Discuss the Causes and Effects of Economic Growth

Topics: Economics, Macroeconomics, Economic growth Pages: 5 (1365 words) Published: July 26, 2008
Economic growth is the overall growth in an economy. Gross National Product and Gross Domestic Product are the normal measures of economic growth. Because growth can come in many ways, GNP and GDP are not particularly good measures. More so, economic growth can occur from having more people in an economy. If economic growth occurs more slowly than the population growth, then there can be economic growth, but the average person is less well-off. As economic growth is measured as the annual percent change of National Income it has all the advantages and drawbacks of that level variable.

There are two types of economic growth, ACTUAL and POTENTIAL. We have to recognise the difference between actual and potential economic growth.

Actual Growth: this is the percentage annual increase in national output and is also known as the ‘GDP’ (Gross Domestic Output). This is said to be the rate of growth in actual output produced. Statistics of GDP growth rates refer to actual growth when they are published.

This is a table of the GDP Growth rates for the last 10 years. I have included a few countries including the UK:

YearU.K.ItalyNetherlandsBelgiumSwitzerlandSwedenAustraliaNew Zealand 2005-0.160.941.16-2.472.46-
Source: http://investintaiwan.nat.gov.tw/en/env/stats/gdp_growth.html

Potential Growth: This is how quickly the economy could grow. It is known as the percentage annual increase in the economies capacity to produce.

Major factors that can contribute to potential economic growth include:-

An increase in resources – natural, labour or capital. Increase in the potential with which these resources can be used, through advances in technology, enhanced labour skills or bettered organisation.

Actual growth will tend to rise and fall. In some years there can be a high rate of growth; this is when the country will experience what is known as a ‘boom’. In other years quite simply growth is low or negative; this is when the country is in recession a period of ‘slump’ or ‘depression’. This series of booms and recessions is commonly known as the business cycle.

There are four ‘phases’ of the business cycle:

1.The upturn – During this phase, a contracting or inactive economy starts to improve, and growth in actual output resumes. 2.The expansion – In this stage there is rapid economic growth: the economy is booming. An extensive use is made of resources and the bridge between actual and potential output narrows. 3.The peaking out – Throughout this phase, growth slows down and can even end. 4.The slowdown, recession or slump – In this period, there is little or no growth and even a decline in output.

Causes of growth

Economic growth is caused first and foremost by factors on the supply part of the economy, factors such as increases in both the quantity of and in the productivity of the economic resources accessible to the economy. These economic resources include land and natural resources, labour (measured in man-hours of work), capital (man-made productive resources).

Increases in the quantity of economic resources may include the development of land for economic use, the unearthing and exploitation of new natural resources, increases in the working population, but the most significant contributor is increases in the stock of capital goods, which is known as capital accumulation. Economists call the production of new capital goods investment, and the rate of investment is an important determinant of the...
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