**2.1 The basic growth model**

The basic model of economic growth that does not include resources at all is Solow model (1956). This model subsequently was extended with nonrenewable resources, renewable resources, and some waste assimilation services (Kamien and Schwartz, 1982; Toman et al., 1994). These extended models are, however, only applied in the context of debates about environmental sustainability, not in standard macro-economic applications.

Economic growth models examine the evolution of a hypothetical economy over time, as the quantities or the qualities of various inputs into the production process change. In Solow

Energy and Economy Links – A Review of Indicators and Methods 269

The Leontief input-output model can be regarded as an alternative to the neoclassical marginal productivity distribution theory. It represents an economy in which there is a single primary factor of production with prices that are not determined by marginal productivity. This representation of the economy or an ecosystem with energy as the

Ecological economists express a more realistic view. They argue that economy should be considered as an open subsystem of the global ecosystem. This accounts for a broader view of inputs of natural capital. These include the absorption of waste from economic activity and the maintenance of the climate that facilitates human life. In the other world, the ecological economists' worldview attempts to account for the laws of thermodynamics.

For ecological economists, energy is a fundamental factor enabling economic production. Some others even argue that energy availability actually drives economic growth, and in turn economic growth resulting in increased energy use (e.g. Cleveland et al., 1984). From this perspective, the possibility of decoupling energy use from economic growth seems

The relationship between energy and aggregate output can then be affected by some factors such as substitution between energy and other inputs, technological change, shifts in the composition of the energy input and shifts in the composition of output. A common interpretation of standard growth theory is that substitution and technical change can

There are significant differences in quality and quantity between energy flows from renewable sources, nonrenewable stocks of fossil fuels and other minerals, and slowly renewable stocks of organic matter (in the form of vegetable and animal biomass), water, etc. in their current and potential contributions to society. Therefore, some inputs to production are non-reproducible, while others can be manufactured at a cost within the economic production system. The primary energy inputs are not given an explicit role in the standard growth theories which focus on labor and capital. However, capital, labor, and in the longer term even natural resources, are reproducible factors of production, while energy

Since the two oil price shocks of the 1970s, there has been extensive debate concerning the trend of energy use and economic activities. It is commonly asserted that there has been decoupling of economic output and resources, which implies that the limits to growth are

The existing literature on energy and development does make clear that energy development is an important component of development more broadly. In this section we have attempted to explore some of the ways in which energy might have influence on the development process. A very simple model of the economy can be used to discuss the possible ways in which increased energy availability might be especially important to

ܻ ൌ ܨሺܭǡ ܪǡ ܧሻ (3)

effectively de-couple economic growth from energy and environmental issues.

**3. Energy and development: Conceptual linkages** 

(except fuels) is a nonreproducible factor of production (Stern, 1999).

no longer as restricting as in the past.

economic development. Suppose that

primary factor was proposed by Hannon (1973).

more limited.

model (1956) using manufactured capital a constant-sized labor force produces output, which is equal to the national income. So, according to neoclassical growth theory, the only cause of continuing economic growth is technological progress. The relationship between productive inputs and output changes, as technological knowledge level rises.

However, the neoclassical the production function can be used to examine the factors that could reduce or strengthen the linkage between energy use and economic activity over time. A general production function can be represented as:

$$Q\_l = f(X\_l) \tag{1}$$

Where the Qi is output, and the Xi are capital and labor inputs.

The neo-classical economic worldview sees the economy as a closed system in which goods are produced by capital and labor inputs, and then exchanged between consumers and firms. Economic growth is achieved by increasing inputs of labor or human capital or improvements in technology or quality improvements of capital and labor inputs. More recently, the role of natural capital in economic growth has also been considered.

The simple model does not explain how improvements in technology come about. More recent models explaining technological progress within the growth model as the outcome of decisions taken by firms and individuals.

In endogenous growth models the relationship between capital and output can be written in the following form:

$$\mathbf{Y} = \mathbf{A}. \mathbf{K} \tag{2}$$

Where capital, K, is a composite of manufactured and knowledge-based capital. The key point is that technological knowledge, A, can be regarded of as a form of capital.

