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What do you understand by the term economic growth? What affects the long run growth potential of a country?What do you understand by the term economic growth? What affects the long run growth potential of a country?
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Why are some countries rich while others are poor? The answer to this question explains the theory of economic growth. “The question so fascinated the classical economists that it was stamped on the front cover of Adam Smith’s famous treatise, an inquiry into the nature and causes of the wealth of nations”. Economic growth can be simply defined as the growth of real output of an economy over time. Economic growth is usually measured in terms of an increase in real gross national product (GNP)/gross domestic product (GDP) or as an increase in income per head, over time. The achievement of a high rate of economic growth is one of the four main objectives of macroeconomic policy. Growth is desirable because it enables consumers to consume more goods and services, and thereby improving real living standards. It is important to distinguish between actual and potential growth. Actual growth is the percentage annual increase in national output. Potential growth, on the other hand, is the percentage annual increase in an economy’s ability or capacity to produce. Actual growth is represented by a movement outwards of the production point on the production possibility curve which illustrates potential output. whereas potential growth is shown by a shift of the whole curve as illustrated below. If potential growth exceeds actual growth, the difference is called spare capacity, which represents an opportunity cost to society as a whole in terms of lost resources. Actual growth may only exceed potential growth in the short run as long run actual growth is restricted to the rate of potential growth. Short run economic growth can come about through a fuller use of resources but for it to be sustained there must be an increase in potential output. Short run policy issues are aimed towards keeping actual growth as close to potential growth as possible, whereas long run policy issues are aimed at finding out what determines potential growth.
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