Importance of Economic Growth - Essay Example

Importance of Economic Growth Introduction Economic growth is an essential factor for a country's prosperity. Economic growth of a country can be defined as an increase in the amount of goods and services produced by the economy of the country over time. Economic growth is vital for any country as it is closely associated with standard of living of the people living in a country. Although it is true that economic growth alone can not bring sufficient changes in the average level living standard of people living in a particular country, it is an important component for obtaining higher quality of life. So, one of the major aims of any country across the world is to attain higher level of economic growth. Economic growth of a country is generally measured in terms of percentage change in Gross domestic product. In this context, one thing should be remembered that while measuring economic growth, one needs to take into account change in real GDP. The reason behind considering real GDP instead of nominal GDP is to net out the effect of price rise, i.e. inflation. Nominal GDP is simply a money value of the total amount of goods and services produced in a country in a particular period of time. Hence, it is quite evident that nominal GDP will increase through rise in price level even in the absence of increase in the level of production of goods and services. Therefore, it would be quite unjustified to consider increase in nominal GDP as an indicator of increase in production level of a country. Consequently to obtain reliable measure of economic growth change in real GDP is taken into consideration. Real GDP is calculated by assuming a base year. Selection of a base year for calculation of real GDP is required to be done with adequate care. Conventionally, for calculating real GDP of a country for a particular year, that year is chosen as the base year from the previous years in which economy of that country functioned in a normal way. Once selection of the base year is done, real GDP of a particular year, say current year, is calculated by valuing total amount of goods and services produced in the current year at the base year price level. (Branson, 1989; Chacholiades, 1990; Donbusch, and Fischer, 1989) Apart from measuring economic growth by estimating change in real GDP, there exists another way to measure economic growth of a country. One can take into account change in the level of per capital income of a country to measure rate of economic growth of that country. Per capita income of a country for particular period is measured by diving GDP by total number of people living in that country in that period of time. If per capita income of a country is found to increase over time, then it can be said that the country has set itself on the path of economic growth. (Donbusch and Fischer, 1989; Clark, 1957,) Economic growth is regarded as an essential factor for ensuring a country's wellbeing. It is therefore, would be to quite interesting find out why economic growth of a country is regarded as such an important factor for welfare of people living in a country. Importance of economic growth Before discussing importance of economic growth, it is necessary to distinguish between economic growth and economic development. Economic growth and economic development, both of these terms are used in the context of indicating wellbeing of a nation. Economic growth, however, is a much narrower concept, compared to economic development. As mentioned earlier, economic growth of a country is measured by taking into account changes in one specific measure only, like real GDP, or per capita income of that country over a particular period of time. Economic development, on the other hand, refers to much more than mere increase in real GDP or per capita income only. Conventionally, the term economic development refers to improvement in a wide range of indicators including GDP growth rate, rate of poverty, literacy rates, rate if life expectancy at birth, infant mortality rates etc. hence, economic development refers to social and technological progress at the same time, while economic growth refers to only one particular aspect of economic welfare of a country. The concept of economic growth does not take into account several important aspects of a country's wellbeing, such as importance of leisure time, distributional equity, and social justice and so on. However, importance of economic growth for a country's prosperity lies in the fact that economic growth plays an important role in improving quality of life of people living in a country. (Kuznets, 1949; Hosteliz, 1953; Lewis, 1954; Seers , 1977) According to the definition of economic growth, it implies increase in production of goods and services. Increase in the amount of goods and services produced in a country, in turn implies increase in the amount of wealth within the economy of the nation. Economic growth implies higher level of income and hence, economic growth is expected to play an effective role in the alleviation of poverty which in turn helps in improving standard of living. (Lewis, 1954) Importance of economic growth for a country's prosperity in economical as well as social terms lies in the fact that there exists a close relation between economic growth and standard of living. Although economic growth