patents Or would you

06:31

go to Somalia or India and you know talk to

06:34

the bald headed pirates there Yeah another example A stable

06:38

banking system that attracts capital Remember our buddies and Lichtenstein

06:41

while those banks bringing in global wealth or you just

06:44

walk around the southern tip of Manhattan for a while

06:47

When you think about sustainable economic growth you're thinking places

06:50

like the US UK China etcetera like the UK is

06:53

government goes back almost a thousand years no civil wars

06:56

of no roving bands of paramilitary groups and no warlords

07:00

And there's actually a thing called the Fragile States Index

07:04

put out by a think tank called Fund for Peace

07:07

Top of list South Sudan then Somalia then Yemen and

07:10

then Syria Alright well not coincidentally South Sudan's GDP dropped

07:15

six point three percent Two thousand seventeen Yemen saw two

07:18

percent contraction Syria Well it's hard to get the figures

07:21

for Syria because it's in the middle of an active

07:23

civil war and then you have Somalia which is actually

07:26

the best of the bunch Its GDP expanded two point

07:28

four percent in two thousand seventeen taking advantage of its

07:32

intellectual capital in piracy to drive growth Now stable society

07:35

doesn't necessarily mean a free society It might be nice

07:38

to get free speech and free assembly like you have

07:41

in the U S or the U K But just

07:42

for economic growth while the key component is stability or

07:45

trust places like China where the communist government keeps a

07:49

lid on political dissent and on Google which it has

07:52

to censor its search results Or you have Singapore where

07:55

chewing gum is illegal and you can literally get caned

07:58

for breaking law Well the's air still traditionally high growth

08:01

places The growth comes despite there being famously repressive government

08:06

Well so country like Nigeria which has the seventh highest

08:09

population in the world and abundant natural resource is including

08:12

membership in OPEC Well they can't sustain any economic growth

08:16

Why will the country continues to see cycles of revolution

08:19

and unrest from unfair wealth allocation by the corrupt government

08:23

there it can't sustain a stable society which doesn't allow

08:27

it to build sustained intellectual capital It can't take advantage

08:30

of its access to labor or access to natural resource

08:33

is to drive sustained economic growth so well it's prospects

08:36

are pretty dim But if you bring all the determinants

08:40

of growth together big population lots of resource is stable

08:43

society Strong intellectual capital Well you've got something like well

08:47

say the U S In the nineteenth century where we

08:49

went from Well a nearly forgettable former colony to being

08:53

the largest economy in the world producing one of the

08:56

all time great GDP growth spurts in World history Way

09:00

did it only after we got rid of the pirates 00:09:02.644 --> [endTime] So hey Somalia You paying attention No

Up Next

Finance: What are Gross Domestic Product (GDP) and Gross National Product (GNP)?
8 Views

What are Gross Domestic Product (GDP) and Gross National Product (GNP)? The Gross Domestic Product is the sum total value of products and services...

Finance: What is Recession?
15 Views

What is a recession? Luckily, it has nothing to do with your hairline...hit play to find out more.

Find other enlightening terms in Shmoop Finance Genius Bar(f)