Economic Growth

Apr 8, 2021 in Economics Essays
Example Essay Economic Growth

Economic growth is a widely recognised economic purpose of the society. The increase in output relative to the population means an increase in the standard of living. The growth of the real product entails an increase in material abundance and helps at least in part to deal with the problem of the economy. The growing economy allows to better serve the needs of people and it is easier to solve social and economic problems both within the country and at the international level. The annual growth of product that can be used to better meet existing and newly emerging needs is characteristic of growing economy.

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The real wages increase widens the range of options available to any family: a journey around the world, home computer, college education for every child without prejudice, and other possibilities and benefits. The economic growth allows new programs to combat poverty and environmental pollution without affecting the current levels of consumption, investment, and production of public goods. The economic growth softens the problem of limited resources. In contrast to the stagnant economy, the growing one enables the public to consume more and increase its future production potential. Making the burden easier generates bounded resources that are widening the framework of the economys production capacity, economic growth enables the public more fully to realise the economic goals, and implement new large-scale programs that require material resources.

The economic growth can be defined as an increase in real national product or the growth in real national product per capita (Sundrum1990).

The economic growth is determined by the following factors:

  1. The increase of the natural resources quantity and quality of the country;
  2. The quantity and quality of labour;
  3. The increase in capital investment;
  4. The advanced technology.

The economic growth of any country is determined by six main factors (Baddeley & McCombie 2007).

Four factors are associated with the economys material ability to grow. These factors include:

  1. The quality and quantity of natural resources;
  2. The quality and quantity of human resources;
  3. The amount of capital;
  4. The technology.

These factors of the economic growth are called the supply factors. They serve as the material agents for expansion. The presence of more and better quality of resources, which includes technological potential, allows increasing the amount of the actual product in the economy.

There are two other factors that contribute to the growth. The first of them is a factor of demand. It is necessary to ensure full employment of more and more resources in order to realise the growing production potential of the economy. This requires a constant increase of the aggregate demand.

The second factor contributing to the growth is the efficiency factor. In order to reach its production potential, the economy needs not only to ensure full employment of the resources, but also to achieve from them overall efficiency. For the production of the societys most valuable goods and services it is necessary additional resources (distribution efficiency) with the lowest cost (production efficiency). The ability to increase production is not sufficient to obtain the maximum amount of the aggregate product. For this purpose must also provide a real occupation of the increasing number of resources and their effective application in the production of the maximum amount of useful products.

Thus, the policy of supply and demand impacts economic growth.

To determine the level of aggregate demand and aggregate supply, it is necessary to combine all of the data on total demand into one indicator, the same needs to be done for the determination of the level of offered goods for consumption.

The aggregate demand is the amount of goods and services that consumers, businesses, and government are ready to buy at any possible level of prices (Benigno 1999).

The state of the aggregate demand is influenced by many factors, one of the main concerning the value is the level of prices for goods and services.

The lower is the level of prices, the higher is the real national output. Among the reasons explaining this kind of the aggregate demands state there should be indicated the so-called effect of interest rates, the wealth effect, and the effect of foreign purchases (Weil 2005).

Effect of the interest rate lies in the fact that interest rates increase with an increase of prices. This leads to the fact that the consumers reduce the demand for the consumption of goods, and there are reduced investments due to the high cost of credit.

Wealth effect indicates that when there is a high level of prices, the real purchasing power is accumulated in financial assets held by the population decrease. In this case, the population in general will become poorer, and therefore it should be expected that in general it will reduce their purchases.

The effect of foreign purchases may be explained in the following way. If the country has rising prices and the government has to buy imported goods, which are also cheaper, it leads to the decrease in aggregate demand for domestically produced goods.

Depth and comprehensive analysis of the above factors in their influence on the change in aggregate demand provides the possibility of correct economic policies at both branch and state level.

Talking about the aggregate supply, it must be said that the state of the aggregate supply primarily depends on the cost of production per unit of output, which has a direct impact on the value of goods and services prices. In turn, this has a huge impact on the business activities of a wide variety of industrys branches as this is a profit margin and appropriate profitability.

Certainly, the fact that reducing production costs per unit of production explains changes in output growth is undeniable. However, this fact hides a huge creative work at various levels of the economic life of the country. Cost reduction is possible only with the growth of the social productivity of labour, which in turn requires the use of more advanced production technology, business organisation and management, the existence of a rational sectoral production structure, harmonious interaction of production and non-productive areas of activity, and a stable socio-economic situation in the country.

Economic development opportunities get full scope for their implementation if the restrictions are removed in increasing demand, supply, and distribution of material wealth in the society. However, there are many limitations in the use of the basic factors of production, and it is necessary to use production potential, so that all the restrictions on the supply and demand are in the state of possible equilibrium in the use of economic resources. It is meant that the increase in production potential is realised in the event that the aggregate costs are increasing to such an extent in order to maintain the state of full employment of labour in the society, and additional resources introduced into circulation should be used more effectively, i.e. expressed in increasing the production of additional products with lower costs. In this case, the goods and services prices will be available to the consumers, which create conditions for increasing demand and output growth.

It is necessary to implement the policy stimulating economic growth, which needs an appropriate theoretical justification of the measures directions needed for the task.

Keynesians are considering economic growth from the standpoint of the supply and demand laws. Low growth rates are explained by an inadequate level of aggregate costs, which constrains the necessary GDP growth. According to their view, in order to stimulate demand, the government should provide appropriate purchasing goods of public needs, the growth of investment. A high level of investment should not exceed growth of inflation, i.e. under certain conditions limitations of government expenditures and consumption should come into force.

