Question

. How do economic prosperity, economic growth, and economic change work together? Provide a real-world example of how these three are woven together. .

Answer 1

Economic growth is measured by an increase in gross domestic product (GDP), which is defined as the combined value of all goods and services produced within a country in a year. Many forces contribute to economic growth. However, there is no single factor that consistently spurs the perfect or ideal amount of growth needed for an economy. Unfortunately, recessions are a fact of life and can be caused by exogenous factors such as geopolitical and geo-financial events.

Politicians, world leaders, and economists have widely debated the ideal growth rate and how to achieve it. It's important to study how an economy grows, meaning what or who are the participants that make an economy move forward.

In the United States, economic growth is driven oftentimes by consumer spending and business investment. If consumers are buying homes, for example, home builders, contractors, and construction workers will experience economic growth. Businesses also drive the economy when they hire workers, raise wages, and invest in growing their business. A company that buys a new manufacturing plant or invests in new technologies creates jobs, spending, which leads to growth in the economy.

Other factors help promote consumer and business spending and prosperity. Banks, for example, lend money to companies and consumers. As businesses have access to credit, they might finance a new production facility, buy a new fleet of trucks, or start a new product line or service. The spending and business investments, in turn, have positive effects on the companies involved. However, the growth also extends to those doing business with the companies, including in the above example, the bank employees and the truck manufacturer.

In this article are a few of the measures that are often employed to increase and promote economic growth.

KEY TAKEAWAYS

Economic growth is driven oftentimes by consumer spending and business investment.

Tax cuts and rebates are used to return money to consumers and boost spending.

Deregulation relaxes the rules imposed on businesses and have been credited with creating growth but can lead to excessive risk-taking.

Infrastructure spending is designed to create construction jobs and increase productivity by enabling businesses to operate more efficiently.

Tax Cuts and Tax Rebates

Tax cuts and tax rebates are designed to put more money back into the pockets of consumers. Ideally, these consumers spend a portion of that money at various businesses, which increases the businesses' revenues, cash flows, and profits. Having more cash means companies have the resources to procure capital, improve technology, grow, and expand. All of these actions increase productivity, which grows the economy. Tax cuts and rebates, proponents argue, allow consumers to stimulate the economy themselves by imbuing it with more money.

In 2017, the Trump administration proposed, and Congress passed the Tax Cuts and Jobs Act. The legislation lowered corporate taxes to 20%— the highest corporate income tax rate was 35% before the bill. Various personal income tax brackets were lowered as well. The bill cost $1.5 trillion and is designed to increase economic growth for the next ten years.

As with any stimulus used to spur economic growth, it's often difficult to pinpoint how much growth was created by the stimulus and how much was generated by other factors and market forces.

Stimulating the Economy With Deregulation

Deregulation is the relaxing of rules and regulations imposed on an industry or business. It became a centerpiece of economics in the United States under the Reagan administration in the 1980s, when the federal government deregulated several industries, most notably financial institutions. Many economists credit Reagan's deregulation with the robust economic growth that characterized the U.S. during most of the 1980s and 1990s. Proponents of deregulation argue tight regulations constrain businesses and prevent them from growing and operating to their full capabilities. This, in turn, slows production and hiring, which inhibits GDP growth. However, economists who favor regulations blame deregulation and a lack of government oversight for the numerous economic bubbles that expanded and subsequently burst during the 1990s and early 2000s.

Many economists cite that there was a lack of regulatory oversight leading up to the financial crisis of 2008. Subprime mortgages, which are high-risk mortgages to borrowers with less-than-perfect credit, began to default in 2007. The mortgage industry collapsed, leading to a recession and subsequent bailouts of several banks by the U.S. government. New regulations were implemented in the years to follow that imposed increased capital requirements for banks, meaning they need more cash on hand to cover potential losses from bad loans.

Using Infrastructure to Spur Economic Growth

Infrastructure spending occurs when a local, state, or federal government spends money to build or repair the physical structures and facilities needed for commerce and society as a whole to thrive. Infrastructure includes roads, bridges, ports, and sewer systems. Economists who favor infrastructure spending as an economic catalyst argue that having top-notch infrastructure increases productivity by enabling businesses to operate as efficiently as possible. For example, when roads and bridges are abundant and in working order, trucks spend less time sitting in traffic, and they don't have to take circuitous routes to traverse waterways.

Additionally, infrastructure spending creates jobs as workers must be hired to complete the green-lighted projects. It is also capable of spawning new economic growth. For example, the construction of a new highway might lead to other investments such as gas stations and retail stores opening to cater to motorists.

During the Great Recession, the Obama administration, along with Congress proposed and passed The American Recovery and Reinvestment Act of 2009. The stimulus package was designed to spur economic growth in the economy since business and private investment was waning. The Obama stimulus as it's commonly referred to included federal government spending exceeding $80 billion for highways, bridges, and roads. The stimulus was designed to help create construction jobs that were hit hard due to the impact from mortgage crisis on residential and commercial construction.

Compete Risk Free with $100,000 in Virtual Cash

Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you're ready to enter the real market, you've had the practice you need. Try our Stock Simulator today >>

Related Articles

MACROECONOMICS

Understanding the Effects of Fiscal Deficits on an Economy

MACROECONOMICS

Why does Unemployment Rise During a Recession?

STOCK MARKETS

How the Stock Market Affects GDP

FEDERAL RESERVE

6 Ways Governments Fight Deflation

REAL ESTATE INVESTING

The Lost Decade: Lessons From Japan's Real Estate Crisis

MACROECONOMICS

The Importance of GDP

Related Terms

Stimulus Check Definition

Stimulus Check is money sent to a taxpayer by the U.S. government to stimulate the economy by providing consumers with some spending money. more

Stimulus Package Definition

A stimulus package is a package of economic measures put together by a government to stimulate a struggling economy. more

Quantitative Easing (QE) Definition

Quantitative easing (QE) refers to emergency monetary policy tools used by central banks to spur iconic activity by buying a wider range of assets in the market. more

Supply-Side Theory Definition

Supply-side theory holds that economic growth stimulus is spurred through supply-side fiscal policy targeting variables that lead to supply increases. more

What Causes Hyperinflation

Hyperinflation describes rapid and out-of-control price increases in an economy. In this article, we explore the causes and impact of hyperinflation. more

Trickle-Down Theory

The trickle-down theory states that tax breaks and benefits for corporations and the wealthy will make their way down to everyone. more