Economic Growth and Its Analysis - Essay Example

Economic Growth and its Analysis Any other information INTRODUCTION: Economic Growth can be defined as an increase in the annual output of an economy over a period of year. In other words, it is the increase in productive potential of an economy. Graphically it can be represented by showing an outward movement of PPC. There are two distinctions of economic growth: Actual growth and Potential Growth. Actual growth is the actual growth that a country achieves in fiscal year. Potential growth is the level of growth a company can achieve given that all its factors are working at their full-rate of utilization. Thus, one can say that actual growth can be less than potential growth but not greater. If the economy is under the full-employment level of output or at any point below the PPC boundary, the economic growth in this case will be movement of output from that level to the boundary of a PPC curve. It can be shown by the following diagram: Figure 1: PPC and Economic Growth Let’s explain the concept of economic growth using the diagram above. Suppose that initially our economy is producing at point X within the curve. We know that at this point there exists unemployment in the economy because if full employment occurs, the economy out can rise up to the boundary of the curve. In this case economic growth occurs when the economy start producing at the boundary of the first curve in the figure 1. However, this is only one condition of growth and without examining the growth of population, one can only say that the nominal growth has achieved. Nominal growth occurs when the output increases in the economy but when the population’s growth is not taken into account. However, by eliminating the impact of population, one can determine if the real growth has occurred or not. Real growth occurs when the growth in output is greater than growth in population. For example, if the growth in output is 4%, we can say that nominal growth has taken place (Sloman, 2001). We can only say that the real growth has occurred if, let’s suppose, the output grows by 4% and population growth is less than 4 percent. This is the necessary condition for real economic growth to take place. Similarly, when economists talks about growth or decline of a economy, they are generally talking about the real growth and not the nominal growth. Nominal growth reduces the per capital income, whereas real growth increases the per-capita income. However, often we are in a condition that our economy is operating at full-employment level. In this case one cannot say that there is no chance for further growth to occur. This can be explained from the graph we drawn in figure 1. We concluded that economic growth occurred as the economy moved from x to the boundary first PPC. Since any point outside this boundary is unachievable, we need to broaden our horizon for growth. In other words we need to move our PPC outwards as shown in the figure. This can be done by drawing a new PPC, as shown in the figure 1. The new PPC will create new PPC boundaries for our economy. This means that we can produce more of everything. This movement in the PPC curve can bring about by the following conditions. HOW TO ACHIEVE ECONOMIC GROWTH UNDER FULL-EMPLOYMENT: 1) Increase in working-age population or increasing the number of productive hours: This helps the economy to increase the number of productive hours. Working age population can be increased by increasing the retirement age, reducing the number of years in college, reducing the internship requirement and increasing the wages. This will help the economys to increase total productive hours in the economy. Increase in these productive hours is going to help the economy to produce more and hence PPC will move outwards and economic growth will occur. 2) Investment in Capital and Machinery financed through borrowing or expenditures: Investment increases the capital and machinery equipment. This increase in machinery and capital helps the labor and operator of this equipment to produce more. Hence, economic growth takes place when there is an increase in output and this investment enables us to achieve the growth in output and economic growth takes place. 3) Investment in human capital and increasing the skills of the present work-force: Investment in human capital means training, education, skills provision and other ways that educate the workers and make them more productive. In other words, investment in human capital increases the productive potential of labor, which enables them to produce more with the given amount of tools and machinery and hence indirectly results in economic growth. 4) Discovery of new resources such as natural minerals, finite resources, non-renewable resources etc.: By resources we mean natural minerals, landscapes, and all sorts of natural climate that assist the economy in the production process. By discovering new resources, the economy can produce more. For example, as we all know that oil is a scarce resource. Each day we get fixed amount of barrels extracted. However, if new oilfields are discovered then it will increase the number of barrels being extracted and more work can be done with the more oil being extracted and hence economic growth will occur. TWO VIEW POINTS ABOUT ECONOMIC GROWTH: Although economic growth is considered very beneficial for the economy, yet many conservationists and environmentalists argue that the costs of economic growth are far greater than its advantage. First and foremost, the supporters of economic growth argue that economic growth is good as increases the variety in the consumer goods both in terms of quality and quantity. Since in this modern world life’s well-being is measured in terms of physical quantities of goods, they say that economic growth leads people towards a better life; enables them earn more income and help them enjoy the luxuries and other benefits that are material in nature. (Bamford, 2003) Similarly, on the other hand, people who are against economic growth argue that quality of life cannot only be increased by income only. They state that if a life’s quality is to be improved, there needs to be a better environment for them to live in. Similarly, some psychologists argue that life quality is enhanced only when a person leads a stress-free life. All these condition are violated by economic growth and hence some people talk against economic growth. For example, if you want to experience an economic growth you need to build more factories. The opportunity cost of these factories is the recreational facilities such as parks that could have been built instead of these factories. Thus economic growth results in more factories and less parks (recreational facilities, for example). This reduction in recreational facilities leads people towards a stressful life. Similarly, building of factories, leads to degradation of environment as they emit poisonous gases and hazardous chemicals. As a result of this many environmentalists talk against the economic growth by stating that it could not lead to a better quality of life. (Lipsey and Chrystal, 2002) Supporters of economic growth counter this argument by saying that economic growth leads people to care more about environment. For example, once an economy develops, it fulfills its economic needs, and then it has more time to focus on environment and other aspects of the society. In their words, economic growth is the only way, by which people can be trained to protect and improve the environmental conditions. Therefore, these people see merits in economic growth. (Velasquez, 2001) CONCLUSION: Considering both sides of the argument and analyzing them, I am of an opinion that economic growth is indeed a necessity for any country. Although we cannot ignore the harmful effects of economic growth, but the truth is no economy can survive without consistent economic growth taking place within its ranks. We, therefore, cannot drop the desire and need of an economic growth just because of its disadvantage, but, what we should do is to try to reduce the magnitude of these shortcomings of economic growth by utilizing our resources with efficiency. I would like to conclude my essay by stating that my stance towards economic growth is positive. This means that economic growth should take place as it is the need of time and no economy will be able to develop and accumulate power if it has weak economy. Therefore, economic growth is justified from both economic and political viewpoint. However, the harmful effects should be minimized to make sure that economies enjoy the maximum benefits of economic growth without any short coming. References: 1. John Sloman (2001). Economics. Pearson Publishing 2. Collin Bamford. (2003). As and A Level Economics. Cambridge University Press. 3. Lipsey and Chrystal. (2002). Economics. Oxford University Press. 4. Manuel G. Velasquez (2001). 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