Economic and financial indicators provide the most vivid position of a country’s prevailing economic situation (UN Statistics Website, 2009). An indicator is essentially something that can be used to measure the performance of a component in a unit or even the entire unit (UN Statistics Website, 2009). Therefore, economic and financial indicators of a country are simply a representation of measurable, transparent, understandable, repeatable, reliable and accessible data regarding the indices and rates of economic growth.
As such, a country’s economic and financial indicators can be presented by proportions of populations living above or below national poverty line; mean or median national income ratios; energy accessibility, water accessibility; sanitation; or living conditions.
Economic growth is usually determined by levels of Gross Domestic Product (GDP). GDP is the preferred means of measuring economic growth because increase or decrease in the GDP levels in a country reflects the real the standards of living of its population.
GDP is the total market value of all final products of all final goods and services produced in a country in a given year expressed in money value (Lucas, 2002).
GDP of a country equals total consumer investments and government spending, plus the value of exports, minus the value of imports (Lucas, 2002; Mokyr, 2005). As such, GDP can be summarized as follows: • GDP = Consumption + gross Investment + Government Spending + (Exports-Imports) or simply GDP = C+I+G+(X-M). However, it must be noted that economic growth entails more than just mere change of scale of economic magnitudes.
By its very own nature, growth exemplifies modifications in economic structures thereby adjusting the general technological and social dynamics in a country.
Lucas (2002) pointed out that economic growth may modify the sectored structure of an economic unit, leading to close down of firms in one sector and creation of new firms in another. Bourguignon (2006) further noted that “growth modifies the structure of prices, thus affecting the standard of living in households in a way that depends on their consumption preferences” (p.
7). Moreover, economic growth calls for increased technological innovations which in turn increase the necessity for increased technological knowledge and skills, a situation that would require increased investment in education and better remuneration for holders of such important skills. The final and most important attribute of economic growth is that it reduces the abundant availability of public goods such as adequate water supply and clean air due to increased pollution (Mokyr, 2005).
Consequently, this may call for intervention and preventive measures in order to maintain adequate supply of the environmental goods. This means that economic growth impacts on the economy, social structures and environmental factors of a country. People, as the human factors of economic growth remain very important components of economic growth. While economic growth is primarily driven by state dynamics and machinery, the interactions within the societal fabric bear consequential impact on the manner in which economic growth may either be beneficial or harmful to the long-term interest of the people (Helpman, 2004).
This paper explores a quantitative analysis of economic and financial indicators in France. Theoretical Background Although there are many theories and models of economic growth, the exogenous theory of economic growth and the endogenous theory of economic growth provide the most vivid theoretical background on issues concerning economic growth (Aghion & Durlauf, 2005). Whereas the exogenous theory was advanced by the neo-classical theorists, the endogenous theory was advanced by the modern economic theorists.
The exogenous theory of economic growth was advanced by Robert Solow and Trevor Swan. The theory states that “long-run rate of growth of a system is determined by forces outside the system” (Solow, 1957). The main prediction of this theory is that an economy will always converge towards a steady state of growth which depends absolutely on the rate of technological progress and growth of labour. The theory is based on a series of equations which demonstrate the relationship between labour, time, capital goods, output and investments.
The main argument of the exogenous growth theory is based on the assumption that capital expansion is subject to diminishing returns. Therefore, given a fixed amount of labour force, the impact on the output of the last unit of capital accumulated will always be less than the impact on the preceding units (Solow, 1957). This cycle continues to a point where new amounts of technological progress and labour force adds no new value to capital produced.
New technological innovations and labour force output only serve to replenish the loss of value to existing capital due to depreciation. Solow and Swan refer to this as static state of growth. Modern theorists such as Barro, Ormerod, and Romer disagreed with the idea of static state of growth subject to diminishing returns as advanced by the exogenous theorists. They therefore developed a more relevant and realistic theory that came to be referred to as the endogenous theory (Larry, 2005).
Proponents of endogenous growth theory argue that comparisons between trends of production in industrialized countries today and before industrialization reveal that growth was generated and sustained by forces within as opposed to forces outside the countries (Aghion & Durlauf, 2005). The endogenous theory states that “economic growth is generated from within a system as a direct result of internal processes” (Romer, 1990; Larry, 2005).
According to the endogenous theorists, improvement in productivity can be linked to a faster pace of innovation and committed investment in human capital. “The theory notes that the enhancement of a nation’s human capital will lead to economic growth by means of the development of new form of technology that will lead to efficient and sufficient means of production” (Romer, 1990, p. 74). The main focus of the endogenous theorists lies on the need for both government and private sector institutions to nurture innovations through incentives that will encourage individuals to be innovative.
As Romer (1981) points out, “the rate of technological progress should not be taken given in a growth model, but rather, appropriate government policies have to be applied in order to raise a country’s growth rate” (p. 81). Such policies should particularly be targeted towards creating higher levels of competition in markets and greater innovation initiatives among individuals. Endogenous theorists identify private investment in research and development as being the key driving force for technical progress. Furthermore, protection of property rights and patents can provide the incentive to engage in research and development.
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