The Political Economy of Economic Growth

GDP (Gross Domestic Product)

Total monetary value of all goods and services produced in a country in a given period. Can be measured three ways: production (sum of value added), income (sum of wages + profits + rents), or expenditure (C + I + G + X − M). All three give the same result.

Expenditure Approach

GDP = C + I + G + (X − M).

C = household consumption,

I = corporate investment,

G = government spending,

X − M = net exports.

The most commonly used approach; best for analysing aggregate demand.

Circular Flow Model

a model of the economy showing how money flows between households, firms, government, the financial sector, and the foreign sector.

Households supply labour and receive wages; firms sell goods and receive revenue; savings flow through the financial sector back into investment.

Macroeconomic Policy

government policies designed to influence aggregate demand (C + I + G + net exports) to stabilise the business cycle and maximise employment and growth.

Business Cycle

the recurring pattern of expansion and contraction in economic activity. Driven mainly by fluctuations in aggregate demand.

Periods of growth typically last longer than recessions, explaining the long-run upward trend in output.

Recession

a decline in GDP for two or more consecutive quarters. A deeper and more prolonged version is called a depression.

Productivity

output per unit of input, usually measured as output per worker or output per hour worked. The primary driver of long-run economic growth. Higher productivity means more output from the same amount of labour and capital.

Say´s Law

neoclassical principle that supply creates its own demand. If goods are produced, income is generated to buy them — so markets self-correct and sustained demand shortfalls are impossible without government interference.

Profit-Led Growth (Supply Side)

neoclassical view that growth is driven by profitable investment. Policy should focus on making investment attractive through tax cuts, deregulation, and privatisation. Associated with trickle-down economics and the post-1980s era.

Wage-Led Growth (Demand Side)

Keynesian/Post-Keynesian view that growth is driven by aggregate demand, particularly household consumption. Rising wages → more spending → firms invest more → growth. Associated with the Fordist model and the Golden Age.

Fordist Model

The post-war growth model based on mass production and mass consumption. Rising productivity in manufacturing → rising wages → rising consumer demand → further investment and growth. Required strong unions and coordinated wage bargaining.

Creative Destruction (Schumpeter)

process by which innovation continuously destroys old industries and creates new ones, reallocating labour and capital.

The engine of long-run capitalist growth. Beneficial in aggregate but painful in transition for specific workers and communities.

Wage-Productivity Decoupling

empirical finding that since the 1970s, productivity in advanced economies (especially the US) kept rising while wages stagnated.

The gains from productivity went to profits and shareholders rather than workers — a key driver of the falling labour share and rising inequality.

Deindustrialisation

shift of employment away from manufacturing toward services.

Does not mean manufacturing output collapsed — productivity rose so much that fewer workers produce the same or more. The issue is the employment share moving, not output disappearing.

Labour Market Polarisation

consequence of deindustrialisation whereby middle-skill, middle-wage manufacturing jobs are hollowed out, and growth concentrates at the two extremes: high-skill/high-wage (finance, tech, law) and low-skill/low-wage (care, retail, hospitality). Creates an hourglass labour market.

Baumol´s Cost Disease

tendency for service-sector costs to rise relative to manufacturing over time. Because services (healthcare, education, the arts) cannot increase productivity as fast as manufacturing, but wages must still rise with the economy, services become progressively more expensive. Creates fiscal pressure on welfare states.

Trade Liberalisation

Reduction of tariffs, quotas and other barriers to international trade. Pursued multilaterally (GATT → WTO 1995), regionally (EU, NAFTA), and bilaterally. Benefits consumers through cheaper imports but exposes domestic producers and low-skilled workers to competition.

Financial Liberalisation

removal of capital controls and restrictions on cross-border flows of money. Enables portfolio investment and bank lending across borders. Strongly correlated with financial instability. Also strengthens the structural power of capital by making capital flight a credible threat.

Global Value Chain

fragmentation of production across multiple countries, with different stages of the production process happening in different locations. Advanced-economy firms capture the high-value stages (design, R&D, branding) while low-wage countries do the assembly.

Smile Curve

concept describing where value is added along a global value chain. Value added is highest at the two ends — R&D and design (left) and marketing and brand (right) — and lowest in the middle (manufacturing and assembly). Explains why Apple captures ~58% of profits despite outsourcing production.

Elephant Curve (Milanovic)

graph of global income growth from 1988 to 2008 showing who gained most from globalisation. The curve rises steeply for the global middle class (East and South Asia), dips sharply for the Western working and middle class (the "missing middle"), then rises again for the global very rich (top 1%). Captures simultaneously falling inter-country inequality and rising intra-country inequality in the West.

Trickle-down Economics

neoclassical argument that policies benefiting the wealthy and corporations will eventually benefit everyone through higher investment, job creation, and productivity growth. Widely used to justify tax cuts for the rich and deregulation since the 1980s. Heterodox economists argue the evidence does not support it.

Underconsumption

Keynesian/Marxist concept describing a situation where wages are too low or inequality too high for households to purchase all the goods the economy produces. Leads to stagnation, overproduction crises, or debt-driven booms as households borrow to compensate for stagnant income.