Economic growth is one of the most important issues for entrepreneurs, households, and politicians. Economic growth is defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy over time. This growth creates more profit for businesses and gives companies capital to invest and hire more employees. More jobs create incomes. If consumers have more money they buy additional products and services and these purchases drive higher growth. Better access to economic goods and services means improvement of material standard of living. Politicians watch economic growth to discover what stage of the business cycle the economy is in. The best phase is when the economy is growing steadily. If growth is too far beyond the steady growth level the situation is called the overheating of the economy. This is what happened to the housing sector in 2005-2006 for example. If there is too much money and too few goods and services on the market, the situation is called inflation. At some point, confidence in economic growth dissipates, people prefer to sell rather than buy and the economy “cools down”. When that phase continues long enough, it becomes a recession. One of the longest economic recessions occurred in 1929 and is called the Great Depression.10
The most widely used indicator to measure economic growth is gross domestic product (GDP). Gross domestic product is the total value of final goods produced in a given territory during the year. It includes all goods and services that businesses in the country produce for sale. It doesn’t matter whether they are sold domestically or overseas. Most countries measure economic growth as the percent rate of increase in real GDP. As the economy actually grows only if its growth rate exceeds the population growth rate, the country’s population is also taken into account when assessing economic growth. GDP per capita makes it possible to compare economic growth not only over time but across countries too.11
 |  |
Figure 1. Gross domestic product of the European Union member states per capita in 2021.12
GDP is a proper indicator to measure economic growth as it takes into account the country’s entire economic output. Figure 1 shows the GDP per capita of the EU Member States in spring 2021. The indicator in the figure is calculated as the ratio of real GDP to the average population of a given year and includes economic goods and services as well as products produced in a governing sector and non-profit institutions.13
The factors of production on which a country’s economic growth depends are land, labour, capital and entrepreneurship.
The ‘land’ also includes other natural resources. Natural resources are parts of the natural environment that human society needs to exist and use in production. Examples of natural resources are rocks, minerals, liquids, gases and organic matter worth extracting. Natural resources are also water (especially groundwater), as well as natural forests, marine fish, game, in other words anything that is not created or made by man but is used in economic activities. Managed forests, domestic animals, cultivated land and other things that grow and develop under human care are not natural resources. They are the result of human activities. Natural resources may be renewable and non-renewable.
The ‘labour force’, i.e. the economically active population, is people who are willing and able to work, regardless of whether they have found a job or not.
The term ‘capital’ refers to things people use to create benefits in demand in the market. Tangible capital includes land, natural resources, buildings, animals and machinery. Examples of intangible capital are patents, copyrights and trademarks. Cash and cash equivalents are banknotes and liquid bonds in circulation in different countries. Capital is productive if it is used in business to generate income and profits, and it is non-productive if it is used in the public interest. Classical economic theory deals with capital only in physical objects, such as equipment, buildings and vehicles used in production. Some other economists have expanded the concept of capital and they observe investing in the skills and education of employees as building human capital.14
Entrepreneurship is the fourth factor that involves the visionaries and innovators behind the entire production process. Entrepreneurs combine all the factors of production described above to design, develop and produce the concept of their product or service.
The above listed production inputs are limited. By combining these limited resources, people have to make choices about what to produce, what factors of production to use, and how to distribute the goods produced. At the same time, production should be organised in such a way that GDP is constantly growing.15
GDP and GDP per capita are very good indicators to measure the material affluence of a country but they do not say anything about the distribution of this wealth in the country. Rapid economic growth does not mean that an increase in wealth will improve the overall standard of living of the population. GDP does not include unpaid services like child care or other domestic work, volunteer work, illegal black-market activities as well as some environmental costs. It does not provide information on whether the daily needs of the population are met, does not show anything on the promotion of health, education, living conditions, natural environment, etc. GDP does not measure the satisfaction of needs or well-being of the population.16
A process aimed at the economic well-being and quality of life of a nation, region, local community, or individual that is run by the public sector is called economic development. Whereas economic development is a policy intervention aiming to improve the well-being of people, economic growth is a phenomenon of market productivity and increases in GDP is described as “one aspect of the process of economic development”. When economists primarily focus on the growth aspect and the economy at large, leaders of community economic development concern themselves with socioeconomic development as well. In general discourse about economic development it is generally believed that this means creating jobs, increasing the wealth of both the individual and society, improving the quality of human life, but besides the above-mentioned aspects, economic development leads to economic restructuring as well as social and cultural changes, which can be difficult for society without a state-supported socio-economic environment.17
In 1934, J. Schumpeter emphasised the importance of non-economic, cultural and social factors as influencers of entrepreneurship. In the case of economic development, economic growth is achieved mainly through indirect factors (such as economic freedom, increasing the value of human capital, i.e. the development of knowledge, social capital and its development, etc.). Schumpeter points out that though the driving force of economic development is the innovative activity of the undertaking, which stems from its private interest and leads to economic development, the importance of the public sector as the creator of a favourable business environment cannot be underestimated.18
In 1956, R. Solow explained that economic growth should not be based on the intensive use of natural resources but on an increase in capital, labour, and technological development. A change in capital and / or labour leads to a change in technology or productivity and ultimately to a change in the volume or quality of production. This is called a neoclassical model of growth. This model is a further development of the classical model, with an emphasis on the supply side of economic activity and it ignores almost all the Keynesian details of aggregate demand.19
P.M. Romer (1986) studied knowledge as a form of capital, concluding that the long-term development of technology results from the accumulation of knowledge by profit-maximising and prudent economic agents.20 As claimed by the new growth theory, the economy grows due to the development of knowledge, rather than as a result of increasing labour and capital. If you increase classical production inputs but reduce investment in human capital, infrastructure and research and development, the output cannot grow.21
Knowledge has also been seen as a positive externality. All individuals are ready to invest in knowledge only as much as is needed for personal gain. To achieve optimal social well-being, the state has to make additional investments in the acquisition of knowledge and develop policies that would bring knowledge-based entrepreneurship to the state.22
R. A. Solo (1968) regarded economic development as the improvement of the economic well-being of a community in producing higher-value goods using the same resources as before. It means the increased capacity of society to provide its members with higher real incomes resulting from raised resource productivity and employment rates or in other words, an increase in material well-being of people through an improvement in their cultural and social quality. Well-being and cultural quality of individuals are the result of average income, income distribution, consumption patterns and relationships between individuals.23
All authors mentioned above have noted that the public sector has an important role in economic development – they are a creator of a favourable economic and social environment for development. Economic development is linked to the following government policies24:
- Policies that achieve certain economic goals (such as sustainable growth, low unemployment and inflation, etc.);
- Policies designed to provide public services (e.g. access to education, construction of the road network, access to medical care, etc.);
- Policies aimed at improving the business environment (including tax policy, access to education and its content, family policy, etc.).
