Question

Economic growth would decrease if consumer spending decreased. employee wages increased. floods ravaged the manufacturing sector in the north. government spending decreases significantly. the number of imports increased.

Answer 1

Economic growth is promoted both by supply sided and demand side factors. On the demand side the most important factors are consumption, investment, government spending and net export. Among these consumption is the largest component. A higher level of consumption expenditure results in higher level of aggregate demand and higher production, employment and income. A lower consumer expenditure results lower aggregate demand, lower aggregate output and lower employment and income. Thus growth of a country decreases with reduction in aggregate consumption expenditure.

A reduction in aggregate supply also decreases the process of development. An increase in wage rate increases the cost of business sector. In the event of increased cost, the profit of the business sector decrease which will create substantial decrease in production, employment and output. Economic growth is also retarded with fall in aggregate supply.

Natural calamities also reduce the aggregate supply and dampen the process of growth. The natural disasters like flood, earthquake, heavy storm etc decrease the resources available for the manufacturing units and destroy the existing capital. The flood mostly damage the resources available for manufacturing units and the fall in resource reduce the aggregate supply creating lower output, lower employment and income. Thus the economic growth of a country will decrease.

Government expenditure usually paves the way of economic growth. Increased government expenditure creates sufficiently infrastructure for the private business sector to grow. The increased government expenditure increases the income of the people and thereby accelerates the consumption expenditure. In short increase government expenditure is an engine of economic growth. But a reduction in government expenditure reverses the process of economic growth. A decrease in government expenditure reduces the level of aggregate demand though a reduction in consumption and investment spending. Thus a country will lower public expenditure usually will have lower economic growth.

Economic growth is generated through an increased net export. A higher import leads to net export to fall and the country will suffer from adverse balance of payment. Through import the domestic money flows into foreign countries. As more is imported, less is produced domestically. The domestic output, income and employment decreases. Thus an increase in a country’s import decreases the growth rate of an economy.