The external balance of trade is the most essential of all the components that make up a country’s GDP. When the total value of products and services sold by local producers to foreign countries surpasses the total value of foreign goods and services purchased by domestic consumers, a country’s GDP rises. A country is said to have a trade surplus when this happens.
What are three ways for a country’s GDP to grow?
- AD stands for aggregate demand (consumer spending, investment levels, government spending, exports-imports)
- AS stands for aggregate supply (Productive capacity, the efficiency of economy, labour productivity)
To increase economic growth
1. An increase in total demand
- Lower interest rates lower borrowing costs and boost consumer spending and investment.
- Increased real wages when nominal salaries rise faster than inflation, consumers have more money to spend.
- Depreciation reduces the cost of exports while raising the cost of imports, increasing domestic demand.
- Growing wealth, such as rising house values, encourages people to spend more (since they are more confident and can refinance their home).
This represents a rise in total supply (productive capacity). This can happen as a result of:
- In the nineteenth century, new technologies such as steam power and telegrams aided productivity. In the twenty-first century, the internet, artificial intelligence, and computers are all helping to boost productivity.
- Workers become more productive when new management approaches, such as better industrial relations, are introduced.
- Increased net migration, with a particular emphasis on workers with in-demand skills (e.g. builders, fruit pickers)
- Infrastructure improvements, greater education spending, and other public-sector investments are examples of public-sector investment.
To what extent can the government increase economic growth?
A government can use demand-side and supply-side policies to try to influence the rate of economic growth.
- Cutting taxes to raise disposable income and encourage spending is known as expansionary fiscal policy. Lower taxes, on the other hand, will increase the budget deficit and lead to more borrowing. When there is a drop in consumer expenditure, an expansionary fiscal policy is most appropriate.
- Cutting interest rates can promote domestic demand. Expansionary monetary policy (currently usually set by an independent Central Bank).
- Stability. The government’s primary job is to maintain economic and political stability, which allows for normal economic activity to occur. Uncertainty and political polarization can deter investment and growth.
- Infrastructure investment, such as new roads, railway lines, and broadband internet, boosts productivity and lowers traffic congestion.
Factors beyond the government’s influence
- It is difficult for the government to influence the rate of technical innovation because it tends to come from the private sector.
- The private sector is in charge of labor relations and employee motivation. At best, the government has a minimal impact on employee morale and motivation.
- Entrepreneurs are primarily self-motivated when it comes to starting a firm. Government restrictions and tax rates can have an impact on a business owner’s willingness to take risks.
- The amount of money saved has an impact on growth (e.g. see Harrod-Domar model) Higher savings enable higher investment, yet influencing savings might be difficult for the government.
- Willingness to put forth the effort. The vanquished countries of Germany and Japan had fast economic development in the postwar period, indicating a desire to rebuild after the war. The UK economy was less dynamic, which could be due to different views toward employment and a willingness to try new things.
- Any economy is influenced significantly by global growth. It is extremely difficult for a single economy to avoid the costs of a global recession. The credit crunch of 2009, for example, had a detrimental impact on economic development in OECD countries.
In 2009, the United States, France, and the United Kingdom all went into recession. The greater recovery in the United States, on the other hand, could be attributed to different governmental measures. 2009/10 fiscal policy was expansionary, and monetary policy was looser.
Governments frequently overestimate their ability to boost productivity growth. Without government intervention, the private sector drives the majority of technological advancement. Supply-side measures can help boost efficiency to some level, but how much they can boost growth rates is questionable.
For example, after the 1980s supply-side measures, the government looked for a supply-side miracle that would allow for a significantly quicker pace of economic growth. The Lawson boom of the 1980s, however, proved unsustainable, and the UK’s growth rate stayed relatively constant at roughly 2.5 percent. Supply-side initiatives, at the very least, will take a long time to implement; for example, improving labor productivity through education and training will take many years.
There is far more scope for the government to increase growth rates in developing economies with significant infrastructure failures and a lack of basic amenities.
The potential for higher growth rates is greatly increased by providing basic levels of education and infrastructure.
The private sector is responsible for the majority of productivity increases. With a few exceptions, private companies are responsible for the majority of technical advancements. The great majority of productivity gains in the UK is due to new technologies developed by the private sector. I doubt the government’s ability to invest in new technologies to enhance productivity growth at this rate. (Though it is possible especially in times of conflict)
Economic growth in the UK
The UK economy has risen at a rate of 2.5 percent each year on average since 1945. Most economists believe that the UK’s productive capacity can grow at a rate of roughly 2.5 percent per year on average. The underlying trend rate is also known as the ‘trend rate of growth.’
Even when the government pursued supply-side reforms, they were largely ineffective in changing the long-run trend rate. (For example, in the 1980s, supply-side policies had minimal effect on the long-run trend rate.)
