This essay will provide a unique perspective regarding the impact of economic growth and the importance of economic growth. This essay will also provide the argument of the research found that will provide how economic growth can lead to increased prosperity in the developed, the underdeveloped, and emerging countries.
What is economic growth and why is economic growth important? According to Webster’s online dictionary, ‘Economic growth is a steady growth in the productive capacity of the economy and so a growth of national income (webster-dictionary.com)’ Economic growth can sometimes signify that the economy has become wealthier, is producing more, society as a whole is better off and that living standards have become higher. Economic growth is important because it can be seen as a desirable objective for all economies. Economic growth can be calculated by GDP (Gross Domestic Product minus the sun total of the value of a country).
The importance of economic growth can lead to increased prosperity in the developed countries. Economic growth is can be of importance because of the impact of growth in productivity. According to authors,
‘Productivity still remains a very important subject and a very large issue in the construction sector, promising cost savings and efficient usage of resources. Productivity has become an important issue in both developed and developing countries, (Enshassi, Adnan; Mohamed, Sherif; Mustafa, Ziad Abu; Mayer, Peter Eduard, pg. 245).
Economic growth can result in the increased efficiency because of the use in many different factors in productivity. Productivity can lead to positive outcomes that can impact the economic growth for the longevity. According to research, ‘The main factors negatively affecting labor productivity are: material shortage lack of labor experience lack of labor surveillance misunderstandings between labor and superintendent and drawings and specification alteration during execution,’ (Enshassi, Adnan; Mohamed, Sherif; Mustafa, Ziad Abu; Mayer, Peter Eduard, pg. 245). Improving productivity has become a major concern in economic growth.
Some of the important advantages that may have a positive impact on economic growth can include, improvements in employment and lower levels of unemployment. In many developed countries such as the United States, where the economy is experiencing businesses that are growing and where there is a high demand for goods and services can help to employ more individuals as the industry experience some economic growth. Also, if there a country is experiencing economic growth, more than likely, that country has the ability to employ more people as its country is growing. Therefore allowing the government to be able to tax. This can allow the government to improve the increasing deficit, its living standards, can improve, and create a growing economy. The more developed countries have become more aware of the importance of economic growth.
The importance of economic growth can lead to increased prosperity in the undeveloped countries. According to research,
‘The classical modernization perspective, argued that the export of capital to undeveloped countries promoted economic growth by creating industries, transferring technology, and fostering a “modern” perspective in the local population. Dependency theory challenged this pervasive belief (Kentor, 1024).’
Research found that, ‘The dependency school made arguments that the ownership of capital deter-mined the effect on the underdeveloped economy can experience economic growth. An economy that could be controlled by foreign interests would not develop organically. It would experience economic grow in a disarticulated manner, (Kentor, 1025).’
Investment in capital into an undeveloped country can provide the opportunity for these countries to experience some type of economic growth. By investing capital to these underdeveloped counties it can lead to increasing that countries way of improving the manufacturing of the goods and services that their country can produce, and it can help that country to create better jobs for the people. Investing in capital this factor can have a major effect on economic growth for these underdeveloped countries. Every government, whether the country is developed or undeveloped, can use various ways to try to increase economic growth the very best way they can.
The importance of economic growth can lead to increased prosperity in the emerging countries. According to research,
‘Negative impacts of the recent global financial crisis, has caused several countries to experience a slow pace in their rate of economic recovery. This negative impact has been consistent since the early year of 2009, taking into consideration that financial systems were the most affected. In addition, economic recovery has been fragile due to several reasons. For instance, there have been increased uncertainties on the performance and sustainability of the U.S. economy, (EKMEK’?O??LU, 147).’
However, many of the financial systems have a great advantage for future expansion due to a solid economic growth, declining inflation and interest rates. According to research, ‘When GDP is recognized through production, it can be seen throughout many sectors from agriculture and financial services that has experienced negative growth rates in 2009, (EKMEK’?O??LU, 150).’ According to EKMEK’?O??LU,
‘In the fourth quarter of 2009, the services and industry sector experienced a surge and this contributed to a 6 percent increase in GDP. The high growth trend especially in domestic demand and industrial sector continued in 2010, (150).’According to research, ‘Economic growth and recovery has been significant over the many years with a GDP growth of 8.9%, which is an increase from now to compare back in the early 2009. Industry and services sectors are among the major contributors to the experience of this growth with 3.6% and 3.5% increase respectively, (EKMEK’?O??LU, 151).’
Research was found that, ‘Financial growth plays a leading role in influencing economic development in emerging economies. Arestis (2005) says that when monetary authorities are in a position of making funds available at low interest rates, investment and consumption will also increase. As a result of the global financial crisis, global output shrank by 1.1% in the last quarter of 2009. However, substantial fiscal and monetary measures taken to combat the crisis reduced the shrinkage to 0.6%. The recovery process was slow but emerging markets showed a strong growth performance, (EKMEK’?O??LU, 152).’
