Question

When and where did modern economic growth first happen? What are the major institutional factors that form the foundation for modern economic growth? What do they have in common?

Short answer

According to economists, modern economic growth happened in the 17th century in Britain.

Strong property rights, patents and copyrights, efficient financial institutions, literacy and education, free trade, and a competitive market are major institutional factors that form the foundation for modern economic growth.

The common factor about these institutions is that they are modern policy instruments and institutions developed after the industrial revolution.

Step-by-step solution

Step 1. History of economic growth.

The era of modern economics is started after the invention of the steam engine by James Watt in 1776 in Britain. The technology of the steam engine shifted almost all manually manufactured goods to the factories. It also encouraged inventions to locomotives, ships, heavy industrial machines, and from there, modern economic growth started.

Thus, the invention of the steam engine in the 17th century brought modern economic growth to the world. It happened in Britain.

Step 2. Major institutional factors responsible for economic growth.

• Strong-property rights: Strong-property rights are necessary to convince investors that their property will not be snatched by thieves, bandits, or the government. It will encourage them to invest more which will enhance the economic growth.
• Patents and copyrights: Patents and copyrights provide a strong incentive to inventors and authors. It encourages them to find goods and services for society, bringing economic growth to the economy.
• Efficient financial institutions: Financial institutions are the responsible factors for exchanging savings and investment in the economy. An efficient financial institution will increase savings and investments. Hence, the economic growth will improve.
• Literacy and education: Improvement in the literacy rate and education to the citizens will enhance the quality of the human workforce. It will also improve entrepreneurial abilities.
• Free trade: Free trade helps countries to the specialization of goods with lower opportunity costs. It also ensures the rapid exchange of innovative ideas, technologies, and cheap goods and services from one country to another.
• Competitive market: A competitive market system signals the producers about the profits and prices of a good. These signals help them to allocate resources more efficiently for production. An increase in efficiency of resource allocation will increase the output. Thus, it will generate higher economic growth.

Step 3. The common thing among all the institutional factors.

These institutions are the foundation for modern economic growth. They all influence the degree of economic growth of a country. A nation that wants to attain modern economic growth like rich nations needs to develop these institutions in its country. They are responsible for the changes in modern economic growth.

A country’s economic situation can be better off by using these institutional factors. Hence, the common thing among them is that they are responsible for sustaining and promoting economic growth. All these are modern ways of achieving economic growth that ensures the development of industries, easy flow of money, awareness among people, technology advancement, and others.