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Key Factors That Stimulate Economic Growth Economics Essay

Firstly, one of the main determinants is capital. As a result, an increase in capital through investment will increase output. Investment will only raise output depending on the productivity of this new capital which is called marginal efficiency of capital.
Physical capital is essential as workers are more productive and they are able to work more quickly and accurately by having the right tools. Furthermore, the quality of labour (education) determines human capital. Investing in education is similar to investing in physical capital. Consequently, investing in secondary schooling is considered one of the most effective ways that developing countries can increase their growth. Also, this is also showed in the UK budget 2010 where they are giving 20,000 additional places at undergraduates as it is seen as vital to the economic recovery (telegraph, 2010).
Figure 1 shows the student test scores versus GDP per capita. The correlation between GDP and test scores, although not perfect, is strong (economic growth, pg.179). Countries that devote a large share of GDP to schooling, such as UK and Singapore, tend to have high growth rates. Countries that devote a small share of GDP, such as Mozambique and Nigeria, tend to have low growth rates.
Figure 1: Student Test Scores vs GDP per Capita In addition, human Capital includes the size of the labour force. If there is an increase in the working population then there will be an increase in potential output. Population growth has a positive impact on GDP as more people bring stimulus to demand, investment and income. Since 1945, labour input has risen mainly because more women have joined the labour force (Begg, pg. 517)
Both physical and human capital directly impact on the productive capacity of an economy, as there are more resources available. They are complements of each other as one cannot work with a tool if one does not have sufficient education and skills. For example, after the 2nd World War in Germany, physical capital (land, infrastructure) was destroyed, but the skills of the labour force allowed Germany to be one of the countries that recovered most rapidly after 1945 (Begg). Moreover, growth per capita was very small in the past but after the 1750 industrialisation the capital and knowledge that was gained by one generation was accumulated by the next and this resulted in a much increased GDP (Economist). This shows that both types of capital are essential for economic growth.
Moreover, natural resources also contribute to economic growth but there is a limit as to how much can be exploited. For instance, oil is a non-renewable resource and when it is depleted, we will not be able to create more. Also, the land that a specific country owns will always stay the same, unless it is conquered by another country. Therefore, natural resources contribute to the economic growth but they are not necessary for an economy to be highly productive. For instance, Japan is one of the richest countries but does not have many natural resources (Mankiw and Taylor, pg. 508).
Furthermore, technology is another key determinant of economic growth. The new growth theories examine factors that “determine why technology, research, innovation and the like are undertaken and how they interact” (LeRoy). Technological improvements (such as computers) increase the marginal efficiency of capital (which is the additional output resulting from the use of an additional unit of capital) and new machines give a higher rate of return as technology can replace workers. Innovation also allows us to transform objects into forms that provide greater growth. The New Growth Theory also implies that we continue to increase living standards by steadily improving our knowledge of how to produce more and better goods and services with ever smaller amounts of physical resources (Grossman and Helpman, 1994).
Knowledge and education are equally important. Romer (1968) argues that production and manufacturing knowledge is just as important as other determinants. He believes that knowledge is itself a factor of production and economies should invest in it, just as they invest in capital and machines. This is why knowledge and education will affect economies in a long term as more people will be able to contribute ideas, invent new products and build on ideas of others for the economy to move forward.
Figure 2 shows the productivity (GDP per worker) levels in 1993. For decades, UK has invested a smaller proportion than other countries. Few of the causes of this poor performance comparing with other countries are that: UK had been slow to exploit the commercial potential of new technologies, the workforce had not had the skills necessary to adapt to changing economic conditions and to innovate and the amount of investment has been poor comparing with international standards (Treasury). Since then, UK has increased investment in human capital, technology and innovation. This resulted in Figure 3, where the reduction in the UK’s output per worker gap with France, Germany and the US from 1995 to 2005 (after 10 years) is showed. The treasury reported that UK in 2006 was now experiencing its longest period of combined productivity and employment growth since the 1950s.
Figure 2: Productivity (GDP per worker) levels in 1993 Figure 3: International comparisons of output per worker (treasure, pg.3) It is also reasonable to expect that, if other things equal, a greater commitment to innovation and research and development will accelerate technical progress and hence productivity growth (Economic Growth in Modern Britain, pg. 45). This is due to increasing use of technology that enables introduction of new and superior products and processes. This role has been emphasised by various growth models and many studies (Fagerberg, 1987; Lichtenberg, 1992; Ulku, 2004 (working paper)). However, R

Examining The Automotive Industry In Malaysia Economics Essay

The industry I have chosen is the automotive Industry in Asean in particular Malaysia and to go more indepth I took proton as a good case study what is happening to the Malaysian automotive industry.
Why Malaysia?
Malaysia has a “strong driving culture” and “one of the highest penetration rates of cars per capita in the
world” (Bonami, 2005, p. S3), as well as the growing clout of the Association of Southeast Asian Nations (ASEAN) markets, Perusahaan Otomobil Nasional Berhad (PROTON) as an appropriate sample
available at (
Brief introduction about proton
The first national car project by Malaysia was undertaken with the establishment of Perusahaan Otomobil Nasional (PROTON) in 1983. The Proton Saga was produces 1985. Proton nowadays produces a number of car models and variants, including the Iswara, Perdana,Wira, Satria, Putra,Waja and most recently, the GEN-2 and Satria Neo. The latest 104 M. Rosli