- 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.
What are three approaches to boost GDP?
- The monetary worth of all finished goods and services produced inside a country during a certain period is known as the gross domestic product (GDP).
- GDP is a measure of a country’s economic health that is used to estimate its size and rate of growth.
- GDP can be computed in three different ways: expenditures, production, and income. To provide further information, it can be adjusted for inflation and population.
- Despite its shortcomings, GDP is an important tool for policymakers, investors, and corporations to use when making strategic decisions.
What variables would cause the GDP to rise?
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 makes an economy strong?
Question from a reader: Is a robust economy always accompanied by a strong currency?
In other words, a strong currency is a sign of a thriving economy. When the economy is performing well and the economy is in a boom phase, higher interest rates are needed to keep inflation low. Higher interest rates will attract hot money flows and increase currency demand. A healthy economy will boost people’s confidence in their currency. A robust economy may also indicate that the economy is growing more productive and competitive in the long run, resulting in increased demand for exports and hence the currency.
However, there is no assurance that a healthy economy will result in a rise in the currency’s value. In some conditions (poor export growth, rising inflation), a healthy economy could lead to a currency depreciation.
Exchange rates can also fluctuate due to market sentiment (for example, correcting an overvaluation) that has little to do with economic performance.
What is a strong economy?
- Economic growth at a rapid pace. This indicates an increase in economic output, which will result in increased average earnings, output, and expenditure.
- Inflation is low and consistent (though if growth is very high, we might start to see rising inflation)
Why does a strong economy cause a strong currency?
Germany and Japan both had outstanding postwar economic performances, characterized by high levels of investment and rapid productivity and competitiveness gains. German and Japanese exports are becoming more competitive in the global market as a result of these productivity advances. The demand for their exports increased. As a result, the German mark and the Japanese yen have steadily appreciated. High growth, low inflation, and a sustained currency appreciation characterized the economies.
Investors seeking to profit from economic stability will flