Economic Growth

Mars Ma (FB2)

Define economic growth and explain how it is measured.

Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Short term growth is measured by the annual % change in real national output – this is mainly driven by the level of aggregate demand (C+I+G+X-M) but is also affected by shifts in SRAS. In the short term, growth is an indication that the economy is producing as much as it could be and resources are not being needlessly wasted. With a growing population and rising wages, the economy has to grow to create sufficient new jobs.

Long term growth is shown by the increase in trend or potential GDP and this is illustrated by an outward shift in a country’s long run aggregate supply curve (LRAS). In the long term, an economy may grow because technology gets better and the productivity will increase.

Regarding the advantages, economic growth may cause higher living standards, which means an increase in real income per head of population and economic growth stimulates more jobs to help new people as they enter the labour market.

For the disadvantages, it may have inflation risk if demand races ahead of aggregate supply the scene are set for rising prices. Many fast growing developing countries have seen high rates of inflation in recent years, a good example is India. What’s more, sometimes there are fears that a fast-growing economy places increasing demands on the hours that people work and can upset work-life balance. Thirdly, although a growing economy will create more jobs, it also leads to structural changes in the pattern of jobs. Some industries will be in decline whilst others will be expanding. Structural unemployment can rise even though it appears that a country is growing – the labour force needs to be occupationally mobile.

Discuss the policies the UK government might use in order to increase the long-run growth rate of the economy.

The...