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Q: 4) Economic growth is important?

Discuss this statement and assess the potential for a government to

increase the rate of economic growth in an economy. Use examples to

support statements.

Introduction

The world faces many problems such as starvation and poverty which are not

astonishing, even in countries like the UK and the US where average living

standards are high. For that reason, growth is essential as much as it is needed if

people in less developed countries are to escape material poverty. However, rising

population and consumption have put pressure on the earths natural ecosystem

especially through the many forms of pollution. Therefore, although growth is

absolutely necessary and attainable, it must be also sustainable which in turn must

be based on the idea that technological change is part of the solution since

innovation in production processes uses less of all inputs per unit output.

Governments pricing and policy incentives is vital to facilitate direct technological

change in a more environmentally friendly way. Essentially, there is no guarantee

that the world can solve the problems of sustainable growth because there will never

be full protection from the cycle of nature, but at the same time there is nothing that

the modern growth theory and existing evidence to suggest that this achievement is

impossible.

Nature of economic growth:

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Economic growth is primarily concerned with the long run study of how countries

can advance their economies through a process of continuous replacement and

reorganization of human activities simply by investment to take full advantage of

income.1 In comparison, the short run variation of economic growth referred to as

the business cycle proves that almost all economies experience periodical

recessions2 and it is only through long run growth that an economy can raise living

standard through the removal of a recessionary gap because growth can go on

indefinitely.

Causes of economic growth:

Four of the most important determinants of growth relies heavily on growth in the

labour force, investment in both human and physical capital and finally, but not the

least, technological change.

Growth in the labour force occur when population growth increases resulting in

more labour being used which essentially leads to more output and an increase in

Gross Domestic Product (GDP)3 while human capital involves improvements in the

health and the prolonged existence of the population.

When the health of a worker is better, it tends to leads to increased productivity by

cutting down on illness, absenteeism and accidents. In addition, investment in

human capital can prove to contribute to economic growth since the longer a person

has been educated, the more adaptable and productive the worker will become;

technical training is therefore clearly required if a person has to operate complex

machinery or face new challenges in the work force. Furthermore, training potential

innovators can lead to advances in knowledge and also contribute to growth.

1 Actual income and growth represents what the country does in fact produce whilepotential income and growth measures what the economy could have produced if all

resources were employed at full levels of utilization.2 Oil shocks, war and harvest failure are causes of recessions.3 A measure of national income.

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Physical capital on the other hand, affects GDP similarly to that of population

growth. Where labour growth concerns output per person that determines living

standards, physical capital concerns output per unit of capital showing that living

standards can increase as physical capital increases because output is rising while

population remains constant.

Technological change states that the same amount of labour and capital can

produce more GDP if the production function is altered since new inventions can

significantly contribute to growth.

Governments can also play an important role in the cause of the growth process

because they need to provide the framework for the market economy by enforcing

contracts, law and order and the basic right of the individual to locate, invest and sell

where and how the individual decides. Governments also need to provide the

infrastructure such as transportation and communication networks which is critical to

growth in a modern and globalized economy. Government regulations and

competition policy are needed to prevent growth inhibiting monopolies in areas such

as roads, bridges, rail and harbour which can be provided by private firms.

Education and health are also essential concerns of government expenditure,

especially for the disadvantaged, because creating the appropriate factors of

production is critical to creating comparative advantages in products that may be

exported. It is fundamentally significant for governments to place emphasis on

poverty reduction because poverty can exert anti-growth effects as employers will

not be able to develop the skills needed to provide a productive labour force and

may not respond to incentives.

Effects of economic growth

Economic growth has bilateral effects on the living conditions of people.

Benefits Costs1) There is a positive transformation in the

lifestyles of ordinary workers when there is a

1) Growth requires heavy investment of

resources in capital goods and activities such as

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higher GDP per capita.education and health which does not yield

immediate returns for consumption.2) Redistribution on income to the poor through

increased taxes as income rises allows

government to use this opportunity as a powerful

weapon against poverty.

