Economic Growth is the sustained increase in output, and is measured by the Gross Domestic Product of a country. Over the past 100 years, growth has transformed the living standards of people in the western world, enabling almost all to escape from absolute poverty, and now looks like the only way to remove people in the Third World from absolute poverty. Obviously though, there are costs to the economy, which is why the government needs to pursue this objective, to ensure that the costs are limited and the benefits great.
For example, at the beginning of the twenty-first century, economic growth results in several negative externalities. For example, growth has created a large pool of migrant workers, wandering from job to job in different parts of the country. This has resulted in soaring crime rates and divorce rates, as well as stress related illnesses. Therefore the Government must intervene, and make it easier for people to go from job-to-job, therefore pursuing the much needed economic growth whilst at the same time taking precautions against its costs.
Also, with the speculation about war with Iraq, ensuring the sustainability of economic growth will be difficult, and so for this reason it is vital that the government pursue this objective. However, if economic growth is followed up, the discovery of more fossil-fuels or generally non-renewable resources is necessary or much-needed renewable technology, such as wind or hydro-electric power as a means of fuelling the country. Rather than solely economic growth, which will undoubtedly arise, the government should instead be pursuing the development of such renewable resources, in order that the problems associated with growth are kept at a minimum.
A second policy that could is vitally important, if economic growth is chosen as the first, is inflation, as this is generally the outcome of a successful growth spurt, as the aggregate demand of the economy rises, leading to inflationary pressures on firms, as in order to boost profits, prices must rise, as capacity reaches its fullest. Currently inflation is just under 3 percent, which is a very good level by the country’s standards, and so the reason for government pursuing this at the moment is not because it is currently at a poor level, but because it can lead to massive problems if left alone.
The problems of inflation are numerous. Firstly, what is known as ‘shoe-leather costs’, whereby with stable prices, consumers and producers will know what is a fair price and so suppliers will have to charge at the going rate. However, with inflation causing prices to become unstable, the cost of shopping-around to find out the lowest costs will have to be incurred. Secondly, ‘menu costs’, which are those occurred by firms, such as shops and restaurants, who have to change the costs of their visible goods, to be able to compete with other stores. Psychological and political costs also occur, whereby people believe that they are far worse off, even if their incomes rise by more than the rate of inflation. The distribution of income and wealth are also disturbed meaning that the social order is profoundly affected. Also, if left uncontrolled, problems will arise concerning the balance of payments, whereby if inflation rises faster in the UK than in other countries, and the value of the pound does not change on foreign currency markets, then exports will become less competitive and imports more competitive. The result will be a loss of jobs in the domestic economy and lower growth.
Therefore, at the start of the twenty-first century, the evidence shows that the two most important objectives to be pursued by the Government are economic growth and inflation.
