Economic Growth

Abstract

The short-run general macro model developed in section I was based on the following simplifying assumptions:

• (1) The time period involved in the analysis was so short that the net investment taking place had no significant effect on the size of the economy’s capital stock. This allowed us to concentrate on the effect which that net investment has on the size of aggregate demand while neglecting its effect in increasing the economy’s productive capacity.

• (2) A constant population. This allowed us to concentrate on the factors underlying the demand and supply of labour from a constant population. However, during the last century and a half the population of almost every country has been increasing at varying geometric rates. This has resulted in an increase in the labour force over time and has been another factor in increasing the productive capacity of the economy.

• (3) An unchanging level of technical knowledge. This assumption also needs to be relaxed as increasing technical knowledge has resulted in a continual decrease in the real resources required per unit of output as well as in the introduction of new products. Technical change has been a major historical factor in increasing the economy’s productive capacity. It has also stimulated the rate of growth of demand through its impact on the rate of investment.