Possible causes of economic growth

Define what is meant by economic growth and how it is commonly measured?

Economic growth is the change in potential output of the economy shown by a shift to the right of the production possibility frontier. Economic growth is usually measured by the change in real national income. In practice, national income can be measured in many ways, but growth statistics tend to be presented in terms of either a change in GDP or GNP. Growth must be measured in real terms because it is the change in the volume of goods and services that we are attempting to measure and not their monetary value.

Outline the possible causes of growth.

Economic growth occurs when there is an increase in the quantity of quality of the factors of production or when they are used more efficiently. A government wishing to increase growth in the economy fundamentally must pursue policies, which will increase labour productivity. There are three main ways to achieve this.

The quality of the labour force can increase, meaning that each worker on average can produce more output with an existing stock pf capital and an existing state of technology.
The quantity of the capital stock can increase, meaning that workers are able to use more capital, thus raising average output.
The state of technology can change, meaning that a given capital stock can be more productive with a given labour force.

Government policies to promote growth therefore need to be directed at both the labour and capital markets.

Q3. Use Figures 99.5 to 99.12 and any other data you might find, to assess whether there is any statistical evidence to support these hypotheses about the causes of growth.

The graph, which focuses on, fixed capital formation shows positive correlation. This would seem correct, as the production possibility curve would shift to the right, as investment produces growth. This supports hypothesis 2.

The graph, which focuses on real growth in exports, also shows positive correlation. ...

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Government policies to promote growth therefore need to be directed at both the labour and capital markets.

Q3. Use Figures 99.5 to 99.12 and any other data you might find, to assess whether there is any statistical evidence to support these hypotheses about the causes of growth.

The graph, which focuses on real growth in exports, also shows positive correlation. This is because it increases the market potential, and the production possibility curve will shift to the right.

The graph, which shows growth in labour productivity, has positive correlation. This graph suggests that by increasing the quality of labour, more can be produced for the same quantity of labour. This supports hypothesis 1.

The graph, which shows growth in capital productivity, also shows positive correlation. This is because more can be produced with the same quantity of capital. This supports hypothesis 3.

The graph, which shows government spending, has negative correlation. This is because the government does not spend money as efficiently as a person would. The government would invest it in public goods. If government spending is high, GDP is low, as the government will spend more on the trough of the business cycle.

The graph that shows long-term interest rates also has negative correlation. This is because when interest rates are low, there is an increase in GDP, as people will not invest if interest rates are high.

Q4. Which of the 7 major OECD countries (labelled) in the data have the best long-term growth prospects after 1994? justify your answer.

I feel that Japan has the best long-term growth prospects. My reasons for this is that

Japan has the highest real growth in gross investment, which will result in its production possibility curve shifting to the right.
Japan also has the highest growth in labour productivity and gross national savings level.
Japan has one of the highest rates of return on capital in the business sector.
Japan has the lowest government spending, which results in high GDP.
Japan also has the lowest long-term interest rates, which increases GDP.
The only scatter diagram, which may suggest that Japan does not have the best long-term growth prospects, is the real growth in exports scatter diagram. However, Japan may already be exporting larger amounts than the other countries, so does not need to increase the export volumes yearly.

Arguments against growth

Despite the apparent benefits, the goal of economic growth has been increasingly questioned in recent years.

One argument is that the increase in national income has been largely fictitious. Much of the supposed increase in income has come from placing monetary values on what existed already. Much of the increase in income generated by the public sector of the economy comes not from increased production but from increased wages paid to public sector workers who produce the same amount of services.

However, material living standards have increased, people not only consume more goods and services, but they have on average far more leisure time.

Another argument is that modern industrialised societies have created large negative externalities. But perhaps the most serious anti-growth argument is that growth is unsustainable. Each extra percent increase in national income uses up non-renewable resources such as oil, coal and copper. It was thought that industrialised economies would collapse. They would be caught between a growth in pollution and a decline in the availability of scarce resources such as oil, coal and timber. However, in a market economy, growing scarcity of a resource, such as oil, results in a rise in price. First, demand and therefore consumption falls, and it becomes profitable to explore for new supplies of the resource. Also, consumers switch to substitute products, whilst producers are encouraged to find new replacement products.