Factors that affect the long-run rate of economic growth - Essay Example

? Microeconomic Essay Factors that affect the long-run rate of economic growth When factors of production are increased in terms of quantity and quality, there is a resultant Long-run economic growth. These factors of production are: natural resources, capital resources, labor resources and Entrepreneurship. The pace at which long economic growth is realized is referred to as the long-run rate of economic growth. Natural Resources These are substances that occur naturally in nature and are beneficial for the growth of economy. Examples include timber, mineral deposit, water, air and land. A well endowed country in terms of the natural resources will realize a faster economic growth rate provided all the other factors are constant, that is, the country does not suffer any form of abnormality in issues such as the morale of the citizens, labor provision or transportation that would otherwise lead to stunted or retarded economic growth. It is easier for a country having natural resources to realize a self advancement when citizens of the country in question are trained to utilize a given natural resource. For example, a country that has mineral deposits, can easily acquire the necessary skills and machinery required for the mining process. In another perspective, a country might be having a commodity which perhaps it does not need at a given time. Another country in need of the resource can buy it and in turn, the selling country will generate some income which in turn will lead its economic growth (Mankiw, 2001). ] Labour Resources It is the partial or whole engagement of a person’s body or mind with a view of receiving some payment in return. It represents the required human capital required in the transformation of both raw and national resources into consumer commodities. It is only achievable with the availability of able bodied persons capable of working in different fields due to its flexibility. Improvement to the human capital can be done through training them to improve their skills and in the long run be in a position of handling more technical tasks even better. Entrepreneurship It is taken as a factor of production that will lead to the long-run rate of economic growth on the grounds that there can be existence of resources and still not be converted into finished goods. Entrepreneurs are needed in order to create goods and services which are of benefit to man. They assume any risk that comes in their way (Melvin & Boyes, 2012) Components of the Gross Domestic Product (GDP) measure According to Stroup and Sobel, Gross Domestic Growth refers to the total value of commodities produced and services rendered in a country within a period of one year. The final goods and services are mainly categorized into four, namely: Consumption (C) Investment (I), Net Exports (F), and Government Purchases (G).They can also be referred to as building blocks of the Gross Domestic Product and can be illustrated in the equation; C + I + F + G = GDP. Consumption This forms the largest component of the Gross Domestic Product. It consists of purchases of durable goods, non durable goods and services. Durable goods are the goods that are used for a long period of time since they do not get worn out easily. Their useful life is usually more than three years. Examples of such commodities include: washing machines, vehicles, textbooks, furniture and mobile phones (Stroup & Sobel, 2009). These goods can be resold by the owner after a given period of time. This can be as a result of reduced efficiency of the good in question or perhaps, the owner wants to raise cash to use elsewhere. The owner can also resell ones durable goods as a result of wanting to acquire a new one. Non durable goods – their useful life is very short and hence used for a short time period. Some of them are consumed immediately after purchase. Examples include: food, cosmetics, soap and petrol. Unlike durable goods, these goods are non resalable. Whereas durable goods such as a car or a business premise can be rented out, the same cannot be applied to non durable goods such as food. Investment It includes purchases made by companies to produce goods needed by their consumers. However, it is important to note that not every purchase made is counted. For instance, if a purchase made only replaces what was in existence, then it doesn't add to Gross Domestic Product, hence not counted. Capital spending, residential construction and inventory are the three major categories of investment. Capital spending entails the acquisition of new machines, new structures and change in business inventories. Residential construction is mainly characterized by erection of new buildings (recorded at the time it is constructed and not when it is bought), major additions and modifications and brokerage commissions (included in the Gross Domestic Product at the time of purchase). Net exports This can be summed up in the equation: Exports – Imports = Net exports. Exports are produced domestic goods and services sold to foreigners. If the same are sold to domestic consumers, it is not considered as increasing Gross Domestic Product. If someone acquires an imported commodity, that is through buying, both consumption and imports go up by nearly an equally value. Despite of that, imports are not taken as part of the Gross Domestic Product. Exports and imports affect the Gross Domestic Growth antagonistically. The former add while the latter subtract from it. The only importation components of imports that lead to the increase of Gross Domestic Product are transportation and distribution expenses, sales emanating from wholesale and retail margins not forgetting the sales tax. Government purchases These are the purchases acquired for final use in a similar way as consumption and investment. The purchases are made by a state, federal state and local governments. Since the transfer costs do not involve the production of goods and services, they are eliminated from Gross Domestic Product. The purchases made at the federal level are comparatively smaller than government expenditures. About 66% of the budget here represents transfer payment, that is, the type of payments which are effected to individuals without having performed any service and thus, not included in the Gross Domestic Growth. The payments also consist of charges (interest) on the national debt and the grants-in-aid (Baddeley & McCombie, 2007). Summary of relevant changes from the 1950s through the 2000s To determine the average yearly growth rates per decade, one only needs to add each decade’s yearly recorded growth rates and divide their totals by ten. It can be summarized as follows: 1950s….4.17% 1960s ….4.44% 1970s….3.26% 1980s….3.0% 1990s….3.2 % 2000s….1.82%  The above average figure growth rates per decade enables one to sport out short-term impacts of recessions to get a more inclusive impression of each decade’s GDP (Ferri, 2011). Comparison between current labor market conditions and those of past recessions since World War II Creditable, consistent data regarding employment measures is critical to determining employment policy. Tracing back in 2008, following many years of testing and research, current population survey gauges the employment status of workers. Early 2009 marked the start for which bureaucrat government data on employment measures were available. Currently, these data is monthly updated, providing policy makers and citizens with accurate and reliable information on global economy. Simply focusing on unadjusted accounts of conventional statistics may not be the most preferred way to compare the current status to the previous periods, but rather, account for demographic alterations. There has been a considerable debate on the traditional employment measures and output declines at the time of the recession. It diverges from the traditional treatment of these data by recognizing that the labor market today looks different than in the past. The current workforce is characterized by an older tradition. The decline in output in 2008 was comparable to the drop experienced between 1957 and 1973. However, there was a 7% decline in employment which was larger than all the recessions since World War II. According to Michael Evans, the decline in the hours spent by employees in every week in the recent years is less, at -2% as compared to the downturns at -3% in 1969 and -2.1% in 1973. Adding the drop in weekly hours spend by workers puts the approximate figure in this output component at 9% in 2008. This means that the recent contraction was basically the harshest of all postwar contractions. The second complex decline of this kind during the postwar era occurred in 1948, when the total figure dropped by 5.7%. The comparison may also be viewed in terms of the rate at which employment and output recovered following each recession, through looking at the amount of quarters it took for the growth rate per measure to positively turn out. In recent times, employment growth has not recovered as rapidly as it did in earlier recessions. For instance, the first two quarters of picking up after the 2001, 1991, 1960, and 1957 recessions similarly saw continuous declines in employment rates. On the other hand, two quarters of the 2001 and 2008 recession recoveries experienced the biggest employment growth declines as compared to the earlier recessions, which went at -1.8% and -1.35% respectively. However, a positive move was realized in the 2008 recovery era where the growth of weekly hours for each employee increased than in 2001(Evans, 2004). Labor market conditions can also be compared and contrasted using unemployment rates. According to the Bureau of Labor Statistics, unemployment rate was at 10% in the 2009 fourth quarter, a figure almost as high as 10.7% recorded in the fourth quarter of 1982. Nevertheless, the labor force demographic composition differs considerably between the two periods. For example, between 1982 and 2009, the portion of young employees (16-19 years) dropped from 7.6% to 4%. Generally, the unemployment rate among the youths is higher than the total population. Given that the total number of the labor force in recent times is older as compared to that of 1982, it implies that the unemployment rate today is lower when compared to the 1982 one. This is consistent with the belief that recent labor market conditions are worse off than other postwar conditions. References Baddeley, A., and McCombie, J. (2007). Economic Growth: New Directions in Theory And Policy. London: Edward Elgar Publishing. Evans, M. (2004). Macroeconomics for Managers, Retrieved from: http://down.cenet.org.cn/upfile/8/2009529152422188.pdf. Ferri, P. (2011). Macroeconomics of Growth Cycles and Financial Instability. London: Edward Elgar Publishing. Mankiw, N. (2001). Principles of Microeconomics. Harvard: Cengage Learning. Melvin, M., and Boyes, W. (2012). Economics. Harvard: Cengage Learning. Stroup, R., and Sobel, R. (2009). Economics: Private and Public Choice. New York, NY: James David Gwartney. Read More