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Economic Growth and GDP
Economic growth is the increased capacity of a country to produce more goods and services. Among the indicators of economic growth in a country is having an increase in the Gross Domestic Production (GDP) and a lower rate of inflation. Apart from increased productivity, economic growth also means an increase in the quality of life among the citizens of a country. The discussion on economic growth, growth rate and GDP will explain their relationship in macroeconomics.
Economic growth involves better quality of life include access to better healthcare, affordable education and a low cost of living. However, in most instances, economic growth and GDP growth do not necessarily imply an increase in the quality of life of the citizens. Countries have recorded an upward trend in terms of GDP growth, but the quality of life remains deplorable (Roys & Seshadri, 2015). An example is some of the growing economy countries, such as Africa, with a specific case of Ethiopia. The country is among the fastest growing economies in Africa, but it records the highest number of economic emigrants every year. This essay is a reflection on the topics discussed in the economics class with particular focus on economic growth and GDP growth.
Numerous factors can have a positive or negative effect on the rate of economic growth. Top on the list is the discovery of new natural resources (Roys & Seshadri, 2015). Natural resources such as gas, oil and uranium will create more employment opportunities for the people. The discovery of natural resources will also increase the aggregate supply in a country. When the country exports the new resources, it will earn foreign exchange and consequently lead to economic growth. Besides discovering new resources, countries can opt to increase their efficiency in the utilization of their new and existing resources. According to Roys and Seshadri (2015), countries fail to reap big from their natural resources due to mismanagement and corruption.
Investment in the physical capital will lower the cost of economic activity (Roys & Seshadri, 2015). Physical capital in this context refers to production factors such as roads, machinery and factories. Poor road networks increase the cost of production and, consequently, low returns on investment. Lack of factories will prompt a country to export unprocessed goods that have a low market price, unlike when value addition is exercised through manufacturing and processing. Outdated machinery will increase the cost of production and reduce the efficiency of the process.
A mere increase in the population will lead to increased labor force. However, an increase in the investment in human capital will go a long way in fostering economic growth (Roys & Seshadri, 2015). Governments and institutions that invest in the training of their employees will increase the rate of production in their firms. Skilled labor is efficient, innovative and more professional. Besides, when an institution invests in its labor force, it cuts down the cost of importing skilled labor or outsourcing key services.
In essence, factors that lead to economic growth are the same factors that lead to an increase in the GDP of a country. However, a few specific factors immensely contribute to GDP growth. An increase in the real disposable income of the citizens of a country will increase its GDP (Roys & Seshadri, 2015). Such a scenario is only possible when the rate of unemployment goes down. A decline in the personal savings of individuals will increase the GDP of a country. When households save, they reduce the amount of cash flowing in the economy. They also reduce their purchasing power. An increase in consumer confidence will increase their rate of spending. A common occurrence in human beings is failure to save when the future looks promising. They will spend their money carelessly and increase the amount of cash flowing in the economy.
A number of factors are bound to hold back economic growth. The first one on the list is lack of technological advancement (Upreti, 2009). The use of old technology to produce goods and services is will not advance the economy of any country. Old methods of production are slow, inefficient and outdated. Countries that hold on to old technology are not in a position to compete with their counterparts who invest in new technology.
The value of the exchange rate may also affect the economic growth of a country (Upreti, 2009). For instance, devaluing the dollar would make exports more competitive and imports more expensive. Every country relies on imports to some extent. When imports become expensive, the cost of living in the country would go up (Upreti, 2009). According to Roys and Seshadri (2015), having a high cost of living in a country affects its economic growth negatively. The factors that undermine economic growth in such a case are reduced consumption, low demand, high cost of production and unemployment. These factors are also responsible for a low GDP. Some general factors include political instability, labor strikes, natural disasters and an increase in interest rates.
In conclusion, economic growth and GDP growth are synonymous. Factors that lead to economic growth include investment in labor, the discovery of natural resources, population increase and investment on physical factors. Factors that affect economic growth include increased interest rates, varying exchange rates and general factors such as political instability, labor strikes and natural disasters.
References
Roys, N., Seshadri, A., (2015). The Origin and Causes of Economic Growth. Department of Economics, University of Wisconsin-Madison. Retrieved From, <http://www.ssc.wisc.edu/~aseshadr/WorkingPapers/growth.pdf> 24 November, 2015
Upreti, P., (2009). Factors affecting economic growth in developing countries. New York: New York University press.