instantaneously does not refer to higher standard of living, it helps in enhancing overall standard of living of people living in a particular country. (Ackley, 1962) Standard of living simply implies economic wellbeing of people. The idea of standard of living takes into account material comforts, opportunities for personal satisfaction as well as the ease with which a person live his/her life in the society. It is quite difficult to develop a composite indicator of standard of living. Hence, very often economists use GDP per capita as a measure of standard of living of a country as per capita increase in GDP implies increase in the level of per capita income and it is a widely accepted fact that increase in income ha the potential to improve material comforts of life as well as enhancing various opportunities for personal satisfaction and increasing the ease with which a person leads his/her life. ("Living standards and Economic Growth - A primer") To enhance quality of life of people living in a country, economic growth is very important. Quality of life does not only depend on amount of income that a person earn, but also several other factors like education, health status etc. higher level of education and improved health condition of an individual actually make it quite easy for him/her to lead a superior life. Economic growth is important for enhancing overall education and health status of a country because people will be able to spend more on the education and health only if they get adequate amount of income. (Kuznets, 1949; Hosteliz, 1953; Lewis, 1954; Seers , 1977) As poverty reduces, quality of life automatically gets enhanced and economic growth plays a crucial role in removing poverty of a country. Economic growth implies increased level of production, which in turn implies enhanced level of job opportunities. Hence, it can be said that economic growth is essential for reducing the level of unemployment of a country. Reduced level of unemployment in turn automatically helps in the reduction of poverty of a country. ( It has therefore become quite clear that to get higher standard of living or higher quality of life, economic growth is very essential for a country. In this context, one thing, however, should be kept in mind that economic growth does not ensure equal distribution of income. Hence, although quality of life of people living in a particular country might get improved on overall basis due to enhanced level of income, it does not ensure improved quality of life for every individual living in that country. There is no doubt that for any country economic growth is very important for maintaining the prosperity of any country, but importance of economic growth is much higher to a developing nation than to a developed nation. This is because a developed nation has already set itself on the path of economic development in a very strong way by maintaining an adequate level of growth on a long-term basis and therefore a slight decrease in growth rate for any particular year will not alter its socio-economic wellbeing significantly. But for a developing nation, to set itself on a stable path of economic development, it is essential to maintain high rate of economic growth consistently over a long period of time. (Viner, 1958) It would be, therefore, quite interesting to examine how economic growth has been affecting quality of life of people living in developing nations. Brazil and Turkey are two examples of developing nations. It would be now interesting to investigate into effect of economic growth on several indicators of quality of life in these two countries and comparing the effects at the same time. However, before examining the kind of associations between economic growth and quality of life of people living in Brazil and Turkey, it is important to briefly explain the indicators selected for the present study. Growth rate in real GDP: For present purpose real GDP growth rate has been taken as an indicator of economic growth of a country. As mentioned earlier, real GDP of any country at any given point of time is equal to the value of nominal GDP divided by prevailing price level at that time. Now, the term growth rate implies the amount of increase that a variable has attained within a particular period. For the present study the growth in real GDP has been used for the analysis purpose. In the present study simple annual growth rate over the period under consideration has been taken into account. Simple annual rate of growth in output can be defined as an increase in the level of GDP of a country from one year to another. (Branson, 1989) Unemployment rate: Unemployment rate is a major determinant of quality of life individual as an individual's earning directly depends on his/her employment status.. Unemployment rate of a country at any point of time can be defined as percentage of laborers in total labor force who are without any job. In a country total labor force refers to the population, which supplies or seeks to supply labor for production and therefore includes both the employed and the unemployed. (Branson, 1989) Life expectancy at birth: Life expectancy at birth gives the average number of years that a certain group of people born in the same year is expected to live, considering mortality rate to remain constant at each age in the future. While calculating life