Gross Domestic Product and Its Growth Factors

Financial Calculations

In the first place, it is essential to understand the mechanisms of GDP growth, as it defines the country’s wealth and recognition in the global arena. According to the case, it is vital to calculate the growth rate if real GDP was $13.1 trillion in 2013 and $13.3 in 2014 respectively. At the same time, in the context of this part, it is also important to estimate the number of years that will be required to double this GDP. As a consequence, the growth rate of the real GDP in 2014 will be estimated with the assistance of evaluating the differences between the two indicated GDPs. Here is the solution: ((present GDP-past GDP)/past GDP)*100=(0.2/13.1)*100=0.015*100=1.5%. To summarize, the growth rate is 1.5%. In turn, here is the solution to calculate the time required to double the existent value: 1) 26.2=13.1ert (double value of the initial GDP=current value of GDP*etime*rate); 2) 2=e0.015t; 3) log2=0.015t; 4) 0.015t=3t/200; 5) t=46 years. This value can be checked by applying the rule of 70%, as in this case, it will be 70/1.52=46 years. In conclusion, with the current growth rate, it will take 46 years to double the present GDP value.

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Sources of Human Capital

Apart from the calculations mentioned above, it is essential to understand the aspects that have a direct impact on GDP and its growth. One of them is human capital, and this term can be defined as a combination of employees’ skills and competences and their impact on the overall economic value while not all workers can be viewed as equally important due to the differences in their input (China Development Research Foundation, 2014). Generally speaking, the major stimulants of the growth of the human capital pertain to continuous investment in this area that can be represented with the assistance of providing education and training and creating a favorable working environment. China can be discovered as one of the countries that successfully invested in this sphere and contributed to the demographic development of the nation (China Development Research Foundation, 2014). For example, China started heavily investing in education including providing grants and scholarships (for universities, colleges, internships, and schools as the main sources) to fill potential gaps related to quality and quantity of the offered services (China Development Research Foundation, 2014). This factor contributed to constant GDP growth and increased the attractiveness of China for foreign investors.

As for other Western countries, the USA and UK use governmental and legislative tools to encourage and support the university and vocational education to cater to emerging trends of the industry including the service segment (China Development Research Foundation, 2014). To minimize the existent gap in qualifications of the workforce, the Chinese government started educating workers in rural areas (China Development Research Foundation, 2014). Being able to see a link between the human capital and sources of labor productivity was one of the definers of rapid growth. To summarize, the major sources of labor productivity can be linked to increasing budget for education, narrow specialization of the workforce, successful integration of technology in the manufacturing process (e.g., automatization of assembly lines in the automotive industry), and offering a favorable working environment and opportunities for idea-sharing.

The Law of Diminishing Returns

In turn, other components determine GDP such as the law of diminishing returns. The definition and working principles of this economic term are directly linked to labor productivity and efficiency. In this case, it can be interpreted as if one variable such as the number of workers increases, eventually, the overall level of productivity will decrease (Warner, 2015). Another critical aspect to apply the principles of the law of diminishing returns is the fact that one of the factors such as financial capital and the budget has to be fixed while this term is only applicable in the short-term (Warner, 2015). It remains apparent that it is impossible to implement the major principles of this economic phenomenon in the long-term since all factors tend to vary depending on the changes in the economic environment.

To gain a profound understanding, it is vital to provide an example. For instance, within a short timeframe, the management of the company decides to expand its pool of workforce. According to the law of diminishing returns, adding extra workers will decrease the overall productivity of the company or contribute to very slow growth. It will incur because the amount of the required work to be completed will be the same but the number of employees will grow. Consequently, to increase Key Performance Indicators (KPIs), the workers will attempt to do more and cause disruptions in the production process. A similar case may incur in a small restaurant when hiring extra waiters or chefs, as it will cause an upward shift in manufacturing costs and minimize revenues. Overall, it could be said that before hiring extra workers, the company should assess its actual impact on productivity and take into account the law of diminishing returns.

Governmental Actions

Alternatively, it is of critical importance to consider the actions of the government and their impact on the overall condition of the national economy. Governmental authorities utilize a diversity of instruments to gain additional profits and develop budget effectively. Taxes are essential constituents of fiscal policy, as they help generate additional revenues and become economically stable (Hansen, 2014). Thus, according to the case scenario, it is essential to review the major consequences of generating additional financial resources with the help of taxes and use this revenue to engage in spending. When discovering the first part of the statement solely that implies an increase in taxes, it will hurt the aggregate demand. It will incur due to the decreased amount of wealth that can be saved by the individuals, and, as a consequence, their purchasing power will experience a decrease simultaneously.

To summarize, the consumption rates and expenditures of households will be reduced while slowing the economic growth, GDP, and the financial development of the country. Nonetheless, when considering the second part of the statement (utilizing revenues to engage in spending), this factor slightly changes this situation. In this case, the revenue acquired from taxes will increase while creating opportunities for the government to spend additional resources on the development of society and infrastructure. This aspect will contribute to the actual growth of the aggregate demand, as the economy will continue its development while households will experience an increase in revenues. Overall, it could be said simultaneous decrease and increase in aggregate demand will imply that the budget is balanced, as government spending equals the actual revenue. In the end, it is apparent that sometimes, the government has to rely on these concepts, as, otherwise, it will not be possible to take advantage of the cyclic nature of the economy and attain constant financial stability and growth.

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References

China Development Research Foundation. (2014). Demographic developments in China. New York, NY: Routledge.

Hansen, B. (2014). The economic theory of fiscal policy. New York, NY: Routledge.

Warner, D. (2015). Before it breaks. North Fremantle, WA: Fremantle Press.

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