Concept of growth and growth rate, Macroeconomics

The Concept of Growth and Growth Rate is explained below:

Economic growth is rise in an economy’s level of the production of commodities, output or income. We can talk about the production of the commodities or output in two broad definitional contexts. One, we can compare the real GDP with some other measure of welfare such as one which adjusts for externalities, the black market,  social indicators, purchasing power parity, income inequality etc. Two, we can talk about the potential verses actual output. Potential output is the aggregate capacity of output of a nation; the maximum quantity of goods/products and services which can be produced with the available resources and a given state of technology.   In our discussion at this time, we will abstract from such complexities and take output to simply mean real GDP.

The growth/development rate of the country’s real GDP can be negative, positive or zero. A growth rate of between 2-3% is considered normal  for  mature  developed  countries;  for  LICs,  5-7%  is considered healthy and 7%+ excellent.

Per Capita Real GDP:

While studying the growth, it is always instructive to analyse the changes in per capita real GDP along with the changes in real GDP. The per capita real GDP growth adjusts GDP growth/development downwards by the population  growth  rate  and  gives  the  more  accurate  indication  of  improvements  in the living standards in the country. For mature/experienced HICs, Real GDP growth rate = per capita real GDP growth rate, as the population size in these countries is fairly stable.

It is also significant to note that even a small per capital real GDP growth rate say around 2% p.a., if sustained for a very long time (say 100 years) can bring huge improvements in living standards. The U.S. and Japan in the 19th  and 20th  centuries and East Asian tiger economies in last four decades are the neat example of this.

Why the Growth/development is an Important Macroeconomic Issue:

It is evident why growth is a significant macroeconomic issue. Every government wants to deliver a higher growth rate for the country. High growth rates means higher national income

which  means  better  living  standards on  an average standard, which  in  democracies, means  happier electorates and thus increased chances of re-election for another term in office. However, while all countries might wish to achieve high growth rates, in the exercise, only a handful have been able to convert the wish into reality.

Traditional Thinking about Growth:

Traditional thinking on growth/development was that it can be driven either by an raise in factor resources such as land, natural resources, labour, capital, which means the increase in potential GDP, or by more efficient use of the factors, i.e. a move from inside the PPF to the PPF. The policy inference attached to this line of thinking was easy. Countries must either accumulate factors of production or develop more cost-efficient technologies/methods of production to make use of those resources better. In any event, factors of production were at the centre of growth theory.

Posted Date: 7/19/2012 2:58:21 AM | Location : United States

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