Note: This is the first post in a sequence I announced over a year ago. The sequence is intended to serve as a primer to the field of economic growth for those interested in the intersection between growth theory and artificial intelligence. See the announcement for more details.

Economic growth theory concerns the long-run behavior of economies, such as the United States, or the world economy. An "economy" here simply means the collective behavior of many agents interacting in a universe with scarce resources. Since economies are very complex, economists tend to focus on a small set of summary statistics to characterize them. For our purposes, we are most interested in the behavior of gross domestic product (GDP) over time as it interacts with factors such as labor, capital, and technology. The Solow-Swan model is the benchmark model in mainstream economics for understanding this process, so it is the first model we will look at in this sequence.

Why GDP?

Technically speaking, GDP is the market value of all final goods and services produced within a given nation, in one year. The meaning of "final good" is crucial here: if someone is producing a good for an intermediate purpose—such as smelting metal to be used in a smartphone—only the value added to the smartphone is counted for the purpose of GDP, not the total money exchanged during the entire process of making the smartphone. This concept is crucial for understanding the so-called production approach to calculating GDP.

GDP is useful for characterizing a large economy because, in two senses, it represents both the output and input to a market economy. GDP represents the output of an economy for a reason I have already alluded to: it is estimated by counting up all production within the economy, with only those interactions between agents that add value to end consumers counting in the calculation.

GDP also represents the input to a market economy because each good produced will at some point be bought by a consumer. There are two approaches to calculate GDP which take this fact into account. The first is the expenditure approach, which adds up the market value of all goods and services sold to consumers within an economy over a year. The second is the income approach, which is based on the fact that each good and service bought by a consumer also represents income taken home by a seller.

From the perspective ...