Economic Growth

Economic Growth

Definition

The best definition of economic growth and expansion over the long term productive capacity of the economy. And should result in sustained economic growth, higher real living standards and high employment. Are measured by short-term growth rate by the annual change in real GDP.

Growth and limits the possibility of producing :

The increase in the long run aggregate supply by switching to the outside in the PPF

Advantages of Economic Growth :

Sustainable economic growth is the main goal of government policy - not least because of the benefits that result from the growth of the economy.

v     Higher Living Standard :

- For example, is measured by an increase in real national income per capita of the population - see the evidence shown in the table below.

v     Empolyment Effect :

Stimulates higher growth of employment. British economy was growing since the fall of 1992, we have seen a significant decline in the unemployment rate and a rise in the number of employees.

v     Fiscal Dividend:

Growth has a positive effect on government funding - to increase tax revenues and provide the government with extra money to finance projects spending

v     The Investment Accelerator Effect:

High demand and production and encourage investment in new capital equipment - and this helps to maintain growth in the economy by increasing the overall width of a long-term

v     Growth and Business Confidence:

Economic growth usually has a positive impact on the company's profits and business confidence - good news for the stock market, as well as for the growth of small and large companies alike

Higher national income enhances standards of living :

And the expansion of the economy provides the impetus for the high level of employment and low unemployment rate. This was certainly the case for the British economy over the past decade.

The trend rate of economic growth :

Another way of thinking in the direction of the growth rate to view it as a maximum safe speed for the economy. In other words, an estimate of how fast you can be reasonable for the economy expected to grow over a number of years without creating an increase in inflationary pressures.

v     Above trend growth – positive output gap:

v  If the economy is growing too quickly (much faster than the direction)- then the demand would increase the total at the end of the day in the long run aggregate supply, and lead to a positive output gap emerging (excess demand in the economy). This can lead to the withdrawal of the demand and cost push inflation.

v     Below trend growth – negative output gap:

v  If the economy faces a slowdown or recession constant (ie, much lower than the growth rate of trend), then output will fall short of potential GDP leads to a negative output gap. The result is downward pressure on prices and rising unemployment due to a lack of aggregate demand.

Demand and supply growth factors from the impact of GDP 

Many factors affect the rate of economic growth. Some factors, such as changes in consumer confidence and business conditions and overall demand in the trading partners of the United Kingdom, and monetary and fiscal policy, tend to have a temporary effect on growth mainly. Other factors, such as population growth rates and productivity, and have a more lasting effects, and help to determine the rate of economic growth on average over long periods of time. 

Importance of supply-side economics:

And the trend rate of growth is determined mainly by the ability to supply side of the country - that is, to what extent LRAS increases year after year to meet the high level of demand for goods and services. Potential output in the long term depends on the following factors

v  Growth direction of the working population the size of the supply of any active employment (such as those people able available and willing to find paid work)

v  Growth of the nation's stock of capital - driven by the level of capital investment in new buildings, machinery, equipment and technology

v  Trend rate of growth of productivity of factors of production (including labor productivity) - a measure of the gains in efficiency factor

v  Technological improvements driven by innovation and invention which reduce the cost of supply of goods and services, which lead to the shift to overseas production in the country to the possibility of border

Long-run aggregate supply and the trend rate of growth:

And return the implications of the increase in aggregate supply in the long term chart below. Increase in LRAS allow the economy to operate at a higher level of aggregate demand - leading to a continuous increase in real GDP.

Potential output in the long term depends on the following factors 

(1) labor force growth, for example, those people able available and willing to find work 

If the government is able to increase the number of people willing and able to actively seek paid work, and then increase the employment rate, which led to increased production of goods and services. Government has invested heavily in a number of schemes aimed at raising the level of employment, including employment and the New Deal reforms of the tax system and benefits. Changes in the age structure of the population also affect the total number of people who are looking for work. It can also look at the effects of labor migration to the UK from abroad, including the newly enlarged European Union, can have on our supply of total employment 

(2) the growth of nation's stock of capital - driven by the level of investment of fixed capital. 

High capital investment and adds to the gross domestic product (GDP) directly in the sense that the capital goods necessary for the design, production, marketing and delivery. Increased investment also provides more capital with the workers to work with. The new capital also tend to reflect the technological improvements that provide workers with sufficient skills and training to make full and effective input of new capital, should lead to a higher level of productivity after a delay time. 

(3) the trend growth rate of labor productivity and capital. For most countries is that productivity growth drives long-term growth. The root causes to improve the efficiency come from making markets more competitive, and achieving better productivity within individual plants and factories. Seen on a large scale increase in investment in human capital of the workforce is essential if the United Kingdom in order to improve productivity in the long-term performance - for example - to increase spending on training related to work and improve the education system in the UK at all levels. 

(4) technological improvements are important because they reduce the real costs of supply of goods and services leading to a shift to overseas production in a country .