Economic Growth Theory

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Kuznets (1973) defines economic growth as a long-term increase in the ability of a country to provide a progressively more varied bundle of goods to its population. He specifies that the increase in the ability has to be based on either ideological and institutional adjustments or advances in technology. In line with Kuznets (1973), economic growth can be defined as an increase in the rate of change of output or income of an economy over time and is calculated as the percentage rate of improvement in real gross domestic product (GDP). Therefore, economic growth represents an increase in per-capita real GDP or a more productive approach to the production of goods and services in a country within a given timeframe. There have been several growth…show more content…
The endogenous growth models are models where long-running growth is treated as an endogenous variable and it is possible for output per-capita growth to occur without limits because the country in principle has an infinite capacity to create ideas. Romer (1986) explained that the technology changes by learning in association of the concept of Arrow (1967) and Sheshinski (1967), which explains that an accumulation of knowledge from an involuntary investment that occurs to the workers while gaining experiments from the enterprises. In 1990 however Romer changed his hypothesis which did not conform to the rational behaviour and assumed that workers’ knowledge was a voluntary investment initiated in order to increase profits due to the innovators. In an endogenous growth framework, however, government policy can affect rates of growth. This is because government policy has an impact on the actors within the economy. The government might decide that the provision of needed infrastructure, protection of individual property rights and the maintenance of law and order are a priority and as such provide them or consider them a luxury and pay them no heed all the while taxing citizens and businesses to fund its activities. Thus, a country’s entire policy organisation, as well as its financial structures, regulatory…show more content…
However, the neo-Keynesian and neo-classical growth theories focus on the traditional factors (physical capital stock, labour, human capital) while totally ignoring the role of institutions, such as government, and the financial sector, as opposed to the endogenous growth theory. The possible impact of financial deepening on economic growth has generated a lot of interest over the years. There has, however, been a relatively limited attempt at modelling the relationship, particularly for developing countries. This chapter embarks on a review of the theoretical and empirical basis for any such relationship between the financial deepening and economic growth, so as to build up a theoretical and empirical framework for the analysis that will take place later in the work. 2.1.1 Aims and Objectives of the
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