2) Innovation of technology in a changing

economy requires rapid adjustments which can

cause misery and upset to the people affected by

it.3) It is easier for a fast growing economy to give

more towards unfortunate citizens through

redistribution incomes than with a static

economy.

3) Things that affect the quality of life such as

pollution and congestion are not measured when

considering economic growth.

4) Economies are driven by new technology and

improvements in efficiency.

4) Growth encourages the creation of greed and

artificial needs as the industry causes consumers

to desire new tastes and can also lead to crime

and violence.

5) Pollution regulation policies are strictly

enforces throughout developed countries in an

attempt for citizens to help care for the

.environment.

5) Humanitys environmental demand puts a

strain on Earth natural capacity thereby depleting

resources and creating shortages for the future.

6) Human welfare is increased through higher

consumption of goods and services resultant of

higher income levels.

6) Although distribution of income globally has

increased average wealth, it has added to the

inequality of wealth.

7) Inflation can result in the absence of economic

growth putting strain on the individual consumer.

7) The natural balance of the earth is being upset

because of human activity due to the

manufacture of CFCs. In addition, the depositionof acid rain on farmland reduces crop yields.

Brief history of the United Kingdoms economy

The UKs economy is a modern, market based, mixed economy where much of what

society produces depends on population and productivity level. The long period of

sustained productivity growth in the twentieth century, especially after World War II,

had caused British citizens to expect a substantially better off life than parents and

grandparents because the trend in employment had been positive which was

stimulated when more women had been encouraged to enter the labour force at that

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time. This growth in labour productivity was a key determinant of economic growth

in the UK living standards where productivity had doubled between 1920 and 1970

and an even further 70% by 1993. As each worker produced more in total, there was

more for each person to consume on average. There had also been an 80%

increase in productivity in the manufacturing sector between 1980 and 1993.

Continual technological change which made labour more productive in market

economies have also contributed to economic growth in the UK. Job structure and

the pattern of work had also changed in the UK as Great Britain was the first

industrial nation to show a sharp decline in manufacturing industries, especially in

the agriculture field, to service industries. This was because services that used to be

provided within manufacturing firms had been contracted out to specialist firms. In

addition, the rapid growth rate of international trade caused production and sales for

increasing quantities of service inputs such as transportation, banking and

marketing. Also, one of the most important aspects of change that saturate market

economies is the continual introduction of new products: as more products became

high-tech more money was spent on product design and customer feedback which

could be termed as service activities.

Governments role in the economy

The Governments central economic objective is to raise the economys sustainable

rate of growth, and achieve rising prosperity, through creating economic and

employment opportunities for all. In order to improve the productivity of the UK

economy the Government made changes to promote macroeconomic stability,

reform the labor market and improve the efficiency and equity of the microeconomic

environment. In the UK, innovation and growth drives market economies to

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continually change and in order to ensure continued success, government policy

must be adapted to keep it relevant in this ever changing global environment.

It is because of economic growth that have banished the misery and poverty that

occurred in England more than 150 years ago owing to increases in the total output

of goods and services that the economy is capable of producing. Nationalization

have emerged from the belief UK government control over natural resources and key

industries are a prerequisite to growth which can be best handled through public

ownership.

In addition, policies that reduce structural employment can increase the employed

labour force and therefore increase potential income. Although this increase might

not be large, social benefits will result from the reduction in unemployment.

Reducing inefficiencies can be valuable to an economy as it serves to increase

national income which will be welcomed where many wants go unsatisfied.

Governments continue to have policies to redistribute income and to make basic

services such as education and hospital health care available to everyone since

many people care about the relative differences among themselves. Economic

growth, inefficiencies and redistribution are all interrelated since policies that create a

distribution of income that is unrelated to the market value of work, can negatively

affect the growth rate. As a result, policies that are designed to reduce inefficiencies

need to be examined carefully for any effects that it may have on growth. Similarly,

policies that are designed to affect growth need to be examined for their effect on

economic efficiency and income distribution for example, policies that raise the

health and educational standards or ordinary workers, may raise growth rate.

A major goal of the UKs government policy therefore, is in essence, economic

growth.

Government policies to increase economic growth

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The UK is committed to sustainable development through its international aid

programme, helping developing countries make improvements by balancing

economic, social and environmental factors. It reinforces the UK's central objectives

of poverty reduction and achieving the MDGs. In 2000, the UK expanded its national

investment in scientific activities, following the analysis and review in the DTI White

Paper Excellence and Opportunity. The additional investment in science

infrastructure and support of higher wage positions for top scientists offered, a

brilliant opportunity to analyse what government could do to enhance knowledge

creation and the economic consequences of it.

The use of fiscal policy is to influence total desired expenditure in order to influence

the level of national income. Because the UK government is placing more reliance

on markets to improve economic efficiency and prospects for growth, they have

introduced taxation policies such as VAT where income taxes are taxed as it is

earned, however, income that is saved would be untaxed which can prove to be an

incentive for person to save. This would in effect contribute to growth creating

investment. This tax would then be charged on interest earned on the savings only

when it is actually spent on consumption. On the other hand, tax rates that are

progressively steep penalize people with fluctuating incomes. This was a major

problem in the UK when the government in the 1980s decided to cut the maximum

rate of tax from 70% to 40%, reducing the tax penalty.

Labour market policies attempt to boost growth through improved equity especially

when people lose jobs because of an economic change The UK government has

funded Training and Enterprise Councils (TECs) where training or work experience is

encouraged for young people who are out of work and not in higher education.

Government is also tempted to help industries that are declining which reduces

unemployment in the short run while aiming at efficiency, however, other industrial

policies aimed at long term growth maximize on competition while some hold that

monopoly and oligopoly profits is an incentive to growth creating innovations. This

led to a nationalisation of many British industries and heavy regulation of many

others in the private sector. Patent laws on the other hand, are designed to provide

incentives to the innovating firm to continue developing new ways of improving

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products under competition while creating a temporary property right over the

invention. In its absence, innovation can be easily copied by competitive firms

causing new firms to enter the market easily and quickly. Private firms are therefore

not motivated to produce since innovation is essentially a public good.

Monetary policy when compared to fiscal policy is used to suit the current change in

which it is operating since interest rates are determined by market forces in the

(international) markets for loans and deposits. Monetary control in the UK is

achieved through the Bank of England to determine the level of short term interest

rates in money markets. Monetary tightening involves forcing the interest rates up

which occurred in the competitive environment for the UK financial system in the

1980s. This caused changes as competitive forces encouraged innovation in

financial products and services between banks and building societies. Building

society deposits were increasingly held as transactional balances and banks were

forced to pay increased interest rates on both current and savings accounts. As a

result, monetary tightening was abandoned in the UK in 1986 because of the

perceived instability of the money demand function of which financial innovation

contributed heavily towards. In the UK, nationwide building society said that house

prices increased by 0.9% in March, slowing the annual rate of decline to 15.7%

because of the recent G20 package to boost world economy. In an attempt to

quickly recover from global economic problems, this G20 package includes a

banking clean-up and a $1tn dollar injection into world financial system from the

International Monetary Fund and World Bank. This would help to stimulate growth

and expand loans to troubled nations, restore credit, growth and jobs, as well as

measure clamping down on tax havens and a commitment to build a green and

sustainable economy. Investing in human capital and the poor would bring about

land reforms and major investment in small scale agriculture, education and health

care while use of the IMF's reserve assets (Special Drawing Rights - its own

currency) will enable poorer countries to access much needed liquidity at low interest

rates without the hassle of the complexities of IMF loans.

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