Analysis of the economic growth

 » Growth, growth, is this that I have a hangover to growth? » By diverting the famous words of Arletty in the famous film Hotel of the North (1938), the emphasis is on the question of economic growth. That is what it is? How measurement-t-on growth? Can we criticize the measure? What are the sources of growth?

The concepts of the program to know: GDP, HDI, investment, technical progress, endogenous growth, overall productivity of the factors, labor factor, capital factor

I. How to measure the economic activity?

A. the growth and GDP 

Economic growth is « a sustained increase during one or more periods long, an indicator of growth, the product gloabl Real » (F. Perroux)

On the long time, the last two millennia, we can identify the major characteristics of the economic growth:

Economic growth is a recent phenomenon. For centuries, the history is characterized by a near stagnation of economic growth. The wars, famine, disease, submit periodically in the cause a possible expansion. From the end of the Middle Ages appears the first tremors of economic growth. But it is with the Industrial Revolution, which begins in England and then in France and continues in the ‘late-comers’ Germany and Amértique of the North, that settles definitively a mode of life punctuated by economic growth but also the instabilities of this economic growth. As well the global GDP will be multiplied by 5 between 1800 and 1940 after the Second World War, during the period of the ‘glorious 30’ this growth will accelerate before knowing new instabilities since the end of 1973.

An uneven growth in the world. Since the Industrial Revolution began at the end of the eighteenth century in England, the rates of growth in the world are separated. There are then several groups of countries if we resumed the names of A. Maddison, the British economist who has specialized in the comparative analysis of growth, a distinction can be made by geographic area. As well the Anglo-Saxon countries and the European countries have experienced the acceleration of economic growth since the nineteenth century. The countries of the Middle East and Asia of the emerging IS since the years sixty ten. The zone of Africa knows an acceleration of economic growth since little but with significant contrasts according to the country.

A growth which allows the development. It should be read the excerpts from the Book of J. Fourastié, the thirty glorious years or the invisible revolution from 1946 to 1975, (1979), where it describes the transformations of the mode of life to Does stave, a small village of Quercy. As well, economic growth will feed an increase in the level of life that will fundamentally transform the mode of life of each.

The growth allows the transformation of society. The growth is a quantitative phenomenon which allows the development in other words, the transformation of modes of life, the structures of society. The development is a qualitative Phenomenon

 

B. The GDP: An aggregate useful to measure the growth?

The Gross Domestic Product is an aggregate which represents the final result of the production activity of residents.

Did you know?

The origin of GDP

Simon Kuznets was a famous American economist who has developed in 1934 this indicator synthetic. It was at the time know the magnitude of the damage caused by the crisis of 1929 this is why the U.S. Congress has made the request. We understand better why this indicator of economic growth takes into account essentially the merchant productions created. It was used in France for the first time after the Second World War at the time where to put in place the National Accounts. Since it has kept its place of official indicator of economic growth!

 

The GDP can be measured in three different ways:

Either we consider the activities carried out in the interior of the country: values added  + taxs on products* – Subsidies on products

Either the jobs are considered to be inside the country: 

Final consumption  + GFCF + Stocks + (x – M)

Either we consider  the overall revenue (factors) that is to say all the revenues collected in consideration for the participation in the production: Wages Gross + operating surplus and mixed income + Net taxs on production and imports

In 2014, the GDP of France is around 2100 billion euros

As you know the bulk of production comes from the companies but however the education, health, … administrative services are taken into account. It is estimated « arbitrarily » that their productions correspond to the costs of their productions;

* the taxs on products: this concerns mainly the VAT and the TICPE (internal tax on the consumption of energy products). Beyond the VAT at 20% which concerns the majority of products, there is VAT at 5.5% which concerns food products, books, passenger transport, performances, … and the rate to 2.1% which relates to certain work of renovation of the main housing or regions of France who enjoys exceptions: the DOM or Corsica.

While economic growth is defined by a sustained increase in the production of goods and services during a given time period, usually a long period, in practice the indicator of economic growth that is the variation of GDP on a year

But how to compare GDP between countries that have different currencies and of floating exchange rates -the course of currencies is constantly evolving between they-? The solution: calculerle GDP according to the Purchasing Power Parity (PPP) GDP PPP

Thus, we can say that the parity of purchasing power is a method that allows you to compare the aggregates (often the GDP) of different countries, without that the comparison is affected by the evolution of the exchange rate.

Order to familiarize yourself with this notion, I te advises to throw a glance on the sheet

C. The limitations of GDP as an indicator of growth

The GDP it is too! Too to take account of certain activities which do not represent in reality of the wealth. As well road accidents, the material damage which will necessities of repairs, bronchiolitis in excess in infants affected by the pollution, represent a boon for GDP since this will generate productions that are recorded positively in the GDP.

The Economists North Americans J. Tobin and Nordhaus have put in place the concept of defensive expenditures that relate to the whole of the production which is used to repair the damage related to human activity

The GDP is too little! Too little taken into account some of the activities that provide yet a lot of well-being. Thus you aid your neighbor aged in doing their shopping or you aid your little brother to do his exercises of its to the House. Do you want to come in to help the most needy in giving volunteer time for the Restos du Coeur. This is not taken into account in the GDP as the whole of the unpaid activities which provide yet a lot of well-being of solidarity, of social wealth. The more people are selfish and interested, more this is beneficial for the GDP!