expectancy at birth, both male and female populations are taken into account. It is widely considered as a measure of quality of life in a country. (United Nation statistical Division) Literacy rate: Literacy rate generally does not have any universal definition. However, most of the time, literacy rate of a country is defined as the percentage of population who are able to read and write at a specified age. Low level of literacy can be a major obstacle to economic development of a country. (United Nation statistical Division) Association between economic growth and alternative indicators of quality of life in Brazil and Turkey Economic growth and Unemployment Rate: As mentioned earlier economic growth and unemployment rate have some close association. With increase in economic growth, unemployment rate is expected to decline. It would be interesting to find out how unemployment is related to economic growth in Brazil and Turkey. Figure 1 presents economic growth rate in terms of real GDP growth rate in Brazil and Turkey and Figure 2 presents unemployment rate in the two selected countries. Figure 3 and Figure 4 shows the extent of association between economic growth and unemployment rate in these two countries. Figure 1 Figure 2 Source: CIA Fact Book Figure 1 shows that during the period of 2000-2008, in most of the years real GDP growth rate in Turkey exceeds that of Brazil. As far as level of unemployment is concerned, in some of the years during the period of 2000-2008, unemployment rate was greater for brazil than Turkey, while in some other years the thing got reversed. Figure 3 Figure 4 Source: CIA Fact Book Figure 3 and Figure 4 show the extents of association between unemployment rate and real GDP growth rate in Brazil and Turkey, respectively, in terms of scatter diagrams. Figure 1 shows a positive but weak association between unemployment rate and real GDP growth rate during the period under consideration, which actually contradicts general expectation. It implies that Brazil did not experience decline in the level of unemployment rate with increase in real GDP, rather in a few cases it experienced a increase in rate of unemployment with increase in economic growth. In Turkey, on the other hand, no clear association is visible between rate of unemployment and real GDP growth rate during the period under consideration. Economic growth and literacy rates: Theory suggests a positive close association between economic growth and literacy rate. It is generally expected that with increase in income people will tend to invest more in human capital. Education is the most important human capital that an individual can possess. So with in crease in real GDP, investment in education and therefore overall literacy rate is expected to rise. But it would be interesting to find out how far this expectation has been materialized in Brazil and Turkey. Figure 5 presents literacy rates of Brazil and Turkey during 2000-2008. Figure 5 Source: CIA Fact Book Figure 5 shows that in each of the years during the period under consideration literacy rate of Brazil were greater than that of Turkey, although not very significantly. It indicated a relative higher level of investment in education in Brazil compared to turkey. Now figure 6 and 7 shows the extent of association between literacy rates and real GDP growth rate in Brazil and Turkey, respectively. Figure 6 Figure 7 Source: CIA Fact Book Figure 6 and figure 7 shows no clear association between real GDP growth rate and literacy rates and literacy rates in Brazil as well as in Turkey. So here gain, theoretical expectation has not been materialized in reality in both of the countries. Economic growth and Life expectancy rate: With increase in economic growth, a country is also likely to invest more in health sector. Hence higher level of income is expected to be closely associated with higher level of life expectancy at birth. Figure 8 shows life expectancy rates in Brazil and Turkey during the period under consideration. Figure 8 Source: CIA Fact Book Figure 8 shows that in each of the year during the period under consideration life expectancy rate at birth was higher in Brazil than Turkey. It implies that in turkey, investment in health ground had been greater than in Brazil. However, over the year, differences between Brazil and Turkey had declined mostly due to significant increase in life expectancy rates in Brazil, particularly after since the year of 2003. Figure 9 and 10 present the extents of association between life expectancy rates and real GDP growth rate in Brazil and turkey, respectively. Figure 9 Figure 10 Source: CIA Fact Book According to the figures above, during the period of 2000-2008, Brazil did not experience any kind of close relation between life expectancy at birth and real GDP growth rates, while Turkey had experienced a weak negative correlation between real GDP growth rate and life expectancy at births, contrary to general expectation. Reviewing the trends of all the selected variables in Turkey and Brazil, it is found that while all the selected indicators of quality of life have shown improved performance over the years, growth rate in real GDP has followed fluctuating trend in both of the countries. So it can be inferred that economic growth rate has not been significantly associated with quality of life in Brazil as well as in