Index

CHAPTER I: INTRODUCTION................................................................................................1
1.1. Introduction..................................................................................................................1
CHAPTER II: DEVELOPMENT...............................................................................................2
2.1. Economic development....................................................................................................2
2.2. Economic growth.............................................................................................................4
2.2.1. Concepts and Facts.......................................................................................................4
2.3. Solow's Model..................................................................................................................6
2.3.1. Solow Model No Technical Progress...........................................................................6
2.3.2. Solow Model With Technical Progress......................................................................10
2.3.3. Limitations of the Solow model..................................................................................11
2.4. Endogenous Growth.......................................................................................................12
2.5. Structural Policies..........................................................................................................12
CHAPTER III: CONCLUSION...............................................................................................14
3.1. Conclusion.....................................................................................................................14
Bibliography.........................................................................................................................15
CHAPTER I: INTRODUCTION

1.1. Introduction
The bibliographic research to be presented was carried out through consultations with books
and articles provided on the internet, where we will address economic growth, dealing with
this issue related to growth in terms of the economy of a country or region, we could not fail
to aside on economic development, which among these concepts are related to each other
according to the lifestyle providing the population is directly linked to the sustainable
development of that economy. Not only depending on an evolution in terms of economic
growth, measured by various indicators such as GDP (gross domestic product) and CPI
(consumer price index), but we will also relate their distinctions to economic development.

By presenting this topic in more depth and under a better understanding, we will address the
Solow model of the market, which deals with economic growth, its causes, the lack of
technical progress, with technical progress where in this model we will still, talk about
economic growth dealt with by the marginal productivity of workers within companies for,
from employability to the level of demographic growth (increase in the population living in a
given region), which directly affect economic growth in the short and long term.

We will end this research by addressing the limitations of the Solow model through puzzles nº
1 , 2 and 3, of endogenous growth that relates the variables of technical progress within
economic growth, as a way of expanding the technology of different economies, reducing
costs and creating a system of increasing returns to scale.

Structural policies consist of factors other than capital and labor that affect economic growth.

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CHAPTER II: DEVELOPMENT

2.1. Economic development

Globalization has brought an increase in the diversity of sectors of the economy, the
conjunction of a growing internationalization and interdependence of markets with the
formation of free trade areas and the so-called third technological revolution currently
characterize the globalization of the economy. Seen from this point of view, economic
development is the process by which a positive variation of “qualitative variables” occurs,
while economic growth is the increase in the productive capacity of an economy being
measured by variables such as gross domestic product (GDP), gross national product (GNP),
thus economic development addresses issues of a social nature, such as well-being,
consumption level, human development index, unemployment rate, illiteracy, quality of life,
among others. So “development can be considered as a process of improvement in relation to
a set of values or else as a comparative attitude with respect to such values” (Colman &
Nixson, 1978, p.21).

At this point we can clearly see the need to improve conditions in terms of quality of life in
order to obtain economic growth, there is an interrelationship on these concepts since world
globalization and technological advance making changes in the economic sector and the need
for adaptation. According to Fernandes (2011), “Maximizing the population’s level of well-
being requires the use of economic resources, which by definition are always scarce.” (P.20).

Given this situation, all the factors of production in a country can be used in alternative
applications. Under normal circumstances, it is up to the state to promote the efficient
allocation of productive resources whenever the market, in circumstances that are perfectly
identified today, fails to carry out this purpose. Therefore, the factors associated with
development (labor, capital, technology and innovation) are not doubted by the different
economic theories, however:

Economic development is not confined to investing in technical capital or skills. Human capital
is not exhausted in the construction of highways, schools or hospitals. Development is complex
involving human beings with motivations and expectations that cannot be controlled by
administrative or political mechanisms. (Osman, 2003, p.12).

Noting that for the economic success of a country, there is a need for the transformation and
improvement of the sectors of economic contribution, which can bring greater productivity
and efficiency in the production and manufacture of a range of diversities of products and
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consumer goods, analyzing the issue of Mozambique, a country with high production
resources (land, labor) the lack of capital and specialized personnel causes a fall in the
production system causing, for example: in the agricultural sector there are middle class
productions, but the lack of processing industries for agricultural products, so that they are
exported and return to the country after processing, with the high price, so if there were
Mozambican industries for processing and packaging, the price of the final consumer would
reach low scale, being able to control inflation. The existence of failures in the sector of
exploration of mineral and oil resources that:

In the field of exploitation of mineral resources, as in the previous cases, the usual weaknesses
in the prevention and control of mining and illegal marketing of mineral products prevail, the
enormous territorial extension and vulnerability of national borders, the high number of mining
titles in relation to the state's ability to monitor/inspect the existence of corruption hotspots and
record substantial environmental damage. It is also noted that the bulk of mining is exported in
raw form, given the weak local processing capacity, which implies less revenue for the country.
(Mosca, 2012, p.95).

