ABSTRACT
Previous chapter provided a rigorous analysis on short-run stabilisation and discussions to the major developments in time series analysis and their impact on modelling macroeconomic relationships. With regard to modelling growth, we first survey the theories of growth in this chapter, and then analyse the pattern of real GDP growth on the demand side. This has been
warranted by noticing the fall in the share of investment as shown in chapter 2, which suggested that, of the components of GDP, investment has been (one of) the slowest growing. On the supply side, this is justified by the growth accounting. Accordingly, this chapter models output and private investment on the assumption that declining levels of investment expenditure leads to a shortage of physical capital and thereby retards economic growth. In the recent years there has been a growing concern with the theoretical and econometric analysis of growth-oriented adjustment in DEs. The standard model of economic growth has been mostly supply-driven within the framework of Neoclassical theory in which the process of capital accumulation is driven by household savings behaviour and in which aggregate demand effects are absent. But the core part of the analytical framework of the gap models of the Bank for funding DE adjustment programs' advocates that higher investment is necessary for long-run growth. In other words, this implies that it is the rate of growth of demand that may constrain the rate of output growth. In a growth context, Keynesian economics emphasizes the primacy of investment spending by firms in determining capital accumulation and the rate of technical progress (Palley, 1996; 1997).
