Economic growth accounting studies show that Technology is the most important component of economic growth Population growth is the most important source of growth Capital deepening is the most important factor in economic growth. Improvements in physical capital are more important than improvements in human capital
The correct answer and explanation is :
The correct answer is: Technology is the most important component of economic growth.
Explanation:
Economic growth accounting, based on the Solow Growth Model and Total Factor Productivity (TFP) analysis, identifies three primary drivers of economic growth: capital (physical investments like machinery and infrastructure), labor (population and workforce growth), and technology (improvements in efficiency and productivity). Studies have consistently shown that technological progress is the most important factor in long-term economic growth.
- Technology and Productivity Growth
Technology drives economic growth by enhancing productivity, allowing economies to produce more output with the same or even fewer inputs. For instance, innovations like automation, artificial intelligence, and improved production processes significantly increase efficiency, reducing costs and increasing output. - Evidence from Growth Accounting
Empirical studies by economists like Robert Solow (Solow-Swan Growth Model) have shown that increases in capital and labor alone cannot fully explain economic growth. A significant portion of long-term growth comes from Total Factor Productivity (TFP), which includes technological progress. - Limitations of Other Growth Factors
- Population Growth: While a larger workforce can contribute to growth, it is not as crucial as technology. Without technological progress, an increasing population may lead to diminishing returns and lower per capita income.
- Capital Deepening: While investment in physical capital (e.g., machinery) boosts growth, it reaches a point of diminishing returns. In contrast, technological innovation continuously enhances the productivity of both labor and capital.
- Human Capital vs. Physical Capital: While improvements in physical capital are vital, advances in human capital (education and skills) enable economies to better utilize technology, making them complementary rather than substitutive.
Thus, technological progress remains the most important driver of sustained economic growth.