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Modern Economic Growth

Economies have existed for thousands of years since humans first began interacting with one another and trading. The term "economy" might not have always been established in the way it is now, but the relationships between different peoples that existed thousands of years ago functioned similarly. They had territories, they traded, and the people in the community had their assigned jobs to make sure the community could survive and prosper. Over time, how economies grow and prosper has had to evolve to account for how large and complex modern economies are. If you are curious to see just how much the recipe for modern economic growth differs from the old one, you will have to keep reading. 

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Modern Economic Growth

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Economies have existed for thousands of years since humans first began interacting with one another and trading. The term "economy" might not have always been established in the way it is now, but the relationships between different peoples that existed thousands of years ago functioned similarly. They had territories, they traded, and the people in the community had their assigned jobs to make sure the community could survive and prosper. Over time, how economies grow and prosper has had to evolve to account for how large and complex modern economies are. If you are curious to see just how much the recipe for modern economic growth differs from the old one, you will have to keep reading.

Modern Economic Growth Definition

Why not start with the modern economic growth definition? Economic growth itself is when an economy's production capability increases along with the type of goods and services it produces becoming more diverse over the long term.

So what sets modern economic growth apart from past economic growth? Modern economic growth relies on the economy's technological advancements, changes in human behavior, and the evolution of social ideologies to be able to grow.

Modern economic growth is the increase in an economy's production capability along with the diversification of the type of goods and services it produces over the long term, as a result of technological advancements, changes in human behavior, and the evolution of social ideologies.

As people grow from being children to adults, they start to have more complex demands and desires and a growing economy is no different. If we fed a teenager the same foods they ate when they were a baby, their bodies would not grow as well as they would if they ate teenager-appropriate meals, and they would not develop as quickly as their peers. For economies of the past, having land to farm, workers, and basic technology was sufficient to meet society's expectations. However, there is only so much growth an economy can have on a "baby food" diet before it becomes stagnant and its people become dissatisfied.

For modern economic growth, people need to be willing to change their behavior, be progressive with their ideologies, and invest in new technology. If people are stuck in the past and unwilling to change course, they are hampering growth. With modern economic growth, we also typically see prices rise more quickly over time and the standard of living is continuously rising.

Economic growth can be experienced in the short run but long-run economic growth is where we can collect the most data and learn about the nature of the economy. To read more about it take a look at our explanation - Long-Run Economic Growth

When Did Modern Economic Growth Begin?

When did modern economic growth begin? Most economists can agree that modern economic growth began around the industrial revolution during the early 1800s in western nations like Great Britain and the United States.1 The shift to modern economic growth could be seen when the old methods of production like small, family-run enterprises or ones that used slave labor were beginning to be outnumbered. The businesses that replaced them were large multilevel enterprises that used modern technology like heavy machinery to produce on a large scale.

The industrial revolution is when former behaviors like small-scale and low-energy production were no longer enough for continuous economic growth. For example, factories began to grow to increase their output levels, and to man these large factories, workers and their families flocked to the bigger cities for better-paying factory jobs, which left fewer farmers and farmhands. At the same time, electricity was being explored and introduced into people's everyday lives. To produce electricity, more large factories had to open to keep up with demand whereas a small-scale family model simply could not keep up.

Before the industrial revolution, people did not have the same need for basic education like literacy, nor did they condemn inhumane practices like slavery as we do today. As more people came to work in the cities and factories, education and fair working conditions became more important to them. As people earned more wages and socioeconomic status began increasing, people learned to organize themselves and advocate for better working conditions and wages. This eventually led to the labor movement.

The labor movement is a fascinating time in economic history! You should check out our explanation of it here: - The Labor Movement

Modern Economic Growth Theory

There are many modern theories of economic growth and development and sometimes they can appear similar. Before getting into them, however, let's establish what past theories of growth were based on.

In the past, economists stated that land, labor, capital, and entrepreneurship were the key to achieving both economic growth and development. Soon, those four resources were becoming easy to acquire. All of a sudden, many countries met these requirements, but some were seeing much more economic growth and development than others. This difference in success was then chalked up to the technology available to the economy. Those that had more advanced technologies were able to pull ahead of the others in the race to economic success.

As time went on, it was observed that much more went into modern economic growth. It was not only the practical elements going into the economy that stimulated its quantitative growth, but also the presence of qualitative factors that helped advance economic development. But what do we mean by that?

Economic growth and economic development are not the same, although they are often used interchangeably. Economic growth refers to a quantitative change like a nation's increase in GDP or higher national income. Economic development refers to qualitative values like an increase in the standard of living that occur alongside growth. Table 1 provides some examples.

Economic DevelopmentEconomic Growth
  • Increased standard of living.
  • Better infrastructure.
  • Better education.
  • Improved health care.
  • Increased GDP.
  • Increased national output.
  • Increased national income.
Table 1 - Differences between economic growth and economic development.

It is important for an economy to grow because it increases the nation's ability to supply its inhabitants with the goods and services they need and want. For economic development like increased standards of living and healthcare to happen, the nation needs to have economic growth.

Now that we have established what economic growth and economic development are, we can dive into some of the most prominent modern economic growth models.

GDP is one of the most well-known measures of a country's wealth. How well do you know it? Find out by having a look at our explanations on:

- Gross Domestic Product

- Nominal GDP vs Real GDP

Modern Economic Growth Models

We will look at three of the most prominent modern economic growth models. While this is by no means a comprehensive list of all economic growth models, these are where we will start.

Modern Economic Growth Models: Keynesian and Neo-Keynesian Growth Theory

This theory states that economic growth is pushed by demand. If aggregate demand is what controls all other factors in the market, then an increase in government spending during recessions will boost economic activity.2 When people are spending money, they are increasing aggregate demand which increases a nation's output.

Modern Economic Growth Models: Neoclassical or Exogenous Theory

This model incorporates the importance of technology along with labor and capital in an economy to achieve economic growth. This theory finds that exogenous factors like the savings rate are a determining factor for a higher level of investment and therefore production.2 Population growth is also important since it represents the supply of labor, and with more labor and investment, we can have more production.2 The third important factor that drives home the others is technological advancement. 2

Modern Economic Growth Models: Endogenous Growth Theory

This theory is similar to the neoclassical theory in that it values technological advancements but it differs because it states that technological advancements come from within the economy itself, rather than exogenous factors.2 Where the Neoclassical Theory states that growth is a result of changes in technology, the endogenous model finds that if an economy invests in its human capital, like health and education, it will lead to economic growth.

Modern Economic Growth Characteristics

There are many modern economic growth characteristics, but we will stick to the most prominent ones. Economists say that for economic growth in general, a country needs land, labor, capital, and entrepreneurship. As long as those four characteristics are met, an economy can grow. However, as established by the newer economic growth theories, the characteristics of modern economic growth are more complex, as our economy has grown more complex. Let's take a look.

CharacteristicWhat does it mean?
High per capita growth rate.This refers to a rapid increase in a country's population via a high per capita population growth rate and a rapid increase in a country's Gross Domestic Product (GDP) per capita.
High increase in the rate of productivity.When an economy sees a dramatic increase in the productivity of each unit of input, including units of labor.
Quick changes in the economic structure. This refers to the ability to shift the main areas of an economy's production. As an economy grows, it moves away from small, personal businesses to larger organizations that have higher output. These shifts are often from agricultural endeavors to more industrial production of goods, and then most recently to services.
Quick changes in social structures and ideologies. When a society's social structures shift and its ideologies become more modernized. An example of modernization is the movement away from a more rural lifestyle with a stronger religious affiliation to being more urban and less religious.
Economically more developed nations reaching out to less developed nations. When economies experience modern economic growth, they enter into a better financial position which allows them to open up communications with less developed nations than themselves.
It does not automatically spread to other developing countries. When one economy experiences modern growth, it does not automatically mean that others do too. This results in a gap between economically developed nations and those who have not experienced the same amount of economic growth.
Table 2 - Characteristics of modern economic growth.

These characteristics all separate economies that are experiencing modern economic growth from those whose economies are still developing. In the end, the biggest change from past economic growth to modern growth is the all-around increase in knowledge, which is just as important as the original four factors. The main indicator of economic growth has not changed. GDP is still the most widely used measure to gauge an economy's development.

Do you want to dive deeper into the main determinants of economic growth? Come read our explanation - Determinants of Growth

Modern Economic Growth - Key takeaways

  • Modern economic growth is when an economy can increase its production of goods and services over the long term due to technological advancements, changes in human behavior, and the evolution of social ideologies.
  • Modern economic growth began towards the beginning of the 1800s, around the time of the Industrial Revolution, in countries like Great Britain and the US.
  • The main difference between economic growth and economic development is that growth is determined by quantitative measures like GDP, while economic development is qualitative.
  • Some of the modern economic growth models are the Keynesian/Neo-Keynesian growth theory, the neoclassical theory/ exogenous theory, and the endogenous growth theory.
  • Some of the characteristics of modern economic growth are a high per capita growth rate, a high increase in the rate of productivity, quick changes in the economic structure, economically more developed nations reaching out to less developed nations, and that it does not automatically spread to other developing countries.

References

  1. Joel Mokyr, LONG-TERM ECONOMIC GROWTH AND THE HISTORY OF TECHNOLOGY, August 2005, https://faculty.wcas.northwestern.edu/jmokyr/Durlauf.PDF
  2. Ilkhom Sharipov, Contemporary Economic Growth Models and Theories: A Literature Review, CES Working Papers, 2015, https://www.econstor.eu/bitstream/10419/198426/1/ceswp-v07-i3-p759-773.pdf

Frequently Asked Questions about Modern Economic Growth

Modern economic growth is the increase in an economy's production capability along with the diversification of the type of goods and services it produces over the long term, as a result of technological advancements, changes in human behavior, and the evolution of social ideologies.

Modern economic growth began around the industrial revolution during the early 1800s in western nations like Great Britain and the United States.

The main difference between economic growth and economic development is that growth is determined by quantitative measures like GDP, while economic development is qualitative, meaning it focuses on improving education, improving infrastructure, and increasing the standard of living. 

Economic growth is important because it increases the nation's ability to supply its inhabitants with the goods and services they need and want. 

The main characteristics of modern economic growth are a high per capita growth rate, a high increase in the rate of productivity, quick changes in the economic structure, economically more developed nations reaching out to less developed nations, and that it does not automatically spread to other developing countries.

A nation's gross domestic product.

The four factors of economic growth are land, labor, capital, and entrepreneurship. 

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