Mon. Jan 30th, 2023
    Economic growth

    What is Economic Growth?

    Economic growth is a process of changing the economic conditions of a country on an ongoing basis from the goods and services produced by an economy from time to time.

    How is economic growth measured

    Economic growth has two aspects:

    • a quantitative aspect (which can be measured, often by means of GDP )
    • a qualitative aspect (which takes structural transformations into account)

    Economic growth takes place over time and is a mostly irreversible process. It can be measured and is accompanied by phenomena of economic and social transformation. It is also accompanied by a questioning of society ‘s operating rules .

    Structures are the set of relationships and proportions that define a given economic situation.

    How is economic growth calculated?

    Most countries use the GDP indicator to estimate their economic growth. You should know that the GDP corresponds to the value of all the goods and services that a country has produced throughout a year. Growth is measured by the estimate of GDP per capita. Some countries also use gross national product (GNP) as an indicator of economic growth. GNP is defined as the total value of goods and services produced by companies or persons having the nationality of the country, whether they benefit from an establishment in the country or abroad.

    What are the effects of economic growth?

    Strong economic growth will have a positive impact in many areas:

    • increased purchasing power;
    • improvement of the standard of living of the population;
    • increased life expectancy;
    • drop in unemployment;
    • decrease in the poverty rate;
    • political stabilization;
    • etc

    The limits of the measurement

    Measuring economic growth using GDP as an indicator involves certain problems:

    Limits to GDP itself

    An increase in GDP does not necessarily imply an increase in output, and in fact there have been cases where GDP has increased but not output. This is due to facts such as undeclared production, especially when GDP is calculated by adding wages, gross operating surpluses and VAT . Thus, GDP is an indicator sensitive to extra-economic phenomena.

    GDP assessment problems

    Any indicator depends on an assessment, which is done through the price system. But, in certain cases, the prices can move away from the real cost of production. In addition, the valuation of the price system is done through reports sent to companies , which must fill them in with the requested data. When companies don’t know this data, make mistakes when copying it, or simply don’t return the reports, these errors affect the GDP assessment. So, it is an inherently unreliable indicator.

    Limits of GDP per capita

    GDP per capita can count as positive what is actually negative. For example, an AIDS epidemic that killed half of a country’s population but boosted drug production and doctors’ working hours would cause an increase in GDP per capita.

    Externalities

    Externalities are related to the previous point. These are consequences of economic activity that the market does not take into account. For example, a flu vaccination campaign indirectly increases GDP because more people will be able to work instead of staying home sick, but it is not possible to estimate precisely how much GDP has increased because of this. On the other hand, phenomena such as the precariousness of work or the deterioration of the environment are also effects of some types of economic activity that reduce the wealth of a country, but which are not taken into account by the GDP.
    Finding an effective way to measure these externalities would be a very desirable reform in economics.

    What are the consequences of zero growth?

    Zero growth means that the level of wealth created is equivalent to that of the previous year. If, as is the case in France, the population increases from one year to the next, this means that GDP per capita is decreasing. Indeed, more than the growth of a country, what counts the most to evaluate the evolution of the standard of living is the growth per inhabitant, that is to say in relation to the evolution of the population.

    A lack of growth has negative consequences on public finances: tax revenues do not increase, the State has more difficulty reducing its public deficit and repaying its public debt, except by drastically reducing public spending.

    Similarly, this has negative consequences on unemployment, on the ability of borrowers to repay their loans, etc.

    Some voices are raised against this unbridled search for growth, highlighting the ecological, demographic and social dangers of this single objective. Some economists even advocate “degrowth” (i.e. a drop in GDP) to improve the lot of people and the planet.

    Indeed, an increase in production leads to an increase in the consumption of raw materials, the emission of greenhouse gases and the generation of waste. Moreover, as fossil fuels are available in limited quantities, growth would in any case be destined to stop in the more or less short term.

    These criticisms of the quest for ever higher growth are not unfounded. However, many economists point out that technological evolution makes it possible to produce more while limiting the environmental impact. We can also see that, throughout history, technological progress has made it possible to evolve from wood to coal, then from coal to oil and, perhaps in the future, to another source of energy.

    Finally, the economy is becoming more service-oriented, in practically all countries. This means that production is shifting from agriculture and industry to services. Today, about three quarters of French GDP are represented by services, most of which are not or only slightly polluting (education, health, personal assistance, culture, security, advice, etc.).

    If the production and consumption of services increase, then the GDP also increases (which means economic growth), without there being any significant ecological impact.


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    Sources: Consultant4Companies, CleverlySmartPinterPandai, Science DailyTrading EconomicsInvestopediaWorld Bank

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