Development and economic growth are partners that must go hand in hand, keeping the
economic system balanced, avoiding its collapse, something that unfortunately happens to
several countries, for progress and development, a constant advance of the technological
sector is necessary to improve the production modes and methods and from the point of view
of Samuelson & Nordhaus (1998), economic growth only happens with the revolution in the
technological sector, otherwise we find a stationary situation with the end of capital
intensification and wage increases that, by real interest rates will be constant, and that in a
way technological progress has clearly led to a vast improvement in production possibilities
(PP) in Europe, North America and Japan.

In addition to the technological sector, the economic sector needs for its growth and at the
same time to guarantee the well-being of society and families, it involves the correct
establishment of prices for goods and services so that control can maintain a good lifestyle of
the society that is studied by the branch of economics, microeconomics and contributing to
economic development, according to Pireto (1997), price equilibrium constitutes an important
point in the equilibrium of the economy, according to the level of production, existing
resources, tastes of individuals, habits, and purchasing power sets the price and quantity of
available goods and services and their prices.

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The distribution of the relevance of each sector creates economic stability, but returning to
globalization has its effects/impacts being negative or positive in the constitution of the
economy. According to Lindert & Williamson (2001, p.25 apud Espada, Morgado & Chelo,
2002, p.21):

Globalization favors economic inequalities, which can be assessed at various levels. There
seems to be agreement on the fact that the rate of inequalities between countries adhering to the

globalization process has significantly decreased after 1980, reversing a secular trend .

At the national level such pride or concern plays a central role in the political process and in
garnering electoral support for policies or governments. And in the study of development the
central focus of concern is often the statistical indication of a growing gap between the
standards of living in the richest countries (the so-called developed) and the poorest (less
developed) countries.

Streeten (1971, p.14 apud Smith, 1988, p.23) The truth, however, is that it is difficult to
measure comparative levels of development. The available statistical methods can be
considered reasonably reliable when it comes to obtaining acceptable degrees of growth rates
in living standards and ordinal rankings that give relative positions of countries in terms of
development.

2.2. Economic growth

2.2.1. Concepts and Facts

The economic problem is to try to satisfy people's needs, given the scarce resources available,
and the existing technology. To solve it, it is essential to bear in mind that present choices
decisively affect the well-being of future generations. We live in an age of unprecedented
abundance and prosperity. The enormous technological progress that we witnessed in the 20th
century completely transformed the economy. We now enjoy goods such as the car,
television, computer and mobile phone. We use planes to travel the world, and we
communicate via the Internet. We have more and more quality of life, and our lives are
getting longer and longer.

Economic development is relaxing the restrictions that limit the choices and opportunities of
people, who essentially seek to live well and for a long time. The concept of economic
growth is more restricted, focusing on the quantitative increase in productive capacity rather
than on the qualitative transformation of the structure of the economy.

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The theory of economic growth seeks to find the factors that determine the rate of economic
growth, and to identify policies that encourage its increase. The most frequently used measure
of growth is the growth rate of Gross Domestic Product (GDP) , which is the value of
goods and services produced annually. Since the time horizon for studying economic growth
is long-term, we should try to ignore short-term fluctuations (business cycles), and measure
economic growth as the growth rate of natural product.

Figure 1.1: "Stag-nation" vs "Speed-nation"

Social welfare is strongly associated with the quotient between the quantity of goods and
services produced in the economy, and the number of people whose needs need to be
satisfied. Thus, the GDP per capita is used , or, in a long-term perspective, the natural GDP
per capita , as an indicator of social well-being. It also makes sense to use the level of
consumption per capita rather than output per capita , because it is through consumption
that people satisfy their needs. The exponential nature of economic growth means that small
differences in growth rates can have a huge cumulative effect.

Nicholas Kaldor (1961) identified a set of long-term empirical regularities, now known as
Kaldor stylized facts:

1. Product growth per capita;

2. Growth of the capital-labor ratio;
3. Stability of the capital-output ratio;
4. Real wage growth;

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 5. Profit rate stability;
6. Stability of the ratio between wages and profits.

These empirical facts describe a kind of growth balance of the economy , which is actually
observed as a long-term trend. The stock of capital and output grow at the same rate (
stability of the capital-output ratio ), which is higher than the growth rate of the population
( growth of per capita output ) and of the labor factor ( growth of the capital-labor ratio ).
Regarding the remuneration of production factors, it can be observed that real wages grow (
real wages growth ), while the profit rate is stable ( profit rate stability ), keeping the
income fractions constant (product ) that remunerate the owners of capital and the workers (
stability of the proportion between wages and profits ).

