Economic Growth

This essay will cover the topic of economic growth. Firstly, introducing the concept of economic growth will show the difference in measures of GDP. Secondly, it will explain and demonstrate how factor endowments can lead to economic growth as well as cover the positive and negative effects on domestic consumers and domestic producers. Then it will explain how economic growth can lead to inequality and, finally, how Government Policy can affect employment both long and short term. 

Economic growth is the increase in real Gross Domestic Product (GDP) per capita over a period of time Real GDP takes account of inflation. It is calculated by dividing nominal GDP over the price index (CPI) and then multiplying it by CPI in the base year. 

Real GDP/Capita is measured to compare living standards between countries but this measurement has limitations. In non-market economic activity, some production of goods and services does not get recorded in GDP, for example, DIY Home Improvements. Informal transactions, such as sales of goods on the black market, are not recorded in GDP. Income Distribution compares income levels between countries using per capita data. 

This is misleading because income is unevenly distributed in one country but not in the other. For example, only 6 of every 100 people in the world have access to 50% of the world's resources and only 1% have a University Degree. Growth without development is when production occurs but it benefits very few. For example, a poor country increases cash crops for export at the same time as food is desperately needed for feeding its population. 

Distortions result from congestion as in the case of more people working so more is being spent on transport (travel costs). This increases GDP but people are not necessarily better off. Pollution is caused by increased industrialization. This cost is rarely computed into the production costs, which lessens the value of GDP. Then again people's quality of life (not measured by GDP) rises with increased leisure time as they choose to work fewer hours even though GDP falls. 

Business Activity grew by 3.2 percent during the year ended March 1997. However, this was down on the 1996 growth rate of 3.7 percent and significantly below the 1995 growth rate of 6.2 percent. On the other hand, the contributions of Transport and Communications had increased and were larger than all other groups and now formed one-quarter of total growth. The tradable goods sector as a whole claimed to be under pressure from high-interest rates and the continuing strength of the New Zealand dollar. 

Increases in productivity can lead to economic growth. When more natural resources are discovered, such as petroleum, it enables industrial expansion and allows more goods and services to be produced. Quantitative measures in the labor resource are caused by an expansion in immigration or birth rate. The quality of an existing labor force is increased by education and training. 

This adds to labor output and productivity. Investment means more goods and services are produced so GDP increases. Research and development allow the level of technology to develop by inventing new products or by making it possible to manufacture products more effectively. For more investment to take place there need to be more savings. This occurs when consumers demand and buy less. Investment is aided when government devotes resources to the development of infrastructure like communal facilities. 

Changes in factor endowments can influence the level of investment. Low levels of savings (that are income and not spent) will mean a country has to borrow overseas or encourage foreign investment. Depreciation (the wear and tear on capital goods, or capital goods becoming obsolete) can result in capital not producing as much. Investment has to be used to replace capital so this affects the level of investment to replace capital and so affects the level of investment. (Net Investment = Gross Investment —Depreciation) 

The direction of investment might or might not create employment and economic growth. Investment in property and/or in "sunset" industries will do little to boost these conditions. Businesses will consider the cost of borrowing. A lower rate of interest will make investment projects more profitable and therefore attractive so the level of investment will increase. Investment is aided when government devotes resources to the development of infrastructure and when communal facilities are used to help produce goods and services. 

Economic Growth will benefit domestic consumers and household incomes should increase. Since more workers are being employed, the standard of living of households will increase. This is because people will consume more goods and services requiring more workers to produce them. However, consumers will suffer from price increases (inflation). As the demand for goods and services increases this causes the price of goods goes up. 

Domestic Producers will benefit when consumer incomes increase. When consumers have more savings it will increase funds for investment. This will allow businesses to produce more goods and services. Expenditure data suggests a very strong contribution from residential investment, partially offset by a big fall in business investment and stock building. But these goods and services require a continual supply of natural resources. This is not always possible as resources are used up so fast that there are none left for the next generation. For example, the Maui gas reserves could be used up as soon as 2006. 

Economic Growth can lead to Economic Inequality. 

When, for example, the government reduces income tax and introduces GST to fill the gap left in revenue this tends to favor the middle and upper-income groups, who get more of a percentage reduction in income tax than those in low-income groups, and who do not pay such a big percentage of their income on GST for essential goods such as food. 

Fiscal Policy

A fiscal Policy is a policy designed to promote economic growth. It refers to government and spending measures contained in the budget. The Monetary Policy it is a measure to control the level of economic activity. It promotes the expansion of economic growth. 

A fiscal Deficit is when planned expenditure is greater than planned revenue. This has an expansionary effect on the economy. Government spending increases GDP as more workers and greater investment is needed to produce extra goods and services. 

Fiscal Surplus is when planned revenue is greater than planned expenditure. This is contractionary on the economy. The government's reduced spending decreases GDP and results in fewer workers. 

Fiscal Policies have been used to promote employment. The outcome of the 'Think Big' approach of the National Government in the 1980s in the short term was 400,000 new jobs. But eventually, the projections, on which these policies were based turned out to be inaccurate, the economic climate changed, and alternative car fuels, for example, were soon less in demand as petrol prices came down. When the government increased spending and there was more money circulating which led to a rise of inflation. The long-term effect of this was that money became worth less. This meant that price values rose. The dollar was devalued in 1984 to cope with continued inflation. 

Real GDP and GDP per capita are measured to compare living standards between countries but have limitations. GDP is not recorded on the black market and in other cases. Sometimes GDP shows that the country is benefiting when in fact a lot of inequalities are occurring. In the way of businesses, the Transport and Communications industry has grown as the overall growth rate of Business Activity has shrunk. Increases in productivity could lead to economic growth. 

Natural resources, Quantitative measures in labor resources, and Investment. Changes in factor endowment influence the level of investment. Depreciation can result in capital not producing as much. Domestic consumers benefit from economic growth when household incomes rise. However, they suffer from price increases (inflation). Producers benefit from investment and are able to produce more goods and services. Because they require a supply of continual resources they may use these resources up so fast there is none left for the next generation. Economic Inequality occurs when the government reduces tax and introduces GST to fill the gap and middle and upper-income groups benefit by getting more a percentage from their higher incomes. 

Fiscal Policy is a policy to promote the expansion of economic growth. These policies have been used to promote employment such as the `Think Big approach' which provided jobs that proved to be temporary when the state of the economy changed. As a result of the money created for this expansion, Inflation rose dramatically and prices, in the long run, rose significantly. 

(NB. 6th Form Kapiti College, New Zealand, Assignment circa 2000)