Turkey. One possible explanation of this could be that economic growth alone cannot affect quality of life significantly. Along with economic growth, equitable distribution of benefits of growth is necessary for ensuring increasing quality o life for all. Even if GDP growth rate fluctuates, an improvement in distribution of income has immense potential to improve quality of life. It could be that in both of these countries distribution of income has improved over time which have played a crucial role in lessening the extent of impact of fluctuating economic growth on indicators of quality of life in the two countries under consideration. However, it would not be correct to completely ignore economic growth for enhancing a nation's economical as well as social prosperity. It is true that growth rates have fluctuated in both of these countries, but both economies have been able to grow over time, which have been translated into increase in literacy rate, increase in life expectancy rate etc. Governmental efforts to enhance economic growth: Classical theorists were completely against the idea of governmental intervention for increasing economic growth of a country. They advocated in favor of free flow of goods and services for ensuring maximum income and welfare of a nation. Keynes and his followers, however, raised their voices in favor of government intervention for increasing income level of a country. Keynesian theory suggests that adopting appropriate fiscal policy a country will be able to increase in output. According to Keynesian theories, adequate increase in governmental spending in required areas and appropriate tax policies are two vital drivers of economic growth of a country. These policies at the same time have potential to increase welfare of the people. (Levacic, 1982; Krugman, & Obstfeld, 2003; Horwitz) Although, Brazil and Turkey, have not been found to experience a very close association between economic growth rate and quality of life, governments of both of these countries have taken sufficient measures to increase economic growth of these countries. For example, since 1998, Turkey government has taken several fiscal measures such as improving transparency and responsibility of its economic system, reducing public debt, balancing public expenditure with earnings, and maintaining stability in the performance of its economy. Brazilian government has made several efforts to mix fiscal policies with monetary policies to improve performances of its major economic indicators. For example, since 2003, Government of Brazil has been taking some important steps to reduce the indexation of government securities to exchange rates, for reducing vulnerability of its economy to external environment and to reduce its debt to GDP ratio. It has also made some efforts to lower inflation rates as lower level of inflation guarantees improved performance of economy. (Taylor, 2004; Forbey, et al.) References: 1. Ackley, G 1962, Macroeconomics; Theory and Policy. Macmillan 2. Branson, Willam. H. 1989 Macroeconomic Theory and Policy (3rd Edition) Harper and Row 3. Chacholiades, M. 1990, International Economics, McGrawHill 4. CIA Fact Book: Turkey, n.d. available at: https://www.cia.gov/library/publications/the-world-factbook/geos/tu.html (accessed on May 2, 2009) 5. CIA Fact Book:n.d. available at: Brazil, n.d. available at https://www.cia.gov/library/publications/the-world-factbook/geos/ir.html (Accessed on May 2 , 2009) 6. Clark, C. 1957, The Conditions of Economic Progress, Macmillan 7. Donbusch, R. and Fischer, 1989. Macroeconomics. McGraw Hill 8. Forbey, S., Michelle, N, Orazay, Y. and Shehabi, M. Special Report Presented To The Republic of Turkey: Monetary And Fiscal Policy Development In Fulfillment of The European Union Accession Requirements . Available at international.tamu.edu/eunotes/vol_3_issue_1.doc (accessed on May 2, 2009) 9. Horwitz, S, Understanding Say's Law of Market .,The Freeman Ideas of Liberty 10. Hosteliz, Bert, F. 1953. Social Structure and Economic Growth", Economia Internazionale 11. Krugman, P. & Obstfeld, M. (2003) International economics: theory and policy. 6th ed. Boston: Addison Wesley 12. Kuznets, S. 1949, National Income and Economic Welfare", Boletin Banco Central de Venezuela. 13. Levacic, R . R. 1982, Macroeconomics: An Introductiuon to Keynesian Neoclassical Controversies Macmillan Press Ltd 14. Lewis A 1954, "Economic Development with Unlimited Supplies of Labor", Manchester School 15. Living standards and Economic Growth - A primer. Available at www.economicadventure.org/teachers/primer.pdf ( accessed on May 2nd, 2009) 16. Seers , D. 1977, "The New Meaning of Development", Int Dev Rev 17. Taylor, John B. 2004. United States-Brazil Cooperation to Increase Economic Growth. Available at www.stanford.edu/.../United%20States-Brazil%20Cooperation%20to%20Increase%20Economic%20 (accessed on May 2, 2009) 18. United Nation Statistic Division. Social indicators. Available at http://unstats.un.org/unsd/Demographic/products/socind/health.htm(accessed on May 2, 2009) 19. United Nation Statistic Division. Social indicators. Available at http://unstats.un.org/unsd/demographic/products/socind/illiteracy.htm (accessed on May 2, 2009) 20. Viner , J, 1958, Stability and Progress: the poorer countries' problem", in Hague, editor, Stability and Progress in the World Economy Read More