Economic Growth

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Economic Growth is the increase per capita gross domestic product (GDP). There is a distinction between nominal and real economic growth, where the first is the growth rate including inflation, while the second is the nominal rate adjusted for inflation. Moreover economic theorists distinguish short-term economic stabilization and long-term economic growth. The topic of economic growth is mainly related to the long run. Short-run variation of economic growth is termed the business cycle. The long-run path of economic growth is one of the central questions of economics.

In 1377, the Arabian economic thinker Ibn Khaldun provided one of the earliest descriptions of economic growth in his Muqaddimah (known as Prolegomena in the Western world) (cited in Weiss, 1995):

When civilization [population] increases, the available labor again increases. In turn, luxury again increases in correspondence with the increasing profit, and the customs and needs of luxury increase. Crafts are created to obtain luxury products. The value realized from them increases, and, as a result, profits are again multiplied in the town. Production there is thriving even more than before. And so it goes with the second and third increase. All the additional labor serves luxury and wealth, in contrast to the original labor that served the necessity of life.

Economic growth is an important part of economic theory and one of the most significant problems economists tried to explain is the differences of growth rates of countries. Economic growth has been discussed since the time of physiocrats and Adam Smith. In his book “Wealth of Nations” (1776), Adam Smith mentioned economic growth as the improving and increasing of capital. David Ricardo in “The Theory of Com...

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...baldi et al. (2008) analyze the role of institutions and innovation in economic growth. The model examines how institutional constraints affect growth rates and sets a framework to study the interactions between institutions and human capital. Their work emphasizes on the effects of the quality of institutions on the allocation of human capital to the research and development and in case of economies with poor institutions how human capital influences growth. Through their analysis, they were able to find that long run growth rate is influenced by the growth rate of innovation which is also determined by the growth of institutions. On the other hand, in the short run, if institutions are not able to follow innovation in the path of change, putting therefore barriers in growth, the growth rate of the economy will decrease and so innovation will slow down as well.

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