Factors That Affect Economic Growth Essay

Factors That Affect Economic Growth Essay

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Growth in an economy can be attributed to many things. Some economists believe these variables may be exogenous and others say they are endogenous. Yet other economist believe growth comes from a combination of both of these types of variables. There are many theories that attempt to explain economic growth. Exogenous variable are the things that are taken as given in economic theories and models given and are not explained, while endogenous variables are the ones that can be explained by and are affected by changes in the exogenous variables.
Robert Solow, who was an economist at the Massachusetts Institute of Technology, developed a growth theory which stated that increases in savings, population, and technology would in the long run lead to economic growth, but that all these had to continuously increase, especially technology, in order to sustain long term growth or else in the end there would be diminishing returns and people would not be any better off. In his theory these factors are taken as given and do not explain how the economy grows. He also was the founder of growth accounting, which is a way of figuring out how much growth productivity can be gained from increases or decreases in capital, labor and technology.
Robert Lucas and Paul Romer, who were also economists, were among those who took Robert Solow’s theory to the next level. They noticed that Solow didn’t explain exactly how this growth happens. They all agree that in the long run it is ultimately improving and increasing productivity without increasing the inputs is what ultimately drives growth, this is called technological progress.
Technological progress is created by many means, which will be discussed now. If an economy invests in research and developme...


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...ated with the education of its citizens, all the way through college, either in full, through subsidies, or partially subsidizing those who can afford to pay a percentage of the cost of education themselves. Another policy of the government is to promote certain fields of education, which include science, technology, engineering and mathematics, in order to have a supply of labor that the government and the private sector can employ to work on many projects in researching and developing new technologies, processes and other innovations. Indeed, it is in the best interest of the overall economy that the government has and should continue its policies that are used “to encourage innovation, because the development and diffusion of new products and new processes for making products are key determinants of economic growth in the long run” (Elmendorf, 2015, p. 164).




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