Economic Growth

Understanding Economic Growth: Characteristics, Factors and Measurement Methods

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The economic growth of a country is closely related to the welfare of its people which also becomes a benchmark for whether a country is in a good economic condition or not.

Simon Kuznets himself stated that economic growth is a condition in which a country is able to increase its production based on technological progress which is accompanied by an adjustment of its ideology. The following is a more complete explanation of the Theory of Economic Growth, Starting from the understanding, characteristics, factors to the measurement steps:

Understanding Economic Growth

Economic growth is an increase in the value and amount of production of goods and services calculated by a country in a certain period of time based on several indicators, such as the increase in national income, per capita income, the number of workers that is greater than the number of unemployed, and the reduction in poverty levels.

Economic growth can also be interpreted as a process of continuous change towards better conditions in the economic conditions of a country. The economy of a country itself can be said to be growing if the economic activities of its people have a direct impact on the increase in the production of goods and services.

By knowing the level of economic growth, the government can then make plans regarding state revenues and future development. Meanwhile, for business sector players, the level of economic growth can be used as a basis for making product development plans and resources.

Economic Growth Theory

In its development until now there are various theories of economic growth. This theory itself appears a lot to explain the growth cycle as well as the factors that directly influence an increase in the national economy by experts. Among the many theories that have emerged, here are some of them:

1. Neoclassical Theory

Neoclassical theory or also known as the Solow-Swan model of economic growth because it was originally introduced by Adam Smith, then put back by Robert Solow and TW Swan. This theory states that there are three main factors that influence economic growth including capital, labor, and technological developments.

This theory also believes that an increase in the number of workers can increase per capita income. However, without developing modern technology, this increase will not have a positive impact on national economic growth.

2. Classical Theory

Classical theory has developed since the 18th century. Its originator is a prominent figure named Adam Smith who stated that the economy of the population in a country will reach its highest point when using a liberal system consisting of two main elements, namely population growth and output.

This concept was later refuted by David Ricardo who stated that population growth did not have a positive influence on national economic growth, on the contrary, it would only increase the productive workforce, thus resulting in a decrease in worker wages.

Classical economic theory was born as the first milestone in economic thought which is used as a scientific discipline. This theory arises because of the weaknesses and shortcomings of previous economic theories.

3. Historical Theory

This theory was developed by a number of economists including Karl Bucher, Werner Sombart, and Frederich List with different views, but both are centered on the economic activities of society.

According to Karl, the relationship between producers and consumers affects national economic growth, this relationship itself occurs in cities, communities, closed household levels, to the world.

Meanwhile, Werner Sombart classifies the role of society in economic growth, from the closed economic stage, the industrial growth stage, to the capitalist stage.

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Factors Affecting Economic Growth

Economic growth is a process of changing the economic conditions of a country on an ongoing basis towards a better state within a certain period of time. Find out what factors really play an important role in influencing economic growth:

1. Natural Resources (SDA)

Natural Resources or something that comes from nature includes soil fertility, location and composition, natural wealth, minerals, climate, water resources, to marine resources. For economic growth, the availability of abundant natural resources is very good in supporting development.

Natural resources themselves are further divided into three types including Biological Natural Resources (resources that come from living things both from animals and plants. Examples of biological natural resources include chickens, cows, vegetables, rice, corn, cotton, wood, tea, coffee, to fish, non-biological natural resources (resources that do not come from living things.

Examples are water, sunlight, air, soil, mining materials, petroleum, and natural gas), natural resources that can be or are recovered (Examples of these resources include animals, plants, trees, and fish, Natural resources that cannot be recovered) renewable resources (resources that are limited because they are formed by natural processes over a long period of time (petroleum, coal, and natural gas), lastly, eternal natural resources that will never run out (examples of these resources include water, air, sunlight, etc.) sun, wind, waves, tides, and geothermal).

2. Human Resources (HR)

Human Resources play a very important role in economic growth. Human resources or also abbreviated as HR are productive individuals who act as drivers of an organization, both within companies and institutions.