#### **2.2 Growth models with natural resources**

Most of the natural resources like fossil fuels exist in finite quantities. Finiteness and exhaustibility of fossil fuels make the notion of indefinite economic growth problematic. So far there has been relatively little work including these points in models that also examine the roles of resources in growth (Smulders, 1999).

When there is more than one input there are many alternative paths that economic growth can take. All production involves the transformation or movement of matter in some way and all such transformations require energy. So energy is an essential factor of production (Stern, 1997). Therefore, the role of energy and its availability in the economic production have been emphasized by natural scientists and some ecological economists.

In the neoclassical economics approach, the quantity of energy available to the economy in any period is endogenous (Stern, 1999). Nevertheless, this analytical approach leads to a downplaying of the role of energy as a driver of economic growth and production. Some alternative models of the economy propose that energy is the only primary factor of production. But this means that the available energy in each period is determined exogenously.

model (1956) using manufactured capital a constant-sized labor force produces output, which is equal to the national income. So, according to neoclassical growth theory, the only cause of continuing economic growth is technological progress. The relationship between

However, the neoclassical the production function can be used to examine the factors that could reduce or strengthen the linkage between energy use and economic activity over time.

The neo-classical economic worldview sees the economy as a closed system in which goods are produced by capital and labor inputs, and then exchanged between consumers and firms. Economic growth is achieved by increasing inputs of labor or human capital or improvements in technology or quality improvements of capital and labor inputs. More

The simple model does not explain how improvements in technology come about. More recent models explaining technological progress within the growth model as the outcome of

In endogenous growth models the relationship between capital and output can be written in

Where capital, K, is a composite of manufactured and knowledge-based capital. The key

Most of the natural resources like fossil fuels exist in finite quantities. Finiteness and exhaustibility of fossil fuels make the notion of indefinite economic growth problematic. So far there has been relatively little work including these points in models that also examine

When there is more than one input there are many alternative paths that economic growth can take. All production involves the transformation or movement of matter in some way and all such transformations require energy. So energy is an essential factor of production (Stern, 1997). Therefore, the role of energy and its availability in the economic production

In the neoclassical economics approach, the quantity of energy available to the economy in any period is endogenous (Stern, 1999). Nevertheless, this analytical approach leads to a downplaying of the role of energy as a driver of economic growth and production. Some alternative models of the economy propose that energy is the only primary factor of production. But this means that the available energy in each period is determined

recently, the role of natural capital in economic growth has also been considered.

point is that technological knowledge, A, can be regarded of as a form of capital.

have been emphasized by natural scientists and some ecological economists.

�� = ����) (1)

Y =A.K (2)

productive inputs and output changes, as technological knowledge level rises.

A general production function can be represented as:

decisions taken by firms and individuals.

**2.2 Growth models with natural resources** 

the roles of resources in growth (Smulders, 1999).

the following form:

exogenously.

Where the Qi is output, and the Xi are capital and labor inputs.

The Leontief input-output model can be regarded as an alternative to the neoclassical marginal productivity distribution theory. It represents an economy in which there is a single primary factor of production with prices that are not determined by marginal productivity. This representation of the economy or an ecosystem with energy as the primary factor was proposed by Hannon (1973).

Ecological economists express a more realistic view. They argue that economy should be considered as an open subsystem of the global ecosystem. This accounts for a broader view of inputs of natural capital. These include the absorption of waste from economic activity and the maintenance of the climate that facilitates human life. In the other world, the ecological economists' worldview attempts to account for the laws of thermodynamics.

For ecological economists, energy is a fundamental factor enabling economic production. Some others even argue that energy availability actually drives economic growth, and in turn economic growth resulting in increased energy use (e.g. Cleveland et al., 1984). From this perspective, the possibility of decoupling energy use from economic growth seems more limited.

The relationship between energy and aggregate output can then be affected by some factors such as substitution between energy and other inputs, technological change, shifts in the composition of the energy input and shifts in the composition of output. A common interpretation of standard growth theory is that substitution and technical change can effectively de-couple economic growth from energy and environmental issues.
