One of the most important government economic objectives is to maintain sustainable and high economic growth in the country.
A growth of the economy is an increase in a country’s economic activity over time; an increase in a country’s productive potential measured by its Gross Domestic Product (GDP).
Gross Domestic Product (GDP) is the total value of goods and services produced in a country in one year.
Nominal Gross Domestic Product (GDP) is expressed in current market prices as of this year.
Real Gross Domestic Product (GDP) has been adjusted for inflation (reflects the rate of price increases in the economy) or deflation (reflects the rate of price decreases in the economy) hence considers past year’s prices.
Positive economic growth
When there is economic growth in the country, Gross Domestic Product (GDP) rises as a result of increases in the physical output of goods and services produced in an economy. More goods and services are produced than what was produced in the previous year.
In countries with high economic growth, higher rates of economic growth suggest that the country is more prosperous. We can say that the average person in that country is earning more income and there are more opportunities for businesses to flourish.
Why is economic growth important to a country?
Achieving high economic growth is important for a country and its citizens for many reasons. Here are just a few of the benefits:
- Higher incomes. The need for higher levels of output being produced by businesses leads to increased employment. Therefore, more new workers need to be hired, or current workers will be paid extra wages for working overtime. This will bring an increase in consumer incomes.
- Higher standard of living. With higher incomes earned, more customers will demand to buy goods and use services of better quality. Hence, this increases their overall standard of living in a country.
- Additional government resources. With higher Gross Domestic Product (GDP), more resources are available for the government through a decreased burden of social expenditure. This will reduce the amount of unemployment benefits that the state will need to pay out as there are only few unemployed people. These additional resources could be used to pursue other five government objectives more effectively. Also, it will reduce the burden of TAXation to further stimulate economic growth.
- Improved public services. Thanks to greater government incomes received from TAXes paid by companies that are now producing and selling more products, and from more workers having employment, more resources can be devoted to desirable public-sector projects, such as public healthcare, public education or various social security programs.
- Poverty alleviation. If high economic growth is substantial enough for a long period of time, and the benefits are properly distributed, it is possible to solve the problem of absolute poverty.
Example 1: In February 2021, China’s President Xi Jinping declared that China had eliminated poverty in 2020 lifting over 100,000,000 members of its rural population out of poverty. Since the campaign started in 2015, the Chinese government has spent over USD$80 billion to end poverty. The government has relocated millions of households from remote rural regions to new villages more suitable for economic development, constructed new roads, houses and other infrastructure projects, as well as offered direct cash transfers as subsidies. Source: https://thediplomat.com/2021/09/how-successful-was-chinas-poverty-alleviation-drive/
What factors lead to economic growth?
The main factors that lead to increases in output are:
1. Increase in economic resources. A country’s economy can increase its total output when more economic resources are available and deployed, such as more labor (a higher working population), more land (increases in availability of land or discovery of new natural resources), more capital (easier access to credit or invention of new technology) and more enterprise (larger pool of entrepreneurs, new start-up companies or more business schools).
2. Increase in productivity. If existing resources such as workers and machines can produce a higher level of output this year than last year, then total output will increase. Higher productivity can also be achieved with more labor force put into work, and introduction of better and faster technology.
3. Expansion of industrial capacity. Governments can encourage business investment and innovation of new technology, new industries and new products. Business investment means expenditure on innovative capital equipment, or spending on Research and Development (R&D).
4. Competitive advantages. The ability to add value, or create value, is critical to achieve growth for firms, industries and countries. It is about having the skill of enterprise to best organize scarce resources (factors of production) in order to create, diffuse and sustain innovation. Moreover, to leverage investments made in science and technology as well as Research and Development (R&D) with the ultimate goal of reaping rewards in terms of wealth creation.
5. Favorable government policies. These measures are going to have impact on businesses. There are several policies that the government and the central bank can both make to speed up economic growth. When it comes to fiscal policy, the government can lower Direct TAX rates, lower Indirect TAX rates and increase government spending. And when it comes to monetary policy, the government can lower interest rates to lower the cost of borrowing in order to stimulate consumption and further investments.
The effects of economic growth on businesses
The conditions of a country’s economy, especially the rate of economic growth, can contribute directly to the success or failure of businesses.
- Increasing sales revenue. Businesses will experience rising demand for their products. During high economic growth, companies will produce more output to fulfill growing demands from the customers who now have more money to spend on goods and services. This will result in growing sales revenue not only due to higher amount of sales, but also as a result of higher prices.
Note 1: What determines price? Supply and demand, mood and momentum.
- Expansion. Business growth will involve recruiting new staff, raising finance, purchasing Fixed Assets such as new machinery, increase in size of current premises or moving to new premises, increasing inventory, acquiring or taking over competitors, etc.
- Security. The overall levels of confidence will be strong during the economic growth. Many customers and managers will feel very positive about the current stage of the economy.
- Planning for the future. There will be many start-up companies being launched on the market. This will result in higher investments, increased recruitment and stocking up inventory.
- Increasing costs. With increasing prices of raw materials, more expensive rents and higher wages for the workers, the costs of production will also increase.
Negative economic growth
In the economy that has negative growth, Gross Domestic Product (GDP) falls as a result of decreases in the physical output of goods and services produced in an economy. Lessgoods and services are produced than what was produced in the previous year.
In countries with low economic growth, negative or lower rates of economic growth suggest that the country is poorer. We can say that the average person in that country is finding it difficult to earn decent income and there are less business opportunities.
What would happen to the country without economic growth?
Without economic growth, then, we can expect the following consequences to happen in a country:
- Negative changes in consumer demand. Businesses will not produce more products and services because the overall population will have less money to spend on consumption and investments.
- Lower standard of living. The average standard of living will decline, and people will become poorer.
- Higher unemployment. Fewer workers are needed and increased rates of unemployment will occur.
There are many restraining forces for businesses that wish to expand which create barriers to economic growth. For example, lack of basic infrastructure, poor access to utilities such as water, electricity and gas, limited transportation networks, weak communication networks, etc.
