Inflation, Saving and Growth

Abstract

One of the primary aims of development policy in developing economies is to raise the rate of growth of output in order to raise current levels of consumption and to provide resources for investment and future consumption. A country’s long-run growth rate depends on the rate of growth of its labour force (l) and the rate of growth of the productivity of labour (t). The latter depends, in turn, on capital accumulation and technical progress in the widest sense, including improvements in the quality of labour and capital and methods of organising production. The growth of the labour force (the employed and the unemployed) plus the growth rate of labour productivity can be referred to as the growth rate of effective labour or, alternatively, the natural rate of growth (G _n ).¹ Hence

$${G_n} = l + t$$

((1.1))

The natural rate of growth in any society sets the upper limit to growth in the long run. It measures a society’s growth of productive potential. Growth in this sense is a supply phenomenon. It measures the ability or capacity to produce.