In contrast to the Keynesian theory, there is a theory based on the idea of the demand where an emphasis is made on the factors that increase the potential of the economic system. To solve the problems, it is suggested to reduce income taxes, which allow entrepreneurs to increase investments. In the same direction, there are justified requirements to stimulate labour efforts of small and medium-sized businesses to develop their production.

There are other areas of economic theory mainly related to the disclosure of the states special economic role as a factor influencing the improvement of industrial structure. According to their view, the government would take measures to promote the development of highly productive, high-technology products that would ensure the transfer of resources from low-productivity sectors to high- productive ones. In a variety of options, there are proposed options related to the idea of stimulus of increasing scientific and technological progress, improving education, and the quality of the labour force.

Thus, the factors of supply and demand are closely interrelated in their impact on the economic growth. Unemployment and under-utilisation of the resources can significantly slow down the accumulation of capital and growth of expenditure in the research and development. However, low rate of the technological progress and increased investment, in contrast, may cause unemployment.

However, among all the factors and conditions that provide economic growth, there dominates the growth of labour productivity. Under the labour productivity, there is generally defined the number of goods and services produced in a given time or the number of social time spent per unit of goods or services.

Based on the specified, the increase in real product and income in the society can be done in two main ways: by involving more resources and through the way of a more productive use of them. If this process is considered from the standpoint of labour costs, it can be said that the real GDP at any time is defined as the labour costs (in man-hours) multiplied on the number of goods worked out per person employed and is defined by the formula: GDP = the number of man-hours x labour productivity (the number of goods produced in one hour in monetary terms) (Dasgupta & Solow 2005). Of course, this refers to an average value of the number of man-hours and the prices of goods produced in one hour by one person.

The labour productivity is influenced by the factors such as technical progress, capital, labour force quality, and efficiency of the forces distribution in the production in combination with the scientific organisation and management of business operations.

Entrenched views on the labour productivitys role and importance as the main condition for the progressive development of the society have been questioned and criticised in recent years.

This doubt and criticism are primarily characterised by the economists and policy makers of the countries where there is a high level of peoples welfare.

At the heart of these doubts, a number of serious arguments lie. Against the economic growth, there are put forward the following objections: environmental pollution, population and countries stratification into the rich and the poor, and the problems of wealth distribution among destitute populations. The economic growth in some countries and underdevelopment of other countries create the antagonistic contradictions in terms of the predatory use of raw material resources of countries with a backward economy. Common human morality principles are subjected to shock, the results of which are unpredictable because concern, uncertainty, disappointment, and lack of faith in the political declaration of the ruling elites are increasing among people in the rich and poor countries.

In addition, according to the opponents of growth, there is practically no reason to believe that the economic growth helps to solve social problems such as poverty, homelessness, and discrimination. Talking about poverty, the criticisms believe that in the United States there is rather a problem of distribution than of production. To solve it, there are required political courage and determination to do the redistribution of wealth and income and it is not necessary to increase production.

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The opponents of the growth also believe that although the growth might allow "living better", it does not provide a "good life" (Abel, Bernanke & Croushore 2011). It may be that by producing more and more, people will benefit from it less. The constant companion of the economic growth is the assembly line, sweating system of labour, and the alienation of employees from taking decisions that somehow affect their lives. Improving the technology that lies at the heart of the economic growth carries to the employees a new anxiety and uncertainty about the future. The highly skilled and unskilled employees in equal measure face with the threat that the skills and professional experience, which they have acquired with great effort, will become obsolete under the impact of the technological progress. The economy of high growth is the economy of strong stresses that can cause damage to physical and mental health.

However, there are more statements in favour of the economic growth. The first argument in favour of the economic growth is that it reveals to us the way to material abundance and a higher standard of living.

The growth allows improving the countrys infrastructure, enhancing the care of the sick and the elderly, providing more opportunities to the disabled and those unable to work, and to strengthen police and fire protection. The economic situation of poor people will improve if the general family income is increased as a result of increasing productivity and economic growth. Moreover, the strategy of zero growth in industrialised countries can serve as a serious obstacle to the economic growth of poor countries. Because of the imminent reduce of foreign investments and foreign aid, such countries will long remain in the state of backwardness and poverty.

The acceleration of economic growth does not necessarily mean more environmental pollution. Pollution is not so much a by-product of the growth as "the problem of joint ownership". A large part of the environment rivers, lakes, oceans and air is seen as "common property", which can be used without any restrictions. This co-ownership has turned into the landfill, which people have abused and brought into disrepair.

Of course, the environmental pollution is a really serious problem. However, the limitation of the economic growth will not solve it. On the contrary, the growth allows reducing pollution, caring for the environment, not encroaching in the economic purposes of the pristine nature, destroying hazardous wastes, and not holding back the growth of peoples income.

Thus, thanks to the economic growth, there exist human civilisation and culture. The society in its development has always found opportunities to create more and more favourable conditions for the creation of the masses through the changes in the technical and economic way of life. The culture is the materialisation of human creativity in various areas of public life. People can engage in the most different kinds of activities thanks to the fact that the society has established a corresponding background of the economic nature. It means that with a higher level of productive forces in the society, the person can give to the production only a part of his/her time, another part of it is that the person may have at its disposal only the time for labour for the sake of money. Production of livelihoods does not absorb all of ones active life time.

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