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What is Economic Growth?
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What is economic growth and how is it measured. What are some of the factors that inhibit growth. Using specific examples, show how some countries have achieved high rates of economic development. Economic growth is the ability of a nation to expand it productive capacity, resulting in an increased aptitude to satisfy the material wants of the nation. It occurs as a consequence of the increased availability of goods and services available for consumption and/or investment by the people. Economic growth is measured as the rate of change of the total output of all final goods and services produced within a nation over a specified period of time (usually a year). Gross Domestic Product (GDP) is the most common measure of economic growth, measuring the total market value of final goods and services in a nation during a twelve month period. The Australian Bureau of Statistics (ABS) measures economic growth in four ways by GDP (at average 1989-90 prices (that is, the calculation of real GDP)): 1. GDP (P) ¡V is a production measure of GDP which calculates the value added in each stage of production in the production of final goods and services; 2. GDP (E) ¡V is an expenditure measure which calculates GDP according to the total expenditure of consumers, business and governments within a nation on final outputs (that is, sales receipts on final goods and services); 3. GDP (I) ¡V is the total of incomes received by the owners of productive goods and services (for example, wages; salaries; supplements; and gross operating surplus); and 4. GDP (A) ¡V is an average of GDP (P), GDP (E) and GDP (I) measures of GDP to achieve a standard measure of the rate of economic growth. There are a large number of factors which inhibit the economic growth of a nation, that is, there is a large number of components within a nation¡¦s economy which hinder the rate of economic growth. These components can include: ƒæ Scarcity of Physical Capital ¡V nations which have low economic growth rates often find it difficult to accumulate capital as they find themselves caught in the trap of underdevelopment. That is to say that nations with low per capita incomes have low savings rates due to the need to spend money on goods and services (such as foods) to survive. These low savings cause there to be a shortage of funds available for investment in capital goods resulting in the low productivity rates of labour, maintaining the low level of incomes. Similarly, the low per capita incomes limit the size of markets for goods and services, due to the restrictions on consumers¡¦ disposable incomes since they have low incomes. This results in a weak demand for goods and services reducing the available funds to business firms available for investment in capital goods, and the cycle continues. ƒæ Low levels of Domestic Savings ¡V economic growth is limited when there are low levels of savings. This is a major problem when there are also low income levels within the nation as savings are required for the nation to have investment. As a result of this, low savings levels obstruct the accumulation of new capital. Due to the lack of capital, the productivity of labour remains low impeding on the rate of economic development. ƒæ Lack of Supporting Infrastructure ¡V as a result of insufficient infrastructure, the economic growth of a nation can be lessened.
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