DETERMINANTS OF ECONOMIC GROWTH AND PRODUCTIVITY

The process of economic growth relies on a number of interrelated economic, political, and social factors that work in concert to increase national output. At the core of economic growth is the need to increase productivity over time. Productivity measures the amount of output that is produced per unit of input. On the national level, the amount of output refers to the real GDP, and the inputs are the factors of production—natural resources,

PRIMARY DOCUMENT: Joseph A. Schumpeter Explains Creative Destruction

Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. . . . The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. . . .

[This] industrial mutation . . . incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.

Capitalism, Socialism, and Democracy, Joseph A. Schumpeter

human resources, and capital goods. When the mix of resources used in production results in greater output per unit of input, productivity rises. When the mix of resources produces lesser output per unit of input, productivity falls.

The most common measurement of productivity is the productivity of labor. The productivity of labor is calculated by dividing the value of national output by the number of workers in the labor force. For instance, from 1975 to 2011 the productivity of U.S. workers more than doubled.[1] This means that workers in 2011, on average, were able to produce twice as much output as workers in 1975. Five main determinants of economic growth and productivity are the use of savings for productive investment, the efficient use of resources, entrepreneurship and new knowledge, a favorable economic environment, and good governance.

Economic growth can enhance people's quality of life, including educational opportunities

Economic growth can enhance people's quality of life, including educational opportunities. (Monkey Business)

Saving and Investing: The Virtuous Cycle

Gross saving and investment are the pillars of a virtuous cycle of economic growth and development. This is because people's savings create a pool of money that can be used for productive investments. Significant investment is possible when the pool of savings is deep. Lesser investment possibilities exist when the pool of savings is shallow. The virtuous cycle of growth and development occurs when significant sums of money are saved and invested in an economy. New businesses, jobs, income, and wealth spring from these investments.

Gross saving is the amount of savings by individuals, businesses, and government in an economy. In 2011 gross saving in the United States was about $1.84 trillion, a drop from $2.2 trillion recorded in 2006 just prior to the Great Recession. The personal savings of individuals and business savings, mainly in the form of undistributed corporate profits, accounted for most gross saving in 2011. Government saving, on the other hand, was a negative $1.3 trillion, largely due to the massive federal budget deficit that year.[2] Between 2007 and 2012 the U.S. gross saving rate, or gross saving as a percentage of GDP, hovered in the 11 percent to 15 percent range, among the lowest recorded by the world's major advanced economies, as shown in Table 8.4.[3]

Gross investment consists of private and public sector investments in an economy. Gross investment is financed mainly by gross savings. In 2012 U.S. gross investment was about $2.4 trillion. Nearly $2.1 trillion of U.S. gross investment was made by businesses and individuals in the private sector of the economy, and the remaining $368 billion was made by the federal and state governments in the public sector of the economy. Businesses invested $1.6 trillion in 2012, mainly on computers and other information processing equipment ($555 billion), industrial and transportation equipment ($394 billion), and nonresidential production facilities such as factories, retail outlets, and mines ($463 billion). Hundreds of billions of dollars were also invested in private sector residential structures such single-family houses.[4]

Gross investment in the global economy varies by world region, and by countries' income level and stage of economic development. One international measure of gross investment is gross capital formation, which deals mainly with investments to expand a country's fixed assets. This measure includes spending on land improvements, roads, railways, schools, hospitals, machinery and equipment, factories and office buildings, and residences. The World Bank reported that gross capital formation, expressed as a percentage of GDP, is relatively low in Europe and central Asia, Latin America, and sub-Saharan

Table 8.4 Saving and Investment by Major Advanced Economies, 2012

Source: International Monetary Fund, “Table A15,” World Economic Outlook, April 2013, 172–173.

Africa. The gross capital formation rates for the richer countries, including the United States, were also low. Higher rates of capital formation occurred in East Asia and the Pacific, and South Asia.[5]

  • [1] Council of Economic Advisors, “Table B-49: Productivity and Related Data, Business and Nonfarm Business Sectors, 1963–2012, Appendix B,” Economic Report of the President: 2013 (Washington, DC: U.S. Government Printing Office, 2013), 382
  • [2] Council of Economic Advisors, “Table B-32: Gross Saving and Investment, 1964–2012,” Economic Report of the President: 2013, 362
  • [3] IMF, “Table A15: Summary of Sources and Uses of World Savings,” World Economic Outlook, April 2013, 2013, 172-175. World Bank, “Table 4.8: Structure of Demand,” “Table 4.9: Growth of consumption and investment,” 2012 World Development Indicators (Washington, DC: World Bank, 2012), 242-244, 245-249
  • [4] DOC/BEA, “Table 3: Gross Domestic Product and Related Measures; Level Changes From Preceding Period,” News Release, June 26, 2013, 8-9
  • [5] World Bank, “Table 4.8: Structure of Demand,” “Table 4.9: Growth of Consumption and Investment,” 2012 World Development Indicators (Washington DC: World Bank Publications, 2012), 242-244, 245-249
 
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