More generally the GDP does not allow to take into account what is called the informal economy . This covers the whole of the activities licit or illicit which are not declared. The licit activities can correspond to the family economy as has been shown above and for the company C is what is commonly referred to as the work in the black. The illicit activities it is trafficking in any kind of the drug at the « white slave trade » in passing by the trafficking of arms or bodies. In some regions, for some countries, this represents enormous amounts which are not accounted for in the wealth of the country

To go further, we can criticize the fact that the GDP is a measure of ‘have’ then that today in the societies in post-modern we would rather measure the well-being. During his stay at the Center for Advanced Study at the University of Stanford, in 1974,, the economist Richard Easterlin has measured the effect of income on the well-being said and it is at the origin of what today is called the paradox of Easterlin. In the long term the increase in income is not reflected by increased satisfaction. We can illustrate this problem easily. In effect more than economic growth, it also means more traffic on the roads, more pollution, of security problem, but also an increase of the frustration. Finally, we can not do tell the GDP this why it has not been built.The GDP is a quantitative measure that allows to extrapolate on the quality of life, but the link must be relativized. Can we then measure the development?

D. HDI a better indicator of development

The Human Development Index (HDI), is not new to thee. Already at the end of primary, you mentioned this concept and hast resumed regularly at the College. Then, in the context of the Bachelor degree, resuming and complement what you know. It is including the Economist of Indian origin A.Sen, Nobel Prize in Economics in 1998, WHO has developed this index for the United Nations Development Program. The HDI is a composite index, this means that it is composed of several indices. It integrates the longevity measured by life expectancy, the knowledge which is measured by the average duration of schooling for adults over 25 years of age and the expected duration of schooling for the children of school age, and third index, the level of life calculated through the PIBppa per capita. The index is measured between 0 and 1. The countries who are approaching 0 are marked by enormous development problems and vice versa when the countries are approaching 1. Now resume in the method sheet exercises tray type related to the HDI

II The sources of growth

We discuss here a fundamental question in the economy. What are the factors of growth? Why some countries « develop » and others not? How to explain the rapid development of China since the 1980s and vice versa the persistent problems for many African countries?

A. The traditional model

We have seen in the economic themes of first that economists reasoned in making economic models that is to say a simplified representation of the reality, based on assumptions. Let us take a look on the first models of economic growth.

Did you know?

The factors of production

For the classical economists, there were three factors of production; the earth, a fixed factor which provided to the owner an annuity and the 2 variable factors therefore cumulable, the labor factor in other words the workers and the capital factor. This is consistent with the society of the 19th where predominated still a peasant world important. In the face of any power of the industry rising and therefore the capital factor which becomes dominant, it also understands that the neo-classical economists of the end of the nineteenth century no longer retain that two factors, labor and capital. Finally, the vision of the economy is linked to the society in which it is changing!

 

Since the neo-classical economists it considers that there are two factors of production. The capital factor and labor factor. The economist Solow has synthesized this idea by his famous formula q = f(K,N) with q representing production, K the capital and n the labor factor in other words production realized is the result of the two factors of production employees in the combination of productive (this word te recalls memories of first, non-?), the labor factor and the factor capital. The labor factor corresponds to the amount of work used to produce goods and services. The labor factor can match the number of workers multiplied by the hours of work performed by each worker. Small complement: The labor factor is mechanically linked to the employed population, that is to say it is the population that is working or who seeks to work and who is not unemployed. When the active population increases this has an effect of drive on growth. The 2.5 million immigrants in average which arrive each year in the United States are an important asset for its growth. As well feels that there is a link between population growth and economic growth. It is an exciting topic but complex that we would impose on ideas related to Theme 1 of the specialty depth economy. The capital factor represents according to the Neo-classical The second factor of production which allows you to produce goods and services. It corresponds according to them at the fixed capital that is to say the stock of durable goods intended to be used for a period of at least one year in the productive process. In concrete terms, this represents the buildings and all of the property of production including some services such as software. We recall that the fixed capital renews itself thanks to the Gross Fixed Capital Formation (GFCF). This concept defined by the INSEE measure finally the investment. For all that, in our modern economies, it is necessary to make the distinction between the extensive growth and the intensive growth. The extensive growth corresponds to the growth linked to the increase in the factors of production. But in our modern economies, the growth is often intensive, which means that it is linked to technical progress, i.e. an increase of the quantities produced without increasing the capital factor or work employee. Empirical studies have shown that the technical progress explains to the minimum 50% of the economic growth. This explains the new look focused on economic growth from the end of the years 70.

