The Determining Factors of Economic Development

ByKexinGuo

ABSTRACT：We live in a world of rich and poor. The 7 billion people who inhabit the earth exits under a vast range of economic circumstances. With the developing of the world economics differences among capital between rich and poor countries still is a mystery. This paper aims to analyze the influence factors over economic development.

KEYWORDS：economic development;economic growth

The average incomes in the world's richest countries are more than ten times as high as in the world's poorest countries. It is apparent that these large differences in income lead to large differences in the quality of life. We can clearly see the differences in quality of living but the reasons for these differences are less apparent to the naked eye. After many years of neglect， these researchers tackled the problem behind such phenomenon. Long-run growth is now widely viewed to be at least as important as short-run fluctuations. So， technological changes， human capital， physical capital， and natural resources; by discussing the roles and influences of these capitals in a nation's growth.

Capital flow is the standard of technology

Under neoclassical models of trade and growth， in which countries face the same constant returns to scale production function， homogenous capital and labor inputs， and completely open world capital markets， capital would flow from rich to poor countries because by the law of diminishing returns. Therefore， the marginal product of capital would be higher in the poorer economy. Assuming a production function of the form y=Ax^β where y is income per worker and x is capital per worker， then the marginal product of capital would be r=Aβx^（β-1）， which is equivalent to， r=βA^（1/β） y^（（β-1）/β）when expressed in terms of production per worker.

Then compares the United States and India in 1988， stating that the formula mentioned above would indicate that the marginal product of capital in India must be about 58 times that of the United States. The fact that big amount of capital flows from rich to poor countries are not observed in practice. Therefore， it signifies the important flaws in the validity of conventional classical assumptions.

Some countries receive substantially more private direct investment， while the poorest countries in Africa receive less than middle-income emerging Asia. Likewise， developed economies receive the majority of worldwide FDI （foreign direct investment） which is clearly contrasting with the neoclassical predictions.

In general， the theoretical explanations fall into two large categories. The first category applies to the differences in fundamentals relating to the overall production structure of the economy. Poor or rich， all economies start with some sort of capital. However， there are differences in technology， infrastructure and other elements that affect productivity. Additionally， apart from these elements， government policies （such as tariffs， taxes， capital controls， and non-trade barriers）， and institutional structure play a crucial role in the factor of production of a country. The second category relates international capital market imperfections， such as information asymmetry， sovereign risk， and financing frictions.

Technological advancement and innovation have been an ingredient in the rapid economic growth. Historically speaking growth has not been a process of simply adding new steel mills and power plants. Rather， it is a stream of continuous advancements in inventions and technological change that has led to a vast improvement in production efficiency， quality and quantity. Inventions such as electricity， internal-combustion engine， super computers and mobile phones etc. Which has greatly increased productivity. One of the most progressive technological developments of the modern era are electronics and computers. These days， small laptops can outperform the fastest computer of the 1960s. These inventions show how important technological change has affected our society. Furthermore， technological change is a continuous process of small and large improvements. For the most part， technology advances are usually unnoticed as small improvements increase the quality of products or the quantity of output greatly.

Elements of economics development

Firstly， human capital （labor inputs） consist of the amount of workers and of the skill sets of the work force. A country might obtain the most modern and to date technology and equipment. However， these capital goods can be effectively used and maintained only by skilled and trained workers. Therefore， improvements in education， health， and discipline adds greatly to the productivity of labor force. Labor is one of the most important elements in economic growth because quantity and especially quality of labor determines the efficiency in the output of the economy.

Also， physical capital， includes infrastructures like roads and power plants， equipment like trucks and computers， stocks of inventories， cash etc. Accumulation of capital is crucial in building a progressive economy. For example， during the Industrial Revolution in the nineteenth century， the transcontinental railroads in the United States allowed the American heartland to adopt and be introduced to a new industry. During this period of time， active investment in automobiles， roads， and power plants increased productivity and provided the infrastructure which created new fields and industries. Therefore， the accumulation of physical capital is ever important today， alike railroads and highways， computers and information systems will contribute in the growth of an economy.

The last contributing factor of economic growth is natural resources. The important resources here are arable land， oil and gas， forests， water， and mineral resources. Some rich countries like Canada and Norway have achieved high economic growth primarily through their ample resource base， with large output in agriculture， fisheries， and forestry. However， the possession of natural resources is not necessary for economic success in the modern world. Many countries that have virtually no natural resources， such as South Korea， have thrived by concentrating on sectors that depend more on labor and capital than on natural resources. For example， Singapore that is much smaller than the resource abundant Russia has a larger volume of international trade.

A final thought over world economic development

Economic growth is an important topic because it has such a significant impact on the welfare of so many people. It inevitably goes along the four wheels of labor， natural resources， capital， and technology. But the wheels may differ greatly among countries and nations. There are case by case differences and some countries combine them more effectively than others. However， in the world development how the poor countries to improve their economics through another method， which remained an open question.

NOTES

N. Gregory Mankiw， David Romer， and David Weil （1992）， “A contribution to the empirics of economic growth，” Quarterly Journal of Economics 107， 407-438.

Ross Levine and David Renelt （1992）， “A sensitivity Analysis of cross-country growth regressions，” American Economic Review 82， 942-963.