In: Economics
Using the concepts of incentives and good institutions, explain how a country might achieve economic growth.
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.Growth is usually calculated in real terms - i.e.,
inflation-adjusted terms – to eliminate the distorting effect of
inflation on the prices of goods produced. Measurement of economic
growth uses national income accounting. Since economic growth is
measured as the annual percent change of gross domestic product
(GDP), it has all the advantages and drawbacks of that measure. The
economic growth-rates of countries are commonly compared using the
ratio of the GDP to population (per-capita income).The "rate of
economic growth" refers to the geometric annual rate of growth in
GDP between the first and the last year over a period of time. This
growth rate represents the trend in the average level of GDP over
the period, and ignores any fluctuations in the GDP around this
trend. Economists refer to an increase in economic growth caused by
more efficient use of inputs (increased productivity of labor, of
physical capital, of energy or of materials) as intensive growth.
In contrast, GDP growth caused only by increases in the amount of
inputs available for use (increased population, for example, or new
territory) counts as extensive growth. Gross Domestic Product –
measures the total production of an economy as the monetary value
of all goods and services produced during a specific period, mostly
one year. Dividing GDP by the size of the population gives us GDP
per capita to measure the prosperity of the average person in a
country. Because all expenditures in an economy are someone else’s
income we can think of GDP per capita as the average income of
people in that economy. Here at Core-Econ you find a more detailed
definition.The economic growth of a country is the increase in the
market value of the goods and services produced by an economy over
time.We define economic growth in an economy by an outward shift in
its Production Possibility Curve (PPC). Economic growth is measured
by the increase in a country’s total output or real Gross Domestic
Product (GDP) or Gross National Product (GNP).
The Gross Domestic Product (GDP) of a country is the total value of
all final goods and services produced within a country over a
period of time. Therefore an increase in GDP is the increase in a
country’s production.
Growth doesn’t occur in isolation. Events in one country and region
can have a significant effect on growth prospects in another. For
example, if there’s a ban on outsourcing work in the United States,
this could have a massive impact on India’s GDP, which has a robust
IT sector dependent on outsourcing.