It acts as the main element of the organization compared to other elements such as technology and capital, because it is humans who will then control these other factors. Human Resources itself is not solely calculated based on the number but rather on its efficiency. In encouraging Human Resources to work efficiently, there are several things that can be done:

  • Motivation of Human Resources (HR)  – Change and development will not occur without the awareness of each party. Therefore, motivating Human Resources (HR) is one of the things that must be done.
  • Adjust the Work to the Abilities and Interests of Human Resources (HR)  – Human Resources (HR) performance will be less productive if they accept assignments that are not in accordance with their abilities and interests. Therefore, they must be smart in choosing and determining their position according to their abilities and interests in something.
  • Training Programs  – Providing training programs to Human Resources (HR) will also help improve their skills. The training program must be well structured and must be right on target and in accordance with valid data. Guidance on valid data will then produce optimal output.
  • Periodic Evaluation of Human Resources (HR)  Performance – In controlling the performance of Human Resources (HR) within the specified period, it is necessary to have an evaluation so that they are introspective and try to improve and improve their work to maintain their position.

Human Resource Economics can also be defined as the science of economics which is applied to analyze the formation and utilization of human resources related to economic development.

3. Capital Accumulation

The accumulation of capital as a supply of reproducible factors of production. Capital accumulation is the process of adding to the stock of human-made physical capital in the form of equipment, machinery and buildings. If the capital stock increases within a certain time, it is also called capital accumulation or capital formation.

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The relationship between Capital Accumulation and economic growth itself can measure aggregate capital accumulation from the gross capital formation (gross investment) minus depreciation, both of which are within the scope of the Gross Domestic Product (GDP) component.

In the Harod-Domar model of economic growth, an increase in the saving rate allows more investment, which then leads to a higher rate of economic growth in the medium and short term.

4. Managerial Personnel and Production Organization

Production organization as an important part in the process of economic growth which is then closely related to the use of production factors in various economic activities. Production organization is also carried out and regulated by managerial personnel in various daily activities.

5. Technology

Technological change is considered as one of the most important factors in the process of economic growth, because technological change and progress is closely related to changes in production methods. It will eliminate the boundaries of time and space which then gives rise to new industries that take advantage of technological developments.

This is what then results in economic movement, if initially the exchange of goods was done physically, now this exchange is also happening through the media of technology. Economic movements that occur later will indirectly affect economic growth.

At the macroeconomic level, technological developments play a role in contributing to economic growth and encouraging economic development in a better direction. The development of information technology will also indirectly strengthen the competitiveness of a country in developing its economy.

The companies in it can then increase national income which can later be used to support the welfare of its residents. Therefore, technological changes will increase the productivity of Human Resources (HR), capital, and other production factors.

6. Political Factors and Government Administration

Weak political and administrative structures are a major obstacle to a country’s economic development. Politics that are in an unstable condition and a corrupt government will certainly hamper economic progress.

In addition, the social aspects of people’s lives such as behavior, attitudes, work motivation, community views, or community institutions, legal order and the composition and incorrect implementation of laws and regulations are also factors that hinder economic progress. So it does not support the implementation of economic growth. Therefore the law should be implemented in a consistent and orderly manner.

 

How to Measure Economic Growth

The economic growth of a country can be measured by comparing the Gross National Product (GNP) and Gross Domestic Product (GDP), in the current year with the previous year. These two benchmarks help in calculating the total output of a country’s economy.

Meanwhile, according to Todaro and Smith (2004) there are three main factors or components that affect economic growth, namely capital accumulation, population growth (growth in population), and technological progress (technological progress).

Meanwhile, how to measure the economic growth of a country can be used the following formula:

Gt = ((PBDt – PBDt-1) / PBDt-1)) x100%.

Information :

Gt    = Economic Growth Rate

PBDt       = PDB value period t

GDPt-1 = GDP value of the previous period

In addition, in encouraging economic growth, there are several factors that influence it. Among them, are human resources, natural resources, science and technology, culture and capital resources.

 


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Economics Student of Universitas Gadjah Mada, Indonesia.