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Economic growth and the role of government - Essay Example

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Economic literature defines economic growth as the increase in Gross Domestic Product (GDP) over time. However, growth has more components to be analysed upon. Economists around the world are expanding the domain of the traditional definition of growth to encompass the concept of value addition…
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Economic growth and the role of government
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Download file to see previous pages Economic growth is deeply associated with the general welfare of an economy. In fact, economic development which is so essential for a nation will only start to roll only when the economy grows beyond a threshold growth limit. It has now been proven beyond doubt that economic growth is pivotal in shaping the standard of living of the residents. This happens through a cycle in which productivity of the household transforms into disposable income through the intermittent stages of aggregate demand and income. Economic growth will lead to an increase in the aggregate demand which will trigger an increase in the production of goods and services. Consequently, the residents of the nation who are employed in the production activities will enjoy a higher wages that will increase the income at their disposal. This is the basic framework in which an economy operates and is defined as the vicious cycle. Numerous developments have been made by economists on this model which tries to incorporate the changing dynamics of growth and development. The importance of growth is perhaps defined most prominently by the basic framework which involves both the household and production activities.
The role of government in augmenting growth has been a key area of research and analysis among scholars all over the world. The capitalists have been instrumental in propagating a view where the government will have a minimal role in the economic activities. Adam Smith, in his theory of the invisible hand claims that the economy will be at the equilibrium automatically due to the action of an Invisible hand. The government thus can keep away from controlling the economy in various aspects. This held good till 1929, when the Great Depression shook the world and people's faith in the theory of automatic solution.
A paradigmatic shift occurred post the Depression, during which the theory of John Maynard Keynes gained predominance. It was Keynes who suggested that the government had an important role to play in controlling and monitoring the economy. It would have a substantial role to play achieving the required growth of the economy.
Generally an economy has three basic sectors, based on the occupational structure; agriculture, industrial and service. The role of government is of prime importance in the initial stages of growth. It is during this period that huge volumes of investment are required to provide with the initial boost. The private investment sources are absent in such a scenario because of their apprehensions of the return on the investment. It is only the national government which can fund the huge demands or make arrangements to source it from external sources. The government keeps the machinery running by investing in the development of infrastructural facilities which is so essential in building the economic base of a nation. A country will seldom experience private investments flowing in at the initial stages due to long gestation period of such projects and a considerable time lag before the project yields expected returns. The government is also the sole authority that maintains the growth balance of the economy through monitoring the growth of all the sectors. The optimal distribution of effects of growth will never be possible without the active participation of the ...Download file to see next pagesRead More
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