The concept of economic growth in the science of finance is the multiplication of the total value of all manufactured products of labor in the national economy for a specific time period.
Most people don’t understand the difference between economic growth and development. It is required to understand that the goal of economic growth is the numerical adjustment of dynamic indicators, and development is the structural shifts that occur due to innovative changes and the entrepreneurial movement of people.
Studying the financial development of the state
The main teachings of modern economic theory about the essence of economic growth:
- Keynesian movement.
- Monetarism.
- The financial theory of supply and demand.
- New classical theory.
- Neo-institutionalism.
- General public choice theory.
- Financial imperialism.
Types of economic growth
In financial theory, there are a couple of fundamental types of economic growth: intensive and extensive economic growth.
Intensive economic growth is focused on increasing the efficiency of the technological process and increasing the return of all factors assumed in the production cycle, despite the fact that the amounts of capital used and labor used can remain stable, constant and carry out intensive economic growth.
Extensive economic growth is focused on increasing the social product due to the numerical growth of production factors associated with the involvement of additional capital, human resources, and land plots in production processes. At the same time, no changes in the technology base of the production cycle are observed.
The trend in the national economy can take two fundamental forms, describing the types of economic growth:
- actual;
- real.
Actual economic growth determines the actual increase in gross domestic product and other values in the economy of the maximum level during the year. What characterizes actual economic growth? It develops under the influence of natural growth in the economy and represents the actual growth of the state economy.
Potential economic growth is in itself an increased rate of possible growth of the national economy during the calendar year. In other words, the potential growth of economic indicators of the maximum level that the national economy could achieve, provided that the available resources are 100% involved in the turnover of the state economy. It will also be interesting for you to get acquainted with the opinions of experts on the state of the modern Russian economy.
The essence of real financial growth comes down to reconciling and reproducing the fundamental financial contradiction, which consists in the limited technological resources of production, on the one hand, and the unlimited social needs, on the other hand.
Factors of economic growth
Economic growth can be driven by a variety of factors. As a rule, they are divided into intensive and extensive factors of economic growth. The former are quantitative, increasing the number of factors of production used, character or qualitative, increasing the characteristics of the factors.
Other factors affecting economic growth are divided into external and internal. The first group of economic growth factors is determined by the external environment in relation to the country’s economy:
- the degree of openness of the state to other international markets for production, sales,
- participation of the country in the division of the main labor in the international market,
- degree of a country’s involvement in international trade.
Internal factors:
- natural resources (especially minerals, forest, fresh water);
- capacity of active people for entrepreneurship;
- human resources;
- technological progress.
Depending on the method of influencing the growth of the economy, the state distinguishes factors of direct and indirect impact. The former describe the physical capacity for growth in the state’s economy. The latter have a huge impact on the possibility of turning this very ability into real events. They are able to stimulate the realization of the potential inherent in direct factors, or limit it.
For example, indirect factors include the level of monopolization of the production and sales market, the investment climate of the state. Find out how experts evaluate the Russian investment market.
There are also supply, demand and distribution factors. Demand and supply factors belong to the group of factors of secondary influence.
Indicators of economic growth
Economic growth is a movement in the development of the national economy, which is determined by a change in the set of economic indicators of the maximum level, which are measures of economic growth. This is, first of all, such as the gross domestic product. There are two groups of indicators of economic growth: numerical and qualitative.
The coefficient of sustainability of economic growth characterizes the possibilities of the country’s development at the expense of internal potential sources.
Measuring economic growth
How are the parameters of the economic growth of the state measured? In the theory of finance, two prevailing methods of measuring the rate of economic growth have long been considered, assessments as the final characteristic of the development of the state’s economy for a specific period of time:
- either by the growth rate of real gross domestic product (national domestic product),
- or the rate of increase in the gross domestic product (national product) in terms of per capita citizen of the country.
The requirement to use one or another way of measuring growth in the economy depends on the objectives of studying growth in the economy. Gross domestic product adjustment is considered the main indicator of economic growth.
The first way is used, as a rule, when studying trends in increasing the potential of the state in the financial sector.
The second way of studying growth in the economy is used when analyzing the dynamics of the financial condition of the inhabitants of the state or comparing the subsistence level in states and their cities. At present, in the teachings of growth, the method is used in terms of the indicator per capita of a citizen of the country.
When analyzing the causes of changes in the financial sector, the subject of analysis is not only the factors that determine financial dynamics, but also proportional sectoral adjustments, structural changes in institutions in the process of ongoing adjustments, and government policy. At the same time, the popular interpretation of the content of growth in the economy considers an increase in gross domestic product both in absolute terms and per capita.
Difficulties may arise when discussing the time periods of the factors of increasing the main indicators in the economy at the maximum level. Preference is often given to the intensive type, attention is focused on improving the factors of reproduction.
How does economic growth differ from the economic development of the state?
Many people confuse economic growth and development. It is necessary to understand that the goal of economic growth is numerical adjustments, and development is shifts in structure due to innovative adjustments and the entrepreneurial resource of people.
To help understand how growth in an economy differs from economic development, we can help compare the signs of economic growth and economic development.
Let’s list the provisions, what is the meaning of economic growth:
- It implies a non-negative adjustment to a government’s actual output over time.
- It implies the growth of such indicators as gross domestic product, income per capita of a citizen of the country.
- Economic growth is measured as a positive change in the income of the nation state.
We list the main characteristics of economic development:
- The meaning of economic growth implies an increase in the production level in the economy simultaneously with the development of processes, raising the living standards of the country’s citizens.
- It involves increasing life expectancy, reducing child mortality, increasing literacy and reducing poverty.
- It implies a non-negative adjustment to the government’s real income.
Economic Growth Models
In financial science, there are two main directions for defining growth in the economy: neo-Keynesian and neoclassical.
The first direction arose on the basis of the teachings of J. Keynes about the relative instability of the capitalist economy and equilibrium at the highest possible level.
The second direction takes its origins from the teachings of A. Smith about the market economy as a self-regulating device, factor theory and the theory of marginal productivity of financial development factors. Also known are the models of economic growth by R. Solow and Harrod-Domar.
Harrod-Domar model is a neo-Keynesian model of economic growth that explains the growth of the economy under the condition of constant capital intensity ratios and propensity to save in the long run.
Model of economic growth Р. Solow is a neoclassical model of economic growth that reveals the mechanism of the influence of savings, the growth of labor resources and scientific and technological progress on the standard of living of the population and its dynamics.
Global economic growth forecast for the near future
The most popular scenarios for achieving economic growth in the world in the near future say:
- on the world globalization of development processes, outpacing the growth of international markets in comparison with international technological development,
- about the continuing narrowing of the gap in the level of savings and spending between countries with developed and just starting to develop markets.
The development trend of the international gross domestic product in the next ten years is projected at about three and a half percent, which is half a percent below the minimum growth in the previous ten years, but above the average growth rate during the period of the late eighties of the XX century and the beginning of the current century.
Again, if you look from the other side, the growing restrictions on the use of natural resources and human resources, the overestimation of the requirements for balance in the financial sector in the context of maintaining a high debt burden in the long term will prevent the international economy from returning to high annual growth rates of more than four percent.
