economic

Student Name: Yvonne Teoh Ei HuiStudent ID: I14005697
Section: 5BA1
Assignment: Individual Assignment
Lecture:MR Seyed Mohamad Mehdi TasalotiProgram:BBUS Bachelor Of Bussiness (HONS)
Title: Economics Growth
CONTENTS PAGE
1.0 DEFINITION OF ECONOMIC GROWTH 3
2.0 BENEFITS OF ECONOMIC GROWTH 4,5
3.0 COSTS OF ECONOMIC GROWTH 6,7
4.0 CAUSES OF ECONOMIC GROWTH 8
4.1 DEMAND SIDE CAUSES 8,9
5.0 Why Economic Growth may not bring increased Happiness 9,10,
11,12
6.0 Poverty, Income Inequality and Economic Growth 13
6.1Does Economic Growth Reduce Relative Poverty and Income 14
6.2Why Economic Growth May not Reduce Income Inequality and Poverty 14,15
7.0 GROWTH AND RECIPES 15,16
8.0 CONCLUSION 16,17
1.0DEFINITION OF ECONOMIC GROWTHIncrease in a country＇s productive capacity, as measured by comparing gross national product (GNP ) in a year with the GNP in the previous year.
Increase in the capital stock, advances in technology, and improvement in the quality and level of literacy are considered to be the principal causes of economic growth. In recent years, the idea of sustainable development has brought in additional factors such as environmentally sound processes that must be taken into account in growing an economy.
Annual rate at which a country`s or an industry`s income increases. When this rate is adjusted for the effects of inflation, it is termed real economic growth. Two consecutive quarters of falling growth rates mean a recession, and a similar period of rising growth rate indicates an expanding economy.
2.0Benefits of Economic Growth
Economic growth means an increase in real GDP. This increase in real GDP means there is an increase in the value of national output / national expenditure.
The benefits of economic growth include:
Higher Incomes. This enables consumers to enjoy more goods and services and enjoy better standards of living.
Lower unemployment. With higher output firms tend to employ more workers creating more employment.
Lower Government borrowing. Economic growth creates higher tax revenues and there is less need to spend money on benefits such as unemployment benefit. Therefore economic growth helps to reduce borrowing. Economic growth also plays a role in reducing debt to GDP ratios
Improved public services. With increased tax revenues the government can spend more on the NHS and education e.t.c.
Money can be spent on protecting the environment. With higher real GDP a society can devote more resources to promoting recycling and the use of renewable resources
Investment. Economic growth encourages investment and therefore encourages a virtuous cycle of economic growth.
3.0Costs Of Economic Growth
Despite the benefits of economic growth there are potential costs, such as inflation, current account deficit, environment costs and widening inequality. However, it depends on the type of economic growth and how it is managed.
Potential costs of economic growth include:
Inflation. If AD increases faster than AS then economic growth will be unsustainable. Economic growth tends to cause inflation when the growth rate is above the long run trend rate of growth. It is when demand increases too quickly that we get a positive output gap and firms push up prices.
Boom and Bust Economic Cycles. If economic growth is unsustainable then high inflationary growth may be followed by a recession. This occurred in the late 1980s and early 1990s.
Environmental Costs.Increased economic growth will lead to increased output and therefore increased pollution and congestion. This will cause health problems such as asthma and therefore will reduce the quality of life. Economic growth also means greater use of raw materials and can speed up depletion of non-renewable resources.
Reduced InequalityHigher rates of economic growth have often resulted increased inequality because growth can benefit a small section of society more than others. However it depends upon things such as tax rates and the nature of economic growth
Evaluation
It depends on the nature of economic growth. If growth is balanced and sustainable then it can occur without inflation. Also the environmental costs of economic growth can be minimised through better use of technology.
4.0Causes of Economic Growth
Economic growth means an increase in Real GDP. Economic growth means there is an increase in national output and national income.
Economic growth is caused by two main factors: an increase in aggregate demand an increase in aggregate supply (productive capacity)
4.1Demand Side Causes
In the short term, economic growth is caused by an increase in aggregate demand (AD). If there is spare capacity in the economy then an increase in AD will cause a higher level of real GDP.
AD= C + I + G + X- M
C= Consumer spending
I = Investment
G = Government spending
X = Exports
M = Imports
5.0Why Economic Growth may not bring increased Happiness
1. Diminishing Returns.
If a section of the population is living in absolute poverty, economic growth enables people to have higher incomes and therefore they will be able to afford the basic necessities of life such as; food, and shelter. When economic growth can overcome this type of poverty there is a clear link with improved living standards. However, when incomes increase from say $35,000 a year to $36,000 the improvement in living standards is harder to justify. Diminishing returns is a basic economic concept, which suggests the tenth unit of a good will give much less satisfaction than the first. If we already have 2 cars, does our living standards really improve if we now have the capacity to own 3 cars? Often as economic growth increases incomes, people increasingly save their money (higher marginal propensity to save) this is basically because they struggle to find anything meaningful to spend their money on.