2.3. Solow's Model

2.3.1. Solow Model No Technical Progress

The Solow model , or neoclassical growth model , has as main objective to explain the role
of capital accumulation in the growth process. According to this model, the economy tends
towards a steady-state , in which it presents balanced growth , that is, in which it grows
homogeneously and at a constant speed. In the absence of technological progress, per capita
output growth is nil.

The production function of an economy relates the quantities of resources used in production,
usually capital (K) and labor (N) , with the volume of production (Y) :

Y =F (K , N )

The marginal productivity of capital is equal to the increase in output resulting from the
increase of a small unit of capital. The average productivity of capital is calculated as the
quotient between the product and the stock of capital used in production:

The marginal productivity of labor is equal to the increase in output resulting from the use
of a small additional unit of labor. Average labor productivity is the product obtained for
each hour of labor used:

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The use of greater amounts of productive factors makes it possible to increase the volume of
production. However, additional units of production factors provide ever smaller increases in
production volume. We assume that the productive factors have positive but decreasing
marginal productivities :

In the Solow model, the production function is assumed to have constant returns to scale .
Although each productive factor has diminishing returns, the increase of both factors in a
given proportion causes an increase of the product in the same proportion:

F(λK,λN) = λ ⋅ F(K, N)

This assumption of constant returns to scale allows us to write the production function in
intensive form, relating output per worker y= (Y / N )to the stock of capital per worker
k =( K / N ).

Figure 1.2 : Production function

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We assume that households save a constant fraction, s , of their income (exogenous saving
rate). Equilibrium in the market for goods and services implies equality between investment
and savings:

I =S=s × Y

The wear and tear and obsolescence of capital is described by a constant depreciation rate, d .
The change in the capital stock is equal to the difference between the investment and the
depreciation of existing capital:

dK
=I −d ∙ K =s ∙Y −d ∙ K
dt

If investment exceeds capital depreciation, the capital stock increases . If investment

coincides with depreciation, then the capital stock remains constant . The workforce may
vary over time. Its growth rate, n , is assumed to be constant . The main variable of the model
is the stock of capital per worker . Its evolution depends on savings rates , capital
depreciation rate and labor force growth rate :

In the presence of population growth , in order to maintain the capital-to-worker ratio,

investment must be sufficient not only to offset depreciations, but also to provide capital for
additional workers that emerge in the economy.

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 Figure 1.3 : Steady state

When the stock of capital per worker is below the “ steady-state ” level (k*), investment is
greater than the needs for capital formation, so the stock of capital per worker increases. The
economy thus converges to equilibrium.

Figure 1.4 : Steady-state convergence

A higher rate of population (labor force) growth leads to an equilibrium (steady state) in
which the stock of capital per worker and output per worker are lower. An increase in the
depreciation rate has the same effect.

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A higher savings rate means that a greater fraction of the product is invested, which allows
for a higher level of capital stock per worker to be maintained. The fact that an increase in the
saving rate leads to an increase in equilibrium per capita output does not mean that it is
always desirable. Saving (investing) allows you to produce more in the future, but it implies
giving up consuming in the present.

We found that the Solow model without technical progress does not predict growth
continuous growth neither of output per worker, nor of the stock of capital per worker, nor of
wages. It suggests, therefore, that capital accumulation not enough to generate continued
economic growth. For Solow's model to conform to these stylized Kaldor facts, consideration
of technical progress is necessary.

2.3.2. Solow Model With Technical Progress

Technical progress is reflected in the increase in the productivity of production factors,
allowing a greater product to be obtained for the same level of use of productive factors.
There are three elementary formulations, which have in common the presence of a
productivity parameter, A :

Y =F ( A , K , N )

Hicks technical progress increases total factor productivity , that is, it affects capital and
labor productivity in the same way:

Y= A ∙ F (K ,N )

Harrod 's technical progress only increases labor productivity:

Y =F (K , AN )

Technical progress at Solow provides increases in capital productivity:

Y =F ( AK , N )

In Solow's model with technical progress , the production function incorporates technical
progress into Harrod. It is assumed that the labor factor productivity parameter grows at a
constant rate, a :

Y =F (K , AN ); with A=A 0 ∙e at

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The main variables of the model are defined as the stock of capital per unit of efficient
work , k a=K / AN and the real product per unit of efficient work y A =Y / AN . The
production function in intensive form is obtained as follows:

The Solow model admits two distinct forms of growth. In the absence of technical progress
, there can only be transitory growth , in convergence towards a new equilibrium. In the
presence of technical progress , the economy tends to show continued growth in both
output per worker and the stock of capital per worker, at a rate that coincides with the rate of
technical progress. It can be seen that this evolution verifies the stylized facts of Kaldor.
Solow's model therefore suggests that a growth process based on capital accumulation is not
sustainable. Continued economic growth can only result from permanent technical progress.

