Introduction

At the very beginning of this book (Section 1.1), some of the motivating factors behind our decision to study economics were listed. One of them was the question: how to improve the per capita availability of goods and services? In other words, how does aggregate output per worker (Y/N) grow over time? The rate of growth of Y/N is an indicator of the health of an economy. For instance, if the Indian economy is growing at a good pace, it means that, on average, the income per person is also witnessing a good growth. However, owing to the effect of extreme values on averages, we can never be certain whether the growth is primarily driven by a tiny group of chief executive officers (CEOs) whose incomes grew substantially or owing to an increase in the agricultural incomes for a vast number of rural workers. And nor can we ascertain whether the agricultural sector as a whole is growing. To learn about the nature of growth (or in the language of statistics, the distribution of growth), we need to adopt a meso approach—this is what we do in Section 5.3. Given these considerations, treat the growth rate of an economy (growth of gross domestic product, or GDP) as you would treat the blurb of a book—as a reasonable guide to the story, but unable to provide the complete picture.

The previous chapter provided the determinants of output and employment levels in both closed and open economy settings. To continue with the analogy of the idli, while the last chapter examined the determinants of its size, the present chapter looks at the growth in its size over time. ‘Economic growth’ is the study of the evolution of the size of output or output per worker over time. Contemplate whether the determinants of output levels and output growth are necessarily the same; or would you expect the determinants of growth to be different from those of output levels?

This chapter relaxes a key assumption made in the previous chapter, that of given productive capacity. A study of economic growth warrants a study of the growth of productive capacity. What is the role of technological progress in economic growth?