The graph below demonstrates how, since 2008, actual GDP has fallen below the trend rate. Because of the recession and a considerable drop in aggregate demand, this happened.
- Improved private-sector technology that allows for increased labor productivity (e.g. development of computers enables greater productivity)
- Infrastructure investment, such as the construction of new roads and train lines. The government is mostly responsible for this.
How can GDP be a deceptive indicator of happiness?
GDP is a rough indicator of a society’s standard of living because it does not account for leisure, environmental quality, levels of health and education, activities undertaken outside the market, changes in income disparity, improvements in diversity, increases in technology, or the cost of living.
What factors influence GDP?
The growth of the Gross Domestic Product (GDP) has a direct impact on businesses. Firms can be a little more aggressive and grow with the economy in an expanding economy with growing GDP, however businesses in a shrinking economy with negative GDP growth must dramatically cut spending and refocus on revenue stream, market, and strategy. Understanding important elements that drive GDP growth will be beneficial to business management.
Labor productivity and total hours worked by a country’s labor workforce have the greatest impact on GDP growth. (GDP is calculated by multiplying labor productivity by the size of the labor force.) The money earned by one labor-hour in the country is known as labor productivity. It indicates that as labor productivity rises, so does real GDP per person (provided hours worked in a year do not decrease). The rising work force is responsible for the increase in total hours worked. It means that as the labor force shrinks, the actual GDP shrinks as well (provided gains in productivity are higher than the reduction in the size of the labor work force). We can attain quicker real GDP growth if both worker productivity and the size of the labor force expand at the same time.
Now the question is how to boost labor productivity. The simple answer is that we increase labor productivity by saving and investing in physical capital (plants, equipment, and machines that generate revenue and increase revenue output per worker) and developing human capital (improving the skill and knowledge of the workforce or people who will enter the workforce). It means that investing in people’s education and training can help them work more efficiently. We also see increases in labor productivity as employees become more comfortable in their daily routines (troubleshooting problems faster and proactively addressing issues) and hence boost production (or GDP).
Another important component that must be included into a country’s culture if it is to continue to improve worker productivity is innovation. Building and strengthening the country’s education system around innovation is what innovation entails. This entails both public and private sector institutions investing in research and development. The development of new technology will boost productivity. (This means that top-notch school and college education, as well as excellent universities with a strong concentration on R&D, will be critical to a country’s competitiveness.) Consider how information technology has advanced (or revolutionized) in the previous 20 years, helping people and businesses to be more productive (new technologies emerged in businesses based on powerful internet, network, communication tools, making business more productive). Humans have multiplied their economic production thanks to advances in science and technology. For example, due to the introduction of new manufacturing methods and technology, outputs of food grains and other items grew by a factor of ten).
Faster GDP growth is also aided by good infrastructure. With stronger infrastructure, goods are moved quickly from one location to another, enhancing our production. Entrepreneurs turn R&D insights into real-world business products. As a result, a culture that encourages entrepreneurship aids GDP growth.
The size of our workforce is another important factor that has a significant impact on actual GDP. The size of the workforce in many nations is reducing (particularly in European countries) as a result of negative demographic shifts, putting tremendous strain on the growth of real GDP in these countries. On the other hand, in nations such as China and India, the big workforce has become a significant strength (technology has helped enhance workforce productivity along with the huge world market available to the economies due to removal of trade barriers). If the workforce in these countries is educated and skilled, this workforce will become even more advantageous to these countries. It’s no surprise, then, that China and India are currently spending heavily in labor education and training. Many industrialized economies’ declining workforces will continue to be a source of concern in terms of economic growth. The ancient belief that a lower population is preferable because fewer people put less strain on limited natural resources and hence share a larger share of the fixed size of the economic pie (Malthusian theory) is increasingly being called into doubt. Science and technology innovation has enlarged the size of the economic pie for everyone. The revolution in agriculture production brought about by improved seeds, fertilizers, pesticides, and new farming methods allowed agriculture outputs to be multiplied several times. New technologies have enabled the introduction of new products to the market that have increased productivity. Automobiles, computers, other IT equipment (network, phones), new medical technologies, and new medicines, for example, have enabled unrestricted economic growth. In industrialized economies, innovative pollution management measures have helped to minimize pollution in water and air, and progress has been made toward achieving long-term environmental performance. Alternative energy sources such as solar, wind, nuclear, and hydrogen are being investigated. It appears that as long as new technologies exist, new products will continue to enter the market and be purchased by consumers, allowing economic output to rise. Some countries are unable to profit from this expansion due to their shrinking populations. As a result, these economies’ overall growth rates are either flat or negligible.
