Economic Growth: Indicators, Impacts and Effects

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Definition

Economic growth relates to the growth and quality of the economy as a whole and the term is used to indicate the increase of per capita gross domestic product (GDP) or another measure of aggregate income or even a change in the gross domestic product over a country over a year after subtracting an amount due to the level of inflation. It is often measured as the rate of change in GDP and is the benchmark of comparison between countries signaling rising domestic opportunities. Economic growth refers only to the number of goods and services produced or it is judged from the output of the economy and it could either be negative or positive; negative growth signals low output capacity indicating a shrink of the economy and is associated with economic recession or depression.

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Gross domestic product is a measure of how much an economy can produce and when high it implies more dispensable income.

In a nutshell economic growth is simply an increase in output of a country over time and is usually used to refer to the rate at which output increases, in the long run, irrespective of short-run variations like inflation. Inflation which refers to a sustained increase in the general price level of commodities or a persistent fall in the value of a currency may cause a temporary impediment to economic growth.

Introduction

Economic growth is considered to be a key parameter in determining the overall growth of a country about other countries and the gross domestic product is always used as the SI unit in establishing the growth, but does an increase in GDP out rightly translate to increased standards of living of all inhabitants in a country?

This essay would seek to establish various factors determining economic growth its importance and assess the potential of a government to increase the rate of economic growth in an economy.

Factors Determining Economic Growth

These refer to factors that play a role in determining the rise or fall of economic growth and include the following:

  • Human resources (both quantity and quality); skilled labor and sufficient numbers of human capital determine to a great extent the level of economic growth in any setting.
  • Natural resources: this refers to natural endowments of a country like gold mines, diamonds, oil, and so on and they strengthen the economic reserves of a country.
  • Technological advancements; would ensure resources are not depleted and offer alternative ways in incases where some resources are depleted or declared redundant.
  • Socio-cultural factors like incentives, values, customs, and so on may have a positive or negative impact on economic growth.
  • Capital accumulation; economic reserves of a country act as capital and the more accumulated, the greater is the potential for growth of a particular economy and vice versa; this capital acts as shock absorbers in case of uncertainties.
  • Government policy; this factor plays a key role in determining the rate of economic growth in the sense that it would affect business operations of a country including the level of trade which brings in foreign exchange ultimately strengthening economic reserves. A good example of how government policy may affect economic growth is the case scenario of Zimbabwe who expelled white farmers hence crippling the economy of the country as a whole.
  • Political and social stability; cases of political instabilities may either cripple or slow down the economic growth of a country due to other vices associated with inflation. This has been very evident in developing countries where political instabilities are rampant, the very reason as to why economic growth has been slowest in these countries, for instance, the country of Zimbabwe where political instability caused an inflation rate of over a million percent which almost crippled the economy.

The economic, political, and legal environment is a major determinant of economic growth; governments can promote economic growth by focusing on the following two core functions:

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  • Provision of a legal, regulatory and monetary environment that enforces contracts and protects people and their property from the actions of both domestic and foreign aggressors thus protecting the sovereignty of the country through protecting its people ultimately promoting free trade and competitive markets,
  • Provision of a limited set of public goods like roads and national defense that are difficult to provide through markets (Swan, 1956, pp. 334 – 384).

Economic growth and economic development which refers to the process of improving the quality of human life complement each other in the sense that the former precedes the latter and when combined they indicate how well the economy will do in the future, for instance, when community leaders are looking at economic development, their main focus would not be to promise immediate income for the area, but instead to look at how best to spend the available funds to improve the community and in turn, spur economic growth; this may not be well embraced by the residents because raising taxes to foster economic development only promotes the area’s broad economic objectives (Cleaveland, 2009, pp. 1&2).

Any kind of changes or intended ones that would involve a contribution from taxpayers or are seen to increase the tax levy would always be unwelcome and may not easily be embraced by the residents who focus only on more immediate economic growth instead of intangible economic development for the future.

