Economic growth is one of the most important issues to understand, not just for economists but also for business leaders and individual citizens. When an economy grows, it means people and businesses are spending more and generally feeling better off. Conversely, when an economy stalls or even shrinks, it can leave people and businesses feeling worse off than before.
The most commonly used measure of economic growth is gross domestic product (GDP) which represents the total amount of money that consumers, businesses, and governments spend on goods and services in a given period. However, GDP is not a perfect measurement of economic growth. It does not take into account all the different products and services produced in a country and only includes a select few “economic” goods and services.
An important factor contributing to economic growth is the improvement of production technology. When a new production technology is developed, it allows workers to produce more with the same amount of resources. For example, when goldsmith Johannes Gutenberg invented the printing press in 15th century Europe, it allowed him to produce many books more quickly and at lower cost than before.
This study explores the major determinants of economic growth by employing the neoclassical production function framework and considering the world’s 20 largest economies. The results show that energy use, trade, capital, labour, foreign direct investment and human capital have a significant effect on GDP. These results are confirmed by using several diagnostic tests such as cross sectional dependence test, CADF panel unit root test, Pedroni and Kao test and panel autoregressive distributed lag (ARDL) method of Pool Mean Group (PMG). The findings suggest that reducing red tape can stimulate short-run aggregate demand while improving education and training may be long-term strategies to increase economic growth.
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