Many explanations of countries that have experienced economic growth are focused at the national level. They conditions are associated with factors such as geography, demography, natural resources, and political development. Other explanations can be found at the industry level. However, economic growth does not fall on a countries societies, their governments, or its industries to create more jobs but it’s entirely up to companies and the countries leaders to create better jobs. It is business entrepreneurs and the countries businesses whether they choose to spend, invest, or to hire. According to research, there are different ways in which a business can produce more for less. It states, ‘The first is what we call “sustaining innovation,” the purpose of which is to replace old products with new and better ones. Efficiency innovation” is the second type; it helps companies produce more for less. Efficiency innovations allow companies to make and sell established products or services at lower prices. The third type is “market-creating innovation.” When most industries emerge, their products and services are so costly and inaccessible that only the wealthy can buy and use them. Market-creating innovations transform such offerings into products and services that are cheap enough and accessible enough to reach an entirely new population of customers, (Mezue, Christensen, Clayton M, and van Bever, Derek, 76).’
The importance of economic growth to a growing economy, whether the country is developed, underdeveloped, or emerging, may have a rising output level but also can experience a growing birth rate which can also have an effect on the standards of living. This can have a positive or negative impact on the growth of the economy. In normal situations, real income is often used when determining economic growth.
What drives economic growth? According to research, ‘foreign direct investment (FDI) is typically considered to transfer both physical capital and intangible assets, such as technology, among countries. According to standard growth theories, capital accumulation and technological innovation are the major factors driving economic growth, (Wang, and Wong, 316).’ Wang and Wong also states, ‘The effect of aggregate foreign direct investment (FDI) on economic growth remains uncertain in the literature. We revisit this FDI’Growth relation by analyzing the components of FDI ‘ Greenfield investment and cross-border mergers and acquisitions (M&As). Our analysis contributes to the existing literature by focusing on potentially heterogeneous growth effects of different FDI entry modes. Using a sample of 84 countries from 1987 to 2001, we separately examine the growth effects of Greenfield investment and M&As. We find that Greenfield investment and M&As have different impacts on economic growth. Greenfield investment promotes economic growth while M&As can be beneficial only when the host country has an adequate level of human capital, (316).’
According to research, ‘The major determinants of economic growth in the United States are total factor productivity growth, domestic investment growth, and foreign direct investment growth. 2. Causal relationships between foreign direct investment growth and economic growth is uni-directional, running from foreign direct investment to economic growth. 3. Causal relationships between foreign direct investment growth and total factor productivity growth is uni-directional, running from foreign direct investment to total factor productivity. These findings suggest that foreign direct investment growth has a significant impact on the United States economic growth. Additionally, foreign direct investment has a significant impact on total factor productivity in the United States, further contributing to the United States’ economic growth. This calls on the U.S. policy makers to devise policies that are conducive to increasing the amount of foreign direct investment in this country, (Asheghian, 63).’
More important, economic growth can also be calculated as an increase in per capita real GDP (gross domestic product) measured by its rate of change per year. In many cases, an increase in growth rates are very important because any change can make a significant difference in the years to come. The knowledge of economic growth can be important because it can provide insights that can allow a person to gain valuable information.
There is no single strategy that a country, whether developed, underdeveloped, or emerging, can use to achieve a satisfactory economic growth rate. A nation can use any approach they feel is necessary to enhance economic growth. For example, in order to reduce a countries current deficit, they should probably try to increase their exports, and also try to substitute the imports in order to achieve its desired level of economic growth.
Even if a country is developed, underdeveloped, or emerging, the world’s richest countries have no guarantee that they will remain rich and the world’s poorest countries are not considered to be doomed forever. Rich countries don’t always remain rich and poor countries do not always remain poor. Factors that can determine a nation’s productivity can explain why some countries incomes are much higher than in other countries.
Economic growth can also be determined in three ways according to research. It was stated that, ‘First, we can examine international data of the real GDP per person. This can give you a feel of how much the level and the growth of the living standards that can vary around the world. Second, the role of productivity can be examined. This is the amount of goods and services that a country ca produce each hour by a worker. Third, the link between productivity and the nation’s economic policies can be examined, (Mankiw, 532.)’ Because of the difference in growth rates between nations, how the ranking of countries based on their income, changes constantly over time. This explanation can be explained by one word, and that is productivity. The countries ability to produce goods and services has a major impact on its economic growth.