For instance, “to increase short term revenue, a city council in a depressed area could give a corporation free land and tax incentives to build a factory in their town; this would immediately provide jobs and increase the productivity of the community; however, without proper economic development like highways, utilities, and a trained labor force, the success of the new factory would be short-lived” (Cleaveland, 2009, pp.1&2).

“The town would then be left at the same development state as it was before, but with the addition of an abandoned factory; for a venture like this to be sustainable, the local government or the authority in charge would first have to do the basics necessary for the long term survival like; raise taxes, pass a bond, or raise money to build the infrastructure necessary for the manufacturing plant to operate long term” (Cleaveland, 2009, p. 2).

“However, once the government has made it physically possible for a factory to relocate to their area by allocating land, securing loans, and raising funds for an infrastructure, people will begin to see a positive change in the area; then and only then the locals would look to the state and federal government to establish a higher quality of life for the community including funding for education, parks and recreation, crime prevention, and affordable housing for the existing and new residents that will live and work in the area” (Cleaveland, 2009, p. 3). “Only after this has been achieved would the residents be better able to understand that to enjoy or for economic growth to be beneficial to them, they must experience economic development which would ensure sustainable growth for the long run” (Cleaveland, 2009, p. 3).

Indicators of Economic Growth

These refer to situations indicating achievement of economic growth and include the following:

When there is an increase in production of existing factors of production, like for example when labor becomes more efficient in terms of skill due to training; this would imply more disciplined and skillful labor hence a sustainable change in production.

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When there is an increment in the available stock of factors of production such as an increase in labor resources which would imply an increase in population, development of national resources, or additional capital equipment.

When there is a positive technological change may be in terms of information communication and technology (ICT) or any other technology (Jorgenson & Khuong Vu 2005).

When there is a fundamental change in the composition of a nation’s output for instance from primary production through tertiary productions.

When there is a sustained improvement in terms of trade, a permanent or progressive level of trade is either within or with other countries.

Impact of Economic Growth

Ibn Khaldun described economic growth in the following words, “When civilization or population increases, the available labor increases; this means luxury would also increase in correspondence with the increasing profit, and the customs and needs of luxury increase which necessitates the importance of Crafts creation to obtain luxury products” (Khaldun, 1995, pp. 29 – 37). “The value realized from the creation of crafts increases resulting to the multiplication of profits in the town; production is then made to thrive even more than before thus a second and third increase; as labor keeps on increasing with increasing population, the additional labor would serve luxury and wealth, contrary to the original labor that served the necessity of life.” (Khaldun, 1995, pp. 29 – 37).

This implies that living standards of any group of people in a country would depend on the opportunities available and the extent of benefits accrued from these opportunities; an increment in the gross domestic product would imply more opportunities for entrepreneurship hence a more productive economy which is a clear indication of the change in living standards. The impact of economic growth can either positive be positive or negative;

Positive Effects of Economic Growth

Income Distribution

Economic growth brings about a fair distribution of national income in that the more the growth, the more diminishing inequality in income distribution. “The rapid reduction in global poverty is in large part due to global economic growth and it is argued that the poverty reduction is lowest where growth performance is worst” (Stanley, 2003, p. 13).

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Quality of Life

The living standards of people in any given setting whether a country or even a society would depend on the level of benefits from the available opportunities; research by Cato institute established that happiness increase with an increase in GDP per capita, at least up to a level of $ 15, 000 per person (Cato Institute, 2007).

Resource Depletion

There is a direct link between economic growth and technology advancement which makes it possible for previously unavailable resources to be utilized more economically; economies are driven by new technology and ongoing improvements in efficiency for instance information technology and its application in modern-day use is ever dynamic; this guarantees the availability of resources and rules out depletion of the same. Economic growth makes it possible for the discovery of new resources with depletion or decline of the old resources.

