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Journal section "Theoretical issues"

Return on Equity as an Economic Growth Driver

Balatsky E.V.

Volume 14, Issue 1, 2021

Balatsky E.V. Return on equity as an economic growth driver. Economic and Social Changes: Facts, Trends, Forecast, 2021, vol. 14, no. 1, pp. 26–40. DOI: 10.15838/esc.2021.1.73.3

DOI: 10.15838/esc.2021.1.73.3

Abstract   |   Authors   |   References
The article presents a simple model of economic growth based on the description of the dynamics of fixed capital formation. The main characteristic of the obtained fundamental equation of economic growth consists in an explicit link between the indicators of the GDP growth rate and the level of return on equity which allows not only obtaining the T. Piketty inequality, but also strictly determining the conditions for its implementation. The peculiarity of the fundamental equation of economic growth is in the postulation of the primacy of the capital circulation process which can provide an economic growth regime under certain conditions. The main difference between the author’s model and earlier constructions is the aggregation of most growth factors into one parameter. It is the profit rate (return on equity) which acts as the main driver of economic expansion. To strengthen the explanatory power of the fundamental equation of economic growth, the author considers two economic sectors – ordinary (with a low return on equity) and special (with a very high return on equity). This approach allows dividing the economic growth regime into early and mature stages which differ radically in the values of the macroeconomic parameters. The article shows that the early stage is typical for the period of the economy’s exit from the Malthusian trap and the transition from the industrial depression to sustainable growth. Experimental calculations based on the model proves that, in order to overcome the poverty trap, it is necessary to have a special sector in the national economy with the annual return on equity of hundreds percent. This result is consistent with the available historical data on the profitability of economic operations at a critical development stage – the change of the feudal system intto the capitalist one. The calculations also demonstrate that, for the mature stage of economic growth, such high requirements for business profitability are not imposed, and the thesis about the need for a special sector loses its significance. Moreover, the fundamental equation of economic growth allows outlining the final stage contours of the capitalist management mode

Keywords

economic growth, return on equity, Malthusian trap

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