A nations workers has a major impact on a countries ability to be productive. If the nation’s workers are provided with the proper tools in which to work can play a major role in its economic growth. According to Mankiw, ‘The stock of equipment and structures used to produce goods and services is called physical capital or just capital, (537).’ If a country is producing blue jeans, the workers have to be provided with the proper tools and materials needed in order to produce capital.
Every nation’s leaders will use various policies that are based on the factors that was previously used within this essay to try their best to improve ways to try to increase economic growth. These factors that were mentioned throughout this essay have a substantial effect on a countries economic growth rate. There are many reasons for economic growth that are complex. Economic growth comes as a result of the use of a countries available resources and the factors in their production. These factors can directly or indirectly affect the levels of economic growth.
Economic growth will lead to a increase in the prosperity in the developed, underdeveloped, and emerging countries. There are some factors that can have a positive or negative result in the economic growth for any country. Economic growth is important because of the factors that will indicate that a country has improved throughout many years. The importance of economic growth should always be considered in the impact that it could have on any nation. Economic growth can become widespread and can cause damage to a nation’s economic conditions whether that nation is developed or not. The prediction of economic growth over the past years and the years to come has had some significant consequences for many nations throughout the globe. Economic growth can lead to the enabling of leaders to consider ways to improve the needs of the country to maintain growth. The objective for any country is to ensure that growth is maintained to the best of their ability. Economic growth will always be the main objective for all countries.
Economic growth means an increase in real GDP – this leads to higher output and higher average incomes.
Governments often try to increase the growth rate because it will have various advantages. These include
Firstly, higher GDP implies the economy is producing more goods and services and therefore consumers can enjoy more goods and services. If human welfare is linked to consumption then growth will benefit society. Higher levels of consumption will help to reduce any incidence of absolute poverty (when people can’t meet basic necessities of life.) This may not be so obvious for developed countries, like UK and US, but for developing economies, economic growth and rising incomes plays a big role in lifting people out of poverty.
With higher GDP the government will be able to collect more taxes; this is because people as incomes rise and people spend more they will pay more income tax and VAT. This is beneficial because the government can use this increased revenues to reduce the level of government borrowing and/or spend more on public services and investment in the country infrastructure. This investment in public services can help improve the long-term performance of the economy. For example, better infrastructure enables lower cost of trade. Therefore, growth can cause a virtuous cycle of higher investment leading to higher growth – which enables more investment.
Higher economic growth will also lead to an increase in demand for labour as firms will be producing more. Therefore unemployment will fall, this has various advantages such as lower government spending on benefits and less social problems. If the economy is in recession, then increasing the rate of economic growth will be an important step in reducing unemployment.
The rise in unemployment in 2008/09 was due to negative economic growth.
However economic growth has various costs. Firstly if economic growth is unsustainable and is higher than the long run trend rate inflation is likely to occur.
Furthermore, this temporary boom in output is unlikely to continue and may be followed by an economic downturn or recession. Thus, it can be very damaging to increase the rate of economic growth above the sustainable rate. This boom and bust cycle happened in the UK in the late 1980s and early 1990s.
Also, an increase in economic growth could lead to a balance of payments problem. If increased consumer spending, like in the UK, causes the growth then there will be an increase in imports. Is imports rise faster than exports there will be a deficit. However, growth could be export-led e.g. Japan’s growth in the 1960s and 70s and China currently.
However, if growth is increased by increasing the productive capacity and increasing the long run trend rate then inflation will not occur and the growth will be sustainable.
However, even an increase in the long run trend rate can have undesirable effects. In some cases, economic growth can have unintended costs to living standards. This includes
Environmental costs. Higher output will lead to increased pollution and congestion which can reduce living standards e.g. increase in breathing problems, time wasted in traffic jams e.t.c. China’s break-neck period of economic growth has led to increased pollution and congestion levels. Also, growth will lead to the consumption of non-renewable resources which may place costs on future generations.
- However, higher economic growth may encourage governments and consumers to spend more of their disposable income on protecting the environment. The poorest countries often have bad pollution because they cannot afford to reduce it. Economic growth without pollution is possible – if care is taken to concentrate on more environmentally friendly methods.
2. Income inequality. Economic growth often leads to increased inequality because growth benefits the richer most because they own assets and have the best-paid jobs. Thomas Piketty observed that, without sufficient policies of redistribution, the wealthy tend to increase their wealth at a faster rate than economic growth – because they can reinvest their dividends.
- However, equally economic growth can reduce relative poverty and inequality. Higher growth tends to enable governments to be able to afford welfare states and offer a minimum level of production. Economic growth from 1900 to 1970 helped reduce levels of inequality in the US and Europe.
Economic growth has many obvious benefits however the desirability depends upon many factors such as; the nature of growth, is growth sustainable? Does it harm the environment? However, rather than trying to stop economic growth, it is better to concentrate on improving the nature of economic growth.