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The real GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living.
However, there are some problems in using growth in GDP per capita to measure increasing well-being. These include:
Other measures of national income, such as the Index of Sustainable Economic Welfare or the Genuine Progress Indicator, have been developed in an attempt to give a more complete picture of the level of well-being, but there is no consensus as to which, if any, is a better measure than GDP. GDP still remains by far the most often-used measure, especially since, all else equal, a rise in real GDP is correlated with an increase in the availability of jobs, which are necessary to most individuals' survival.
The short-run variation of economic growth is termed the business cycle, and almost all economies experience periodical recessions. The cycle can be a misnomer as the fluctuations are not always regular. Explaining these fluctuations is one of the main focuses of macroeconomics. There are different schools of thought as to the causes of recessions but some consensus- see Keynesianism, MonetarismMonetarism is a set of views concerning the determination of national income and monetary economics. It focuses on the supply and demand for money being the primary means by which economic activity is regulated. Monetary theory focuses on money supply and, New classical economicsNew Classical Economics emerged as a school in Macroeconomics during the 1970s. As opposed to Keynesian macroeconomics, it builds its analysis on an entirely neoclassical framework. Specifically, New Classical Macroeconomics (NCM) emphasises the importanc and New Keynesian economicsNew Keynesian economics developed partly in response to new classical economics. It strives to provide microeconomic foundations to Keynesian economics by showing how imperfect markets can justify demand management by the government or its central bank.. Oil shocks, war and harvest failure are obvious causes of recession. Short-run variation in growth has generally dampened in higher income countries since the early 90s and this has been attributed, in part, to better macroeconomic management.
The long-run path of economic growth is one of the central questions of economics; despite the caveats given above, an increase in GDP of a country is generally taken as an increase in the standard of living of its inhabitants. Over long periods of time, even small rates of annual growth can have large effects through compounding. A growth rate of 2.5% per annum will lead to a doubling of GDP within 30 years, whilst a growth rate of 8% per annum (experienced by some East Asian TigersThe East Asian Tigers sometimes also referred to as Asia's Four Little Dragons referred to the economies of Taiwan, Hong Kong, South Korea, and Singapore; these nations were noted for maintaining high growth rates and rapid industrialization between the e) will lead to a doubling of GDP within 10 years.
Growth in output can be divided into two major categories: growth through increases in input (e.g. capitalCapital has a number of related meanings in economics, finance and accounting. In finance and accounting, capital generally refers to financial wealth, especially that used to start or maintain a business. Initially, it is assumed here that other styles o, labourIn classical economics and all micro-economics labour is one of three factors of production, the others being land and capital. It is a measure of the work done by human beings. There are macro-economic system theories which have created a concept called) and improvements in productivityIn economics, Productivity is the amount of output created (in terms of goods produced or services rendered) produced per unit input of used. For instance, labor productivity is typically measured as output per worker or output per labor-hour. With respec (e.g. new technologies). In the long term, we need technological progress in order to increase our standard of living - we cannot forever keep increasing labour input, and we will encounter diminishing marginal returns if we forever keep adding capital to the production process (see production theory basics).
The neo-classical growth model, often called the Solow growth model, was the first attempt to analytically model long-run growth. It predicts convergence to a steady state; at the steady state, all per-capita growth arises from technological progress. Given identical factors such as institutions ( governance and central banks), aggregate production functions and savings ratios, all countries will converge to the same steady state. Given that not all countries possess the same characteristics, it is possible that all countries in the world will not eventually converge. Indeed, in empirical data, convergence is observed only in a limited way.
In the neo-classical growth model growth is exogenous - it is set outside of the model i.e. it is not explained by the model but assumed to be a particular rate. This makes the model simple but does not explain how or why an economy grows. Endogenous growth theory attempts to endogenise growth. This means explaining growth within a model of the economy. Research done in this area has focussed on what increases human capital (e.g. education) or technological change (e.g. innovation).
Analysis of recent economic success shows a close correlation between growth and climate, though the actual linkage between the two--and possible causal mechanisms--remains a topic of hot debate. Cold states like Sweden are much more successful economically than warm countries like Nigeria. In early human history, economic as well as cultural development was concentrated in warmer parts of the word, like Egypt. Today, however, cold, Northern states have much higher GDP per capita compared to the hot, tropical states. This aspect of economics ( economic geography)--and its influence on human migration and political structures--was extensively studied by Ellsworth Huntington, a professor of Economics at Yale University in the early 20th century.
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