Within an
economic context, the concept of growth is extremely important. Extensive Growth is that which arises from adding new
factors of production: be they workers, machines, or factories. This kind of growth is driven by
capital accumulation or
labour accumulation and exists in contrast to
intensive growth, which occurs when existing
factors are used more efficiently. An example of this is taking a bunch of separate machines and making them into an
assembly line. No new machines are added, but the existing machines yield a higher
output than before.
Growth can be charted using the
Cobb-Douglass Production Function:
Y (Income) = T (Technology) * L (Labour) ^ (a) * K (Capital) ^ b where a+b=1
ln(Y) = ln(T) + a ln(L) + b ln(K)
Having a and b sum to one creates
constant returns to scale within the
model. In all developed economies, a is around .75 and b is around .25. Since
income is allocated to
factors according to their
marginal contributions, it makes sense that 75% of
national income (
GDP) is directed to labour.
Within this model, changes in L and K represent
extensive growth while changes in T represent
intensive growth. In
Canada, about 17% of
GDP growth is attributable to changes in L, 13% to changes in K, and the remainder to changes in T.