The key question is whether this never-ending growth has a limit due to deteriorating environmental conditions (global warming) or other natural resource constraints. Again, it appears that human beings will continue to find ways to thrive while also managing environmental challenges, owing to their inquisitiveness, bravery, and enterprising nature. Labor productivity will continue to rise if this is true. If this is the case, the size of the workforce will be a major determinant of real GDP growth. It means that for countries with a diminishing workforce, one viable answer is to encourage their current population to expand their workforce (by providing financial incentives to have children) while also encouraging legal immigration of talented and educated workers.
Immigration has long been a political and social concern in the United States. Yes, illegal immigration must be prevented, otherwise the new country will have law and order issues. From the standpoint of economic growth, legal immigration may be beneficial. For these countries with falling populations, immigration of skilled and educated workers will be a huge benefit, and they will be able to boost GDP growth with this approach. Still, some natives may be concerned about the social implications of the expanding immigrant population. Locals may believe that competent and less expensive immigrants are stealing their employment, producing social instability and emotional prejudices against lawful immigration. Though immigration policy in the United States helped the United States gain a significant competitive advantage over other countries in terms of research and development (R&D) and the development of new technologies in the twentieth century, the issue of immigration must be handled carefully (by taking good care of those who may be displaced to other jobs as a result of immigration). These displaced workers must receive proper training and placement assistance in order to locate alternative employment prospects based on their individual comparative advantage).
In conclusion, enhancing worker productivity and expanding the workforce can help to maintain or boost real GDP growth. Savings and investments in physical and human capital can help to boost worker productivity. It implies that we must invest in people’s training and education. We must invest in research and development as well as new technology. Entrepreneurship must be encouraged. We must also invest in infrastructure and develop and maintain effective ways of transportation (roads, bridges, and rail and sea transportation). Finally, we must increase the size of our personnel in a manner that is both acceptable and prudent.
What can we do to boost GDP growth?
As a result, India appears to be on track to earn the title of world’s fastest-growing big economy this year and keep it next year.
Keep in mind that, although the Chinese economy grew by 2.3 percent in FY21, the Indian economy shrank by 7.3 percent as a result of the Covid-19 pandemic.
China’s economic growth slowed more than predicted in the third quarter, owing to a failing property industry that is facing stricter policy measures and an impending energy crisis.
According to The Economist, China’s economic growth is currently being hampered by a “triple shock from energy, property, and the epidemic.”
The difficulties of Evergrande, the insolvent Chinese property giant, are already well-known around the world.
Another stumbling block is the Chinese government’s draconian controls on the country’s tech firms.
India’s growth forecasts for FY22 have been kept at 9.5 percent by the Reserve Bank of India and Standard & Poor’s.
Then there’s the ongoing export boom, which is accompanied by increased tax revenue and lower inflation.
Another good area is the decreasing amount of bad debt burdening the financial system.
Let’s not forget about the soaring corporate earnings, the upbeat industrial production figures, and the ever-increasing number of unicorns.
There are also government initiatives such as Gati Shakti and asset monetisation that are projected to gain traction.
However, significant worries remain about whether high development can be continued in the medium future.
If the forecasts for FY22 and FY23 come true, India will experience the high growth rates of the 2000s once more. However, much work remains to be done if that pace is to be maintained in the future.
How may a country’s GDP per capita be increased?
- Education and training are important. Individuals with more education and work skills can generate more goods and services, start businesses, and make more money. As a result, GDP rises.
- Infrastructure is in good shape. Without a working power system and excellent roads, a country’s ability to manufacture and export things is constrained, and businesses’ ability to deliver services is limited. It is feasible to dramatically expand the economy and boost per capita income by investing in good infrastructure, which includes telecommunications.
- Limit the population. China has a population of over a billion people. It has been authorized for decades to allow only one kid per family to minimize the population. Lowering the population can boost GDP per capita, but forcing families to do so is a cruel approach.
What impact does GDP have on the economy?
GDP is significant because it provides information on the size and performance of an economy. The pace of increase in real GDP is frequently used as a gauge of the economy’s overall health. An increase in real GDP is viewed as a sign that the economy is performing well in general.
What are the four economic growth factors?
Factors of production are the materials and services that businesses require to create goods and services. They are able to benefit as a result of this. The concept of these components may be traced back to neoclassical economics, which combined historic economic theories with other concepts such as labor. Land, labor, capital, and entrepreneurship are the four components of production, as stated previously. The factors of production are defined by the Federal Reserve Bank of St Louis as follows:
What effect does GDP have on happiness?
Higher GDP levels are virtually usually linked to increased life expectancy, higher literacy rates, better nutrition and health care, and significantly more and better communication options (e.g. telephones and television sets). These are critical variables that influence people’s well-being.
What are the drawbacks of GDP?
It does, however, have some significant drawbacks, including: Non-market transactions are excluded. The failure to account for or depict the extent of income disparity in society. Failure to indicate whether or not the country’s growth pace is sustainable.