Question

For an economy to grow it must increase labor, capital and/or productivity. While there are diminishing returns to capital and labor, growth from productivity is unlimited.

Governments have a role in providing the framework for sound economic growth. This includes having sound fiscal and monetary policy. Other factors that encourage GDP growth are reasonable taxes and regulation, low corruption, and openness to trade and foreign direct investment.

For this assignment you will write a paper analyzing the growth of a specific country. Identify one country that has demonstrated high GDP growth rates (over any time period) and answer the following:

1. Describe the growth rates and the time period of the growth
2. Explain the reason for the growth addressing:
   1. Growth of capital, labor and productivity in the economy
   2. Role of fiscal policy in GDP growth (taxes, spending and debt)
   3. Role of monetary policy in GDP growth (money supply, interest rates and inflation)
   4. Role of foreign direct investment and trade in GDP growth

Answer 1

The first question if we pick US as the country we see it has the biggest economy which is clearly more than 10 trillion dollars. Being the largest economy in the world it also has one of the highest growth rates i.e. GDP is higher than many countries. If we see the growth rate of US we can see that it experience high GDP rate during 1996 1997 and in case of 2007 to 2010 we can see negative growth because of recession. In the year 1995 to 1997 US experienced where the country invested in capital formation i.e. both human and physical capital. Extensive investment across nation allowed the country for significant GDP growth. Secondly if we analyse the data we will find that 2007 2012 we see that US experiencing highest growth rate. One of the reasons is the offshore investments coming from the Middle East making US the largest supplier of Crude oil in the world.

Thr role of fiscal policy is another reason for the higher growth rates. Fiscal instruments were not strong enough to cope with the recession but the economy healed in a better way. The monetary policy was also affected allowing in tax concessions to benefit the citizens. The bak rate was critically low allowing them to almost run out of cash. The FDI stated was well below the mark allowing Asian countries to utilize the moment and increase their growth. The Asian countries attracted many FDI allowing US counter parts to loose the market.

But at the same time after 2012 if we analyse the data we will find that US experienced highest growth rates in addition to it development of the banking sector and to curb the inflation rate US govt brought about high tax rate but focus was citizen centric with the return of unemployment benefits. The medical cost was well within the the tax rate allowing proper GDP growth and development to take place at the same time.