Question

What cause the "growth drag" in an economy where output is produced using capital, labour, land and nonrenewable natural resources? List three possible ways that can reduce the magnitude of the growth drag.

Answer 1

The growth drag is caused by the limitation of resources and land, and optimal uses of capital and nonrenewable natural resouces. The resulting lack of aggregate demand leads to deflationary pressure, or drag, on the economy, essentially due to lack of state spending or to excess taxation. One cause of fiscal drag may be bracket creep, where progressive taxation increases automatically as taxpayers move into higher tax brackets due to inflation.

At present, most studies on economic growth drag both domestic and abroad, focus on two aspects:

(1) The analysis of economic growth drag at a national scale. For instance, Nordhaus et al. (1992)computed the American economic growth drag of resources and land as 0.0024, based on an extended Cobb–Douglas production function. Brock and Taylor (2005) indicated that the economic growth of the U.S. reduces by 0.0006 each year because of the drag of the environment, based on the Green Solow model. Gylfason and Zoega (2006)used data from 85 countries and computed the impact that resources have on economic growth as −0.13. Using a dynamic computable general equilibrium (CGE) measure, Bruvoll, Glomsroda, and Vennemo (1999)computed the loss of Norwegian welfare caused by the drag of the environment. Different scholars used different ways to gauge the growth drag. In the case of China, most scholars examined the growth drag based on Nordhaus et al.’s (1992) model. Xue et al. (2004) first used the Solow model to compute China’s economic growth drag of land resources as 1.75 percent. Xie et al. (2005)extended the analysis and computed the drag of water and land resources as 0.14 and 1.32 percent, respectively. Liu (2011)computed the economic growth drag in the central China as 0.11 percent. Subsequently, many researchers carried out further analysis. Thus, this study used Nordhaus et al.’s method to extend the Cobb–Douglas production function to measure the agricultural growth drag. Analysis of economic growth drag at an industry scale. According to Nie et al. (2011),China’s agricultural economic growth of water and land are 0.011 percent. Wang and Han (2008)estimated that by 2030, the growth rate of agricultural output will decrease by 2.66 percentage points annually, due to the shortage of water supply. Li et al. (2014)analyzed the relationship between water consumption in agriculture and agricultural economic growth in the east, south, and north of Xinjiang.

There are three possible ways that can reduce the magnitude of the growth drag.

1. Stream lining the body to reduce drag
2. Reduce the weight to the minimum
3. Providing maximum area for wings without increasing the overall drag too much