2.3.3. Limitations of the Solow model

The Solow model has been called into question as an explanatory model for the differences
between the economic growth of different countries, as it does not explain a series of
empirical facts.

1 puzzle

Countries have levels of per capita output that are too disparate from what would be expected
based on differences in their rates of savings, depreciation and population growth.

2 puzzle

As the capital-labor ratio is lower in backward countries, the marginal productivity of capital
is supposed to be higher in these countries. Therefore, the investment should have a higher
return, leading to the concentration of investment in backward countries. However, higher
rates of return on capital are not observed in poor countries.

3 puzzle

Solow's model does not explain productivity variation (technical progress is exogenous),
which is a crucial growth factor. What are the determinants of technical progress?

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2.4. Endogenous Growth
The solution to these puzzles seems to lie in explaining technical progress, and the differences
between the technological levels of different economies. This is the aim of endogenous
growth models. One way of incorporating technical progress into the growth model is based
on the idea that the use of capital involves a learning process. Technical progress is, to some
extent, a by-product of the production process. This positive externality generates increasing
returns to scale , and thus the possibility of permanent economic growth. Another possibility
is to consider that technological developments result from deliberate and costly research
activities carried out with the aim of making a profit. This perspective is associated with the
idea of “creative destruction” (Schumpeter, 1942). Companies are looking to develop new
products that allow them to outperform their competitors and gain market power (therefore, it
requires us to put aside the assumption of perfect competition). In both cases, human capital,
seen as the set of people's productive skills and competences, translates technical progress. To
statistically measure the importance of Human Capital in the growth process, we can use an
augmented version of the Solow decomposition, which incorporates human capital (H) as a
productive factor, estimated based on the differences between the remuneration of skilled
workers and workers. unqualified (N):

Y=A∙ F(K , H ,N)

2.5. Structural Policies

In addition to human capital, there are other factors that influence the growth of an economy,
such as:

1. Infrastructures;
2. Innovation, research and development;
3. Political regime and stability;
4. Liberalization and opening of the economy;
5. Judicial system and property rights;
6. Geographical situation.

If we have adequate ways of measuring these factors, we can introduce them into the
fundamental equation of growth accounting in order to estimate their contribution to
economic growth:

g y =a+b 1 ∙ g k +b2 ∙ g H +b3 ∙ j+ ⋯+ bn ∙ n

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From the knowledge of the factors that determine economic growth, the public sector can
carry out policies that stimulate the process of economic growth, called structural policies .
Examples of structural policies are:

A. Promoting an appropriate level of savings – setting an adequate public budget deficit

and introducing incentives for savings or private consumption.
B. Human capital formation – promoting vocational education and training, public health,
and retaining existing human capital (avoiding the so-called “ brain drain ”).
C. Support for technological innovation and diffusion – encourage research and
development, innovation, the creation of business networks and the dissemination of
information.
D. Investment in public infrastructure – building schools, hospitals and roads, and
providing public goods that contribute to the competitiveness of companies or reduce
their costs.
E. Market regulation – defining competition policies and protecting property rights.

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CHAPTER III: CONCLUSION

3.1. Conclusion
At the end of this research, we would like not only to highlight the content written by us , but
also to highlight the importance of this knowledge within the economic and social field, of
how a country's economy works and how growth of an economy takes place and how the
development of this economy is linked to the well-being of the population and the evolution
of the cost of living over time.

In this research, we address several issues related to this topic of economic growth, all of
them in order to create a simple understanding and framed for a better perception , we present
the Solow Model, where we explain how markets and the economy develop by the factors the
most crucial elements of the economy, which are capital (resources used for the process of
transforming inputs into outputs) and labor (number of workers that constitute a production
line), in addition to this, we present the models without progress technical progress and
technical progress within the evolution of the economy and, as this also depends on the
marginal productivity of workers within a company, and on how the functions of personnel
within production are implemented.

We approach the relationship linked to demographic growth in certain regions of the country ,
continent that affect economic growth. The impact of technology within the production
process, increasing the marginal product per worker and production itself, measured by
various indicators, the most used GDP.

And as the end of our research, in order to emphasize this issue of economic growth and
development, we address the structural policies that are constituted by infrastructure,
innovation, research and development, political regime and stability , liberalization and
openness of the economy, judicial system and property rights, geographical situation.

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Bibliography
Crescimento Económico. Portugal, Porto. [Referred to on June 11, 2022]. Available at

< https://www.fep.up.pt/docentes/joao/material/macro2/macro2_texto_crescimento.pdf >.

Mankiw , G. (2003). Macroeconomics (5th ed.). NY Worth Publisher

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