Environmental Impact

An increment in economic growth may have some localized environmental effects but large scale ecological effects are minor; the argument as stated by economists such as Julian Lincoln Simon states that “if these global-scale ecological effects exist, human ingenuity will find ways of adapting to them” (Meadows & Randers, 1973, pp. 46 – 62).

Negative Effects of Economic Growth

Economic growth signals development in a country but at the same time it may have a negative impact on the society or the country to a large extent; there are critical arguments which have been raised against it;

Quality of Life

As much as increment in living standards would be positive sometimes economic growth may bring along vices such as crime, prisons, or pollution which may have some negative effects on quality of life in the long run (Case & Fair, 2006). An increment in economic growth would imply an increment in economic opportunities thus a high level of activity which may have a direct link with crime and pollution.

Growth ‘to a point

“Economic growth may improve the quality of life to a point, after which it may not have an impact on the same, but rather obstruct sustainable living” (Beddoe et. al., 2009, pp. 2483 – 2489). “Historically, sustained growth has reached its limits and turned to catastrophic decline when perturbations to the environmental system last long enough to destabilize the bases of a culture” (Beddoe et. al., 2009, pp. 2483 – 2489).

Consumerism

“This refers to a social and economic order based on the systematic creation and fostering of a desire to purchase goods or services in ever greater amounts, would mostly be implied by growth through encouraging the creation of artificial needs” (Solow, 1956, pp. 65 – 94). Industries cause consumers to develop new taste, and preferences for growth to occur; consequently, “wants would be created, thus reducing consumers to mere servants, instead of masters of the economy”, (Solow, 1956, pp. 65 – 94). Economic growth may rule out ethical ideals such as honest packaging and advertising, product guarantees, and improved safety standards by industries thus enslaving consumers.

Centralized Management

“Economic growth could promote free-market growth such that it would be up to an individual to determine how much growth he or she desires by way of personal choices between the much he or she decides to consume and the savings” (Pritchett, 1997. pp.10 – 20).

Social Justice

Rapid economic growth may reduce the emphasis on social justice in that standards of living may be improved without redistribution; this would constitute a negative impact on the moral fabric of the society or even a country.

Environmental Impact

Economic growth out rightly implies increased use of earth’s resources; this is due to increment in population necessitating more demand for resources which would sometimes lead to a situation whereby a society lives beyond its means. According to a report by United Nations Environment Program (UNEP), “Humanity’s environmental demand is purported to be 21.9 hectares per person while the Earth’s biological capacity is purported to be 15.7 ha/person” (UNEP, GEO-4 2007); this indicates a living beyond what the earth can support situation which can only insinuate an increased pressure on the environment whose long term effect may be a systematic collapse of the planet’s natural resources.

Importance of Economic Growth

Economic growth has limitations but at the same time, it is important in improving the living standards of people in a certain region or country.

  • Reduces Poverty; Economic growth may not necessarily reduce poverty but would guarantee sustained development aimed at reducing its magnitude and effects especially in the developing economies; this would be achieved through immense opportunities brought about by the growth such that employment opportunities are available to many.
  • Reduces unemployment; stagnant economy leads to high rates of unemployment, economic growth brings about opportunities which can easily be harnessed by the residents thus providing employment; this would create employment for many, ultimately ensuring that every individual has a role to play in improving the economy. Economic growth is judged from the output of an economy in terms of products and services; with higher outputs firms would tend to employ more workers creating more employment opportunities.
  • Budget Deficits; the deep recession experienced last year and sometimes this year has led to a corresponding rise in the budget deficit in many countries; economic growth would enable different economies of these countries to accumulate enough capital necessary for improving government budget thus overturning the deficits (Pettinger, 2009, pp. 1&2).
  • Living standards; economic growth insinuates a robust economy which means immense opportunities for the residents; this implies that if these opportunities are managed properly there would be an increment in resources which could be channeled to important public services like education and health ultimately improving living standards of the residents (Pettinger, 2009, p. 2).
  • Lower Government Borrowing; with much produce in terms of output associated with economic growth, there is a major likelihood of higher tax revenues and fewer spending avenues for the government implying that the government would be in a position to support its budget.
  • Improved Public Services; high tax revenues would mean that the government has sufficient funds to spend on public services like banking on improved health care services, education, provision of roads, construction of recreational facilities, and so on.
  • Money can be Spend on Protecting the Environment; a stagnant economy would imply less concern for the environment as much of funds are channeled towards other basic societal needs but with a booming economy there is a shift towards adopting means to sustain the growth and one of these means is working towards environmental conservation; economic growth may lead to improved technology which reduces pollution levels and it may also provide resources in terms of tax revenues to find ways of reducing carbon emissions.
  • Higher Incomes; economic growth would imply quality opportunities for the residents with higher incomes which would boost their purchasing power thus enabling them to enjoy more goods and services ultimately improving their living standards.

