Economic growth is arguably the issue of primary concern to economic policy makers in both developed and developing economies. Economic growth statistics are among the most widely publicized measures of economic performance and are always analyzed and discussed with interest. As a consequence, growth theory has long occupied a central role in economics.

The study of economic growth illustrates the power of compound interest. A seemingly small growth differential can accumulate over time to substantial differentials in levels. To take one very simple example, suppose two countries begin with the same level of income. A sustained 1% growth differential in output between the two economies implies that in seventy years – just one lifetime – the output level of the faster-growing economy will be double that of the slower-growing economy. Indeed, the dramatic changes in relative incomes among the OECD countries that one can observe between the end of World War II and the present are in some cases the accumulated results of these seemingly small differences in growth rates.

Some background

Long-run growth was first introduced by Solow (1956) and Swan (1956) into the traditional neoclassical macroeconomic model by specifying a growing population coupled with a more efficient labor force. The direct consequence of this approach was that the long-run equilibrium growth rate in these models was ultimately tied to demographic factors, such as the growth rate of population, the structure of the labor force, and its productivity growth (technological change), all of which were typically taken to be exogenously determined.