B technical progress and endogenous growth

The technical progress, is the increase of the knowledge applied to the production it finally may consider that the technical progress it is the whole of innovations. The technical progress allows you to produce more for a given quantity of factors of production or it allows to produce as much with less of the factors of production or it allows the production of new goods or better quality. The technical progress is measured through the productivity more precisely one can define the overall productivity of the factors. which corresponds to the volume of production achieved reported to the set of factors of production used. The traditional models of the growth taking into account technical progress considered that the technical progress was an exogenous variable. Solow, American economist said: the technical progress is manna from heaven. In other words, we must take into account this variable but it does not explain economically. Small complement on the notion of exogenous variable and endogenous: A variable is called when exogenous c is a given not explained by the model. Conversely the variable is so-called endogenous when it is determined by the model. For example, if we resumed the idea that with the development the population growth declines then we can consider that the fertility rate is linked to psychological factors, behavioral that the economy does not explain. The variable is therefore exogenous. If it is considered by against that the fertility rate is linked to the level of life, the new expectations vis-a-vis a new born, this variable is then explained New economists such as Paul Romer, Robert Barro or even Robert Lucas, will develop in the year 80, theories of endogenous growth. The endogenous growth is a new theory which incorporate four explanatory factors of growth, increasing returns and the positive externalities as the intervention of the State , the research and development and the accumulation of human capital . The increasing returns? It must be remembered what is called the law of diminishing returns a View in the first. When we increase a factor of production, the other remaining Factor Fixed, the marginal productivity (the marginal return) decreases. As well, to take the example of Ricardo, when the first farmers settle, they retrieve the most fertile land and as agricultural needs increase, new farmers settled on new lands less fertile therefore less productive. The act of increasing yields, it is the reverse. the quantity of production increases more than proportionally to the quantity of factor of additional production used. In effect, our new economies have changed the laws which seemed ‘natural’ to the Neo-classical economists. We are today in a new economy, that some calls of economy of the information. As well, the dissemination of new knowledge, software, new production processes have increasing returns. . The positive externalities? Remember that the externalities or external effect are the consequences positive (or negative) for economic action without that this is taken into account by the market. This is the example given by Mead of the beekeeper which produces a lot of positive externalities to the surrounding farmers thanks to the pollination of plants. However, it turns out that in our modern economies, we can encourage the creation of positive externalities. Let us take the simple case of technopoles. The grouping of enterprises in a certain perimeter creates synergies favorable to economic growth. . The Human Capital? The concept of human capital has been invented by the American economist of development Theodore Schultz and popularized by Gary Becker (Nobel Prize in Economics in 1992). Human capital represents the whole of knowledge and know-how of an individual.It is easy to understand that the more the state invests in education, the more he has a chance of having qualified workers who are going to participate in a more sustained economic growth. Finally, the human capital is an endogenous given since it sought and self-sustained by public institutions. . Research and Development? If the State or the economic zone creates incentives to the research by tax deductions or subsidies then one understands that the gain of economic growth achieved is directly linked to the efforts made. Finally the theories of endogenous growth allow you to put in before everything that can foster innovation. Thus, some countries will put the emphasis on education or research. Other will foster the establishment of high-performance communications infrastructure and other regions will stimulate the links between public research laboratories and private entrepreneurs. There is as well a plurality of opportunities to create economic growth. There is not a single model of development. On the other hand the theories of endogenous growth help to explain in part the delay of development of some countries which have not put in place the structures allowing for the emergence of innovations and the adoption and diffusion of the latter by the companies. We have just to see the three factors of production that allow the growth, the work, the capital and the technical progress. For as much beyond these economic factors, it may be considered that the economic growth require rules, an organization, a social control, … in other words of the formal and informal institutions small complement: The orthodox economists consider that the study of institutions is no longer the responsibility of the economy because this requires historical benchmarks , sociological. Other economists on the contrary think that we cannot study the economy without making reference to the institutions. We can classify them in the Group of the Institutionalist.

C The role of institutions and property rights

The institutions are the set of formal rules or informal which organize society and who are required to individuals. For example, the laws, regulations, codes represent the formal institutions while the social standards, the values, habits, routines, represent the informal institutions. The institutions are the basis of the functioning more or less good in the economy of a country. Two examples: the legal rules governing the operation of the business. For example, the growth of a business requires of financial capital. With the birth of the anonymous companies regulated in France in 1867, many companies will be able to take their growth and thus participate in the economic growth of the country. The informal rules are more difficult to measure, but it is explained very well. If some values, such as the work, obedience, tolerance, the respect of the other are shared by a large number of citizens then this form of informal institutions is a factor of economic growth. Among the formal institutions that promote economic growth are the rights of property. To define the rights of property there resumed traditionally the Latin formula, usus, Frutus, abusus As well, the right to property allows you to dispose of an asset, earn income (fructus) in and enjoy as seems to us and in particular to sell (abusus). The well-defined property rights allow as well to protect the inventors. This is done thanks to the patents or copyrights. It is therefore a strong incentive to innovate since the deposit of patents can allow the financial exploitation of innovation by avoiding piracy, the against-way illegal. When it has been known since the Austrian economist J.A Schumpeter (1883-1950) that innovation is the engine of growth then it includes the essential role of the rights of property. Supplement with the contemporary economists, Rodrik and Subramanian: the primacy of the Institutions, 2003

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