Thereare several approaches that can be used to define economic growth. Itis defined as the increase in market value of goods and services inthe economy within a given period. The value is measured afterinflation adjustment. Therefore, economic growth represents a generalincrease in the outputs (Acemoglu, 2011). in acountry is measured using the real gross domestic product (GDP). Therate of economic growth is calculated as the rate of change in grossdomestic product over a given period. This means that growth in theeconomy indicates an increase in GDP. It also indicates an expansionof the economy towards its productive potentials resulting intoincreased output (Acemoglu, 2011). has implication onother macroeconomic factors such as growth drivers and indicators.For example, economic growth is an indication of changes in physicalcapital stock, size and quality of human capital, technology, andfinancial institutions (Arnold, 2014).
Manybenefits are associated with steady economic growth in a country. Asa result, economic growth is the desire of many nations. However,there are some challenges related to long periods of economicexpansion. is associated with improved quality oflife. This is because it has a direct impact on the levels ofpoverty, employment opportunities, productivity of labor, disposableincome and quality of consumables available in the markets. It isalso linked with positive impacts on other aspects of life such asimproved health care services, educational availability andachievements, food security, social services and civil liberties(Acemoglu,2011).Increased productivity in the economy results in an increase in wagesand reduced earning disparity. A stronger economic system isself-sustaining. This is essential in reducing sovereignty debts andgovernment borrowing, both internally and externally. Increasedproductivity results in increased government revenue through taxesand other levies. Since the government is one of the largestspenders in the economy, the increased government spending sustains ahealthy economy. Additionally, there is increased investment inpublic services and infrastructures. Although there are negativeimpacts of economic growth, the benefits outweigh the challenges(Acemoglu,2011).
Thereare several problems that are likely to emerge as a result ofeconomic growth. However, this does not make expansion of the economyundesirable. As a result of increased demand compared to theaggregate supply, an expanding economy results in an increase incommodity prices. Consequently, structural inflation becomesinevitable (Acemoglu, 2011). The most significant negativeexternalities related to the fast expansion of the economy areenvironmental concerns and economic crimes. In the modern world,steady economic growth is supported by a well-developed manufacturingand service sectors as well as extensive agriculture. Thesedevelopments are linked to increased demand for energy andenvironmental pollution. A rise in gross domestic product orproductivity in the economy is accompanied by more industrialactivities and road congestions which increase demand for uncleanenergy (Shahbaz et al, 2013). It also increases the demand foragricultural commodities resulting in deforestation and extensiveagricultural activities. Other concerns included over-exploitation ofnatural resources and piling of domestic and industrial wastes. Avibrant economy will also attract unscrupulous business entities andorganized criminal groups. As a result, economic crimes and othersocial problems are likely to emerge in a rapidly growing economy(Maddison, 2014). Other social and economic evils such as incomeinequality and exploitation of workers are likely to be more common.For example, when the Chinese economy was growing rapidly in the lastthree decades, the Gini coefficient was also increasing swiftly.Statistics indicates that economic growth has a negative impact onincome inequalities. It is also important to note that the growth canbe unsustainable because of both macroeconomic and microeconomicfactors (Li et al, 2013). For example, if the economy depends onnatural resources, the growth will be affected by depletion of theresource.
Distinguishingbetween slow economic growth and economic growth is important.Usually, slow economic growth describes a stagnation of the economy.While economic growth is accompanied by increased productivity,stagnation is characterized by insignificant or no increase in grossdomestic product. Fast economic growth results in increased output,while a slow economic growth is associated with periods of panic andrecession. Consequently, it leads to a wide range of economicproblems at the national and individual level, mainly increasedunemployment and reduced disposable income (Acemoglu & Robinson,2012).
Thereare several microeconomic and macroeconomic factors that have adirect impact on economic growth rates in the short run and the longrun. They include increased capital investment, human capital andlabor productivity, discovery of raw materials and new technologyamong others (Hunt & Lautzenheiser, 2014). Traditionally, beforethe industrialization and technology development took control overeconomic progress, the gross domestic product was dependent onpopulation growth. As a result, countries with higher populationgrowth rate had a steady expansion of the economy. However, this waschecked by demand and supply of food and other essential resources aswell as diseases outbreaks, human conflicts and natural calamities.The phenomenon is supported by modern economic theories which arguedthat economic growth is dependent on productivity and consumption.While productivity in the contemporary society is reliant on theindustrial innovations and technology, the availability of humancapital played an essential role in the past (Hunt &Lautzenheiser, 2014). Despite these changes, demographic factors haveenormous economic impacts. Changes in population and demographiccharacteristics have an impact on consumer power as well asproductivity of the economy. They have an influence on the rate ofunemployment and the level of participation in economic activities. For example, a youthful population has more contribution to theeconomy compared to the elderly members of the society. Additionally,changes such as increased number of women in employment reduce thenumber of dependents per household and thus accumulation of wealth.Demographic changes can also result in spending waves, which canspark economic growth (Arnold, 2014).
Today,output in an economy is dependent on the level of industrializationand advancement in technology. Countries that have more developedmanufacturing sectors and can adopt the most recent technologies havesustainable per capita growth. The main reason why technology canpromote sustainable productivity is because it supports massproduction. Technological advancement in the 20th century broughtabout automation in manufacturing and agriculture resulting intorapid increase in GDP. Other factors have a direct impact on economicgrowth. They included political institutions and stability in thecountry. The political systems adopted by nations, such ascapitalism, socialism, and communism has a direct impact on economicexpansion. They have a bearing on the policies adopted by thegovernment as well as economic freedoms. For example, some politicalsystems support policies that favor economic activities, investments,and development of supporting infrastructures (Maddison, 2014). Onthe other hand, political instability and uncertainty have adverseeffects on economic activities and productivity. They result inincreased economic and financial risks and less investment in basicinfrastructures. Consequently, it discourages productive economicactivities. For example, countries that have experienced violentpolitical competition, unstable governments and civil wars experiencea decline in productivity and thus economic slowdown (Maddison,2014).
Thegovernment plays a critical role in the economy. The actions andinactions by the government can result in economic growth orstagnation. The function is determined by the social, political andeconomic policies adopted by the government. It promotes economicgrowth by providing a legal and regulatory framework that supportbusiness activities. The structure creates an open and transparentsystem that is fair to all players. For example, several regulatoryagencies have legal mandate of implementing standards in specificsectors. It is also responsible for creating a stable environment inwhich business activities can thrive. It is done through policiesthat protect business organizations from economic and non-economicrisks such as inflation, economic recessions, crime or civil unrests(Acemoglu & Robinson, 2012). Economic activities are influencedby enabling infrastructures such as transport and communicationfacilities as well as training institutions. The government canaffect productivity of the economy through investment in thesesupporting structures. Another important role it can play in theeconomy is to facilitate businesses. For example, it can promotelocal and foreign direct investments in the country through promotionagencies and incentives. It can also offer direct and indirectassistance to business organizations through tariffs permits, taxholidays, subsidies, and social security. As stated earlier, thegovernment is a major consumer in the economy. Its expenditure canhave an enormous impact on the economy due to increased consumption,which increases the demand for the commodity in the market (Li etal., 2013).
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