Externalities of Growth.Economic Growth with involves increased output causes external side effects, such, as increased pollution. Global warming from pollution is becoming a real problem for society. The economic and social costs could potentially be greater than all the perceived benefits of recent economic growth. However, it is worth noting that economic growth doesn’t necessarily have to cause pollution. The benefits of growth could be used to develop better technologies that create less pollution. It is just at the moment this has been a low priority.
2. Economic Growth can cause Increased Inequality.
It is perhaps a paradox that higher economic growth can cause an increase in relative poverty. This is because those who benefit from growth are often the highly educated and those who own wealth. In 1980s and 1990s higher growth in the UK and US has resulted in increased inequality. (1) However, it depends on how growth is managed; economic growth can be used to reduce inequality. This occurred in 50s and 60s.
3. Increase in Crime and Social problems.
It is another paradox that as incomes increase and people are better off the level of crime has increased as well. (2) This suggests that crime is not motivated by poverty but perhaps envy. One reason why crime rates increase is that quite simply there are more things to steal. Back in the 1930s auto theft, mobile phone theft e.t.c were rare or non-existent. Economic Growth has created more goods to steal. However the link isn’t absolute for example in recent years crime rates in US have reduced from their peak. But there has been a general association between growth and crimes.
5. Higher Economic Growth has led to more hours worked.
In the beginning of the industrial revolution, higher growth led to people working lower hours.(3) However, in the past couple of decades higher incomes have actually led to people working longer hours. It seems people are unable to enjoy their higher incomes. Feeling the necessity or preferring to work longer hours. This suggest people are valuing earning money more than leisure. However, this trend may also be due to companies wanting people to work longer hours.
6. Diseases of Affluence.
Economic Growth has enabled improved health care treatments, but at the same time there has been an unexpected rise in the number of diseases and illnesses related to increased prosperity.(4) One example is obesity. Modern lifestyles and modern diets have created an epidemic of obesity, with significant proportions of the population expressing a desire to lose weight. It could be argued that problems such as obesity and stress related illnesses are not a direct consequence of growth. This is true, but, it is symbolic of the fact increased prosperity has created as many new problems as it has solved
6.0 Poverty, Income Inequality and Economic Growth
There are two types of poverty:
Relative Poverty: This is when income is less than the average income by a certain amount. For example, in the UK relative poverty is defined as income 50% less than average incomes. Therefore a rise in economic growth will cause a change in what constitutes economic growth.
Therefore, economic growth can reduce relative poverty, but also can increase relative poverty.
Absolute Poverty: This is Income below a certain level necessary to maintain a minimum standars of living. (e.g. enough money to buy the basic necessities of food, shelter and heat.
Therefore, economic growth should reduce absolute poverty, so long as the poorest can gain some increase in living standards from the nation’s growth.
6.1Does Economic Growth Reduce Relative Poverty and Income Inequality?
Economic Growth will reduce Income inequality if:
Wages of the lowest paid rise faster than the average wage
Government benefits, such as; unemployment benefits, sickness benefits and pensions are increased in line with average wages.
Economic Growth creates job opportunities which reduce the level of unemployment. Unemployment and lack of employment is one of the biggest causes of relative poverty.
Minimum Wages increased in line with average earnings 6.2Why Economic Growth May not Reduce Income Inequality and Poverty
Economic Growth often creates the best opportunities for those who are highly skilled and educated. In recent years, in the UK, we have seen faster wage growth for highly paid jobs than unskilled jobs.
Modern economies are creating an increased number of part time / flexible service sector jobs. In these sectors wages have been lagging behind average earnings.
In the UK, government benefits have been indexed linked. This means increased in line with inflation. This means that benefit incomes have fallen behind average earnings.
Economic Growth will not necessarily solve unemployment. For example, growth cannot solve structural and frictional unemployment; this is unemployment caused by lack of skills and geographical immobilities.
7.0Growth and Recipes
Economic growth occurs whenever people take resources and rearrange them in ways that make them more valuable. A useful metaphor for production in an economy comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes generally produce fewer unpleasant side effects and generate more economic value per unit of raw material 8.0Conclusion
Economic growth enables the possibility to deal with many serious problems of poverty, homelessness and lack of basic amenities. However i am more interested in whether economic growth in developed economies is actually increasing living standards. Does rising incomes equal rising satisfaction? The answer is not clear-cut. However there are clearly several issues, which suggest that economic growth, has contributed to serious social, environmental and economic problems, which have reduced living standards. This is not to say economic growth is doomed to bring unhappiness. In fact the challenge is to harness the potential of economic growth to make sure it really does increase sustainable living standards.
Research sources
Pettinger, Tejvan. (26thJune2007) "Problems of Chinese Economy", Oxford. Available From: www.economicshelp.org. [ Accessed: 8thJune2014].
Paul M. Romer (27thAugust2007) The concise encyclopedia of economics Economic Growth. Available from: http://www.econlib.org/library/Enc1/EconomicGrowth.html . [ Accessed: 8thJune2014].
Economic growth. Available From: http://www.businessdictionary.com/definition/economic-growth.html . [Accessed:8th June 2014]