Conclusion

Economic growth brings about immense benefits to any economy; it should be the duty of the governments of the day to put the right mechanisms in place to ensure sustainable economic growth. Economic growth has fears like the threat of inflation because probably the growth is above the long-run trend rate and the economy may not have sufficient capacity to meet the demand or the potential problem of magnifying environmental problems due to over-exhaustion of the environment to meet the demand; it should be the duty of the government to ensure the mechanisms they adopt would guarantee growth rate without causing inflation by promoting the productivity and the supply side of the economy and also channeling some funds to environmental conservation to alleviate environmental problems associated with economic growth.

Economic growth has stages; traditional society, pre-condition for taking off, take-off stage, drive to maturity stage, and maturity stage which is the ultimate stage in which there is a shift to durable consumer goods and services, extensive use of modern technology, and political freedom and the government must analyze key indicators in play in their economy and establish at what stage they are in and craft means of moving forward because the benefits far much outweigh the limitations and contributions.

Works Cited

Beddoe, R., Kubiszewski, I. and et. al. “Overcoming systemic roadblocks to sustainability: the evolutionary redesign of worldviews, institutions, and technologies“. Proceedings of the National Academy of Sciences of the United States of America 106 (8): 2483–2489. Web.

Case, K.E. and Fair, R.C. Principles of Macroeconomics. Prentice Hall, Prentice Hall, New Jersey, USA, 2006.

Cato Institute. In pursuit of happiness research. Is it reliable? What does it imply for a policy? 2007. Washington DC. USA.

Cleaveland, A. ‘Economic Development, growth indicators and financial planning’. Web.

Jorgenson D. W. & Khuong V. u. ‘Information Technology and the World Economy’, Scandinavian Journal of Economics 2005, Stockholm, Sweden.

Khaldun, I. Muqaddimah, 2:272-73, quoted in Dieter Weiss 1995, “Ibn Khaldun on Economic Transformation”, International Journal of Middle East Studies 27 (1), p. 29-37. Middle East, UAE.
Meadows, D.L & Randers, J.The Limits to Growth Washington, DC: Potomac Associates, Washington DC, USA, 1973.

Pettinger, T. Importance of economic growth. Economics help, Perma Link. Web.

Pritchett, L. “Divergence, Big Time.” Journal of Economic Perspective. Massachusetts, USA, pp. 10 – 20. 1997.

Solow, R. M. “A Contribution to the Theory of Economic Growth,” Quarterly Journal of Economics, 70(1), Oxford University Press, USA. Pp. 65-94. 1956.

Stanley, F. ‘Globalization and its challenges’. American economic review. 2003, Washington, USA, P. 13.

Swan, T. W. “Economic Growth and Capital Accumulation’, Economic Record, 32, Melbourne, Australia, pp. 334–61. 1956.

UNEP’s Global Environment Outlook: environment for development (GEO-4 2007) report. Web.

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