Growth of Nations in the Global Economy
This article will focus on the growth of nations in the global economy. The article will provide an overview of the two main national growth theories, including the neoclassical growth theory and new growth theory, and the concept of the global economy. The relationship between global governance and the growth of nations will be discussed. The issues related to human capital and technology as engines for growth of nations in the global economy will be introduced.
Keywords Global Economy; Global Governance; Human Capital; Nations; Neoclassical Growth Theory; New Growth Theory
International Business: Growth of Nations in the Global Economy
The growth of nations varies between regions, nations, and historical eras. Economic and political changes promote or depress the growth of nations depending on variables such as national leadership, political and economic stability, natural resources, international relations, and infrastructure. The current era of the global economy, a product of economic globalization, is creating strong, though variable, national economic growth and development worldwide (Jones, 2005).
The global economy is characterized by growth of nations, both in populations and in output and consumption per capita, interdependence of nations, and international management efforts. Indicators of global growth and interdependence include the huge increases in communication links, world output, international trade, and international investment since the 1970s. The global economy is built on global interdependence of economic flows linking the economies of the world. The global economy is characterized by economic sensitivity. National economic events in one region often have profound results for other regions and national economies. National economies exist not in isolation but in relationship and tension with other economies worldwide. The global economy includes numerous economic phenomena and financial tools shared between all countries. Examples include the price of gold, the price of oil, and the related worldwide movement of interest rates (Preston, 1996).
According to the World Bank, economic growth of nations refers to the quantitative change or expansion in a country's economy. The economic growth of a nation is measured as the percentage increase in its gross domestic product during one year. Economic growth occurs in two distinct ways. Economic growth of a nation occurs when a nation grows extensively by using more physical, natural, or human resources or intensively by using resources more efficiently or productively. According to the World Bank's approach to economic growth of nations, intensive economic growth of nations requires economic development (Glossary, 2007).
The new global economy is characterized and controlled through global management or governance efforts. International organizations, both public and private, work to establish norms, standards, and requirements for international financial governance. These international organizations, including the United Nations, the World Bank, the G-20, the Financial Stability Forum, the International Organization of Securities Commissions, the Organization for Economic Co-operation and Development (OECD), and the Basle Committee on Banking Supervision, develop and encourage implementation of standards, principles, best practices, and economic architecture for worldwide use (Preston, 1996).
The following sections provide an overview of the main national growth theories and the global economy. These sections serve as foundation for later discussion of the relationship between global governance and the growth of nations. Issues related to the use of human capital and technology as engines for growth of nations in the global economy will be introduced.
Theories of Economic Growth of Nations
The economic growth of nations has been a topic of study by economists and political scientists since the nineteenth century. Economic growth of nations is considered by economists to be a natural result of market activity. Economists have long been interested in the relationship between income inequality and the economic growth of nations. Growth theories refer to the theories that explain the factors and relationships that promote the economic growth of nations. Economic growth theories incorporate variables representing the effects of production factors, public expenditure, and income distribution. The following factors influence the effect that income distribution has on growth: investment indivisibilities, incentives, credit market imperfections, macroeconomic imperfections, macroeconomic volatility, political economy aspects, and social effects (Alfranca & Galindo, 2003).
There are two main theories of the economic growth of nations: neoclassical growth theory and new growth theory.
- Neoclassical growth theory: Neoclassical growth theory, also referred to as the exogenous growth model, focuses on productivity growth. The neoclassical growth theory was the predominant economic growth theory from the nineteenth to mid-twentieth centuries. Exogenous growth refers to a change or variable that comes from outside the system. Technological progress and enhancement of a nation's human capital are the main factors influencing economic growth. Technology, increased human capital, savings, and capital accumulation are believed to promote technological development, more effective means of production, and economic growth. The neoclassical growth theory prioritizes the same factors and variables as neoclassical economics. The field of neoclassical economics emphasizes the belief that the market system will ensure a fair allocation of resources and income distribution. In addition, the market is believed to regulate demand and supply, allocation of production, and the optimization of social organization. Neoclassical economics, along with the neoclassical growth model, began in the nineteenth century in response to perceived weaknesses in classical economics (Brinkman, 2001).
- New growth theory: New growth theory, also referred to as the endogenous growth theory, began in the 1980s as a response to criticism of the neoclassical growth theory. Endogenous growth refers to a change or variable that comes from inside and is based on the idea that economic growth is created and sustained from within a country rather than through trade or other contact from outside the system. The new growth theory identifies the main endogenous factors leading to sustained growth of output per capita including research and design, education, and human capital (Park, 2006).
These two theories vary in their argument about what causes economic growth and what role technology plays in economic growth. There are three main criticisms of new growth theories: First, the new growth theory is criticized for lack of conceptual clarity in its underlying assumptions. Second, the new growth theory is criticized for lack of empirical relevancy. Third, the new growth theory is criticized for claiming to be a wholly new theory when it's closely tied to growth theories that came before. Economists debate the significance of this last criticism. The new growth theory claims to represent a total break from neoclassical theory but the continued focus on technology (whether exogenous to endogenous technology) and its relationship to economic growth, connects the two main growth theories in significant ways (Brinkman, 2001).
Criticism of the neoclassical growth theory focuses on the long-run productivity limitation created from exclusive focus on the addition of capital to a national economy. According to Mankiw (1995), the “neoclassical model predicts that different countries should have different levels of income per person, depending on the various parameters that determine” income levels (p. 282). The range of income levels between countries shows the magnitude of international differences is actually vast and variable. The neoclassical model also “predicts that each economy converges to its own steady state, which in turn is determined by its saving and population growth rates.” Comparisons of the growth rates of rich and poor countries shows that the neoclassical model does not successfully predict the rate of convergence of all countries. Convergence refers to the tendency of poor economies to grow more rapidly than rich economies (Mankiw, 1995, p....
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