Main Causes of Economic Growth - Example

Main Causes of Economic Growth It is believed that there is no set recipe for achieving economic growth and there are multiple factors which are at play to cause economic growth. It is also explicit that different countries grow at relatively different growth rates and due to different reasons. This is also because of the fact that economy of every country is relatively built differently and different factors play critical role in that. The overall possible causes of economic growth are: Increase in Total Demand One of the key reasons for economic growth is the increase in the aggregate demand within the economy. This increase in aggregate demand can be attributed to different factors and the increase can come from different sources. The increase in aggregate demand however is a short term phenomenon and economic growth can be for short run only. It is also important to note that the short term increase in aggregate demand can only result into economic growth if there is excess capacity available within the economy. If economy is already running at the full capacity, even an increase in aggregate demand will not result into an increase in economic growth.( Arnold, 2011).  An increase in aggregate demand in short run can also be attributed to the reduction in the interest rates. When interest rates are reduced borrowing becomes cheaper and therefore firms as well as households increase their borrowing thus causing an increase in aggregate demand within the economy. Not only spending increases but also investment increases too due to reduction in the interest rates. Increase in wage rates An increase in the wages also results into an increase in the economic growth. When wages are increased, the overall disposable income of the household increases thus can result into increase in spending. When spending increases, the overall aggregate demand increases too thus causing the economic growth within the economy. An increase in wage rates however also depends upon the overall demand for the labor within the economy. The overall improvements in quantity as well as quality can actually result into long term increase in the productivity within the economy. Increase in wage rates therefore is also linked with the overall demand for the labor within the economy. If firms are not willing to demand more workers, there may not be an increase in the wages.( Colander, & Gamber, 2006).  Increase in Government Spending An increase in government expenditure increases the aggregate demand and hence results into the increase in economic growth. It is also important to note however that higher level of government spending can create budget deficit which may not be a good sign for the economy to manage. Government spending can often takes place through construction and development of physical infrastructure within the country including construction of roads and other projects of public importance. Increase in Consumer Spending An increase in consumer spending can also result into economic growth over short run because an increase in consumer spending will increase the aggregate demand and hence an increase in gross domestic product of the economy. Economic growth can also be achieved in long run when following factors actually occur: Increase in Capital In the long run when capital formation occurs within the economy due to increase in investment activity, economic growth also takes place. Increase in capital can occur through establishment of new factories as well as investment into developing the infrastructure in the economy. Government as well as private sector can play critical role in increasing the overall pace of capital formation in the economy to achieve economic growth. Increase in Working Population An increase in working population increases the supply of labor and cause the long term aggregate supply curve to shift rightwards. This increase in working population can occur due to an increase in overall birth rates or through migration. Increase in productivity of labor When a country invests into the education and skill development of its labor force, the overall productivity of its also labor increases. With an increase in the productivity of the labor force, the economy achieves the necessary boost to become more productive and achieve economic growth at relatively quick pace. (Boyes, & Melvin, 2010).  As such above factors define and contribute towards the increase in the economic growth of a country. Q#2 Introduction Gross Domestic Product or GDP is considered as one of the best indicators of the economic growth in development in any economy. However, it is not the conclusive indicator of overall economic development of the country. Per capita income therefore may not represent the true economic development and progress of any country. COUNTRY RANKING NOMINAL GDP per capita 2011(UNITED NATIONS MEASURE) RANKING GDP per capita (PPP) 2011 (IMF MEASURE) RANKING HUMAN DEVELOPMENT INDEX 2011 UK 27 24 28 SOUTH KOREA 36 27 15 QATAR 5 1 37 EQUATORIAL GUINEA 45 21 136 As per the criteria given above, Qatar is in top category followed by UK, South Korea and Guinea according nominal GDP per capita. As per GPD per Capita based upon purchasing power parity, Qatar is on the top followed by Guinea, UK and South Korea. However, on the human development index, the overall ranking is relatively different with South Korea at the top and Guinea at the lowest level. The above figures therefore suggest that the GDP per capita based upon any measure may not be the appropriate or most suitable measure to judge the economic progress and development of any country. It also suggests that there are different other factors at play which help economy to economic progress and development. Per Capita GDP therefore may not provide the correct measure of how the economic development has taken place and how the overall wealth has been distributed within the country. Besides having some procedural problems, GDP per capita does not show the gap between the rich and poor and how economy actually distributes wealth across different sections of the society. As defining how income is distributed by the society based upon per capita income of the country may not be possible to ascertain. Apart from this, this measure also do not account for the environmental degradation, pollution as well as the resource depletion which takes place within any economy as a result of the economic activity. Apart from this, GDP do not take into consideration the unpaid work done by various members of the society and as such fails to recognize a significant part of the economic activity which cannot be translated into the monetary equivalents. The traditional weaknesses of the per capita GDP therefore may not indicate that it is the true measure of showing the overall standard of living in any country. Human development Index on the other hand however, provides a comprehensive statistical measure which can be used to measure the standard of living within any country. It is a statistical composition of life expectancy, education and income indices based upon which the countries are ranked in terms of their overall living standards and economic progress. Accordingly, Guinea is at the lowest among the countries suggesting that the overall living standards may not be up to the mark despite the fact that GDP per capita at PPP is relatively high.( Siggel,2005).  Lorenz Curve is another measure which can highlight the overall wealth distribution within the economy. It is a cumulative distribution function of the wealth distribution within the economy and provides for measuring the inequality within the individuals. The overall points on the Lorenz curve suggest as to how much percentage of population/households actually have how much percentage of income. The straight line suggests that the income is distributed equally within the economy whereas the curve indicates various combinations of the percentage of people as well as how much income is actually distributed. Another measure of assessing the standard of living of individuals is the gini co-efficient which is one of the mostly used measures of measuring inequality within the economy. A gini-coefficient of zero means there is a complete equality whereas a figure of 1 indicates complete inequality. Gini coefficient can be easily measured as the area between A and B on the Lorenz curve shown above. (Nixson, F2001). Gini coefficient along with the Lorenz curve provide a much better alternative of assessing as to how the overall income is distributed within the economy and how society is actually represented by the rich and the poor. The respective scores shown by both the coefficient as well as the Lorenz curve therefore can effectively inform much about the overall standards of living as compared to the GDP Per capita. Conclusion Per capita income is calculated by dividing total GDP for the year with the total population and indicates as to how much every citizen earns during the year. Though it is one of the most common indicators of economic progress however, it may not be an appropriate measure for judging the living standards of the people. A country may have a higher Per capita GDP however; it may not provide the higher level of living standards to its citizens. References 1. Arnold, R. A. (2011). Macroeconomics. Mason, OH, South-Western/Cengage Learning. 2. Boyes, W. J., & Melvin, M. (2010). Macroeconomics. Mason, OH, South-Western Cengage Learning. 3. Colander, D. C., & Gamber, E. (2006). Macroeconomics. Cape Town, Pearson/Prentice Hall. 4. Nixson, F. I. (2001). Development economics. Oxford, Heinemann. 5. Siggel, E. (2005). Development economics: a policy analysis approach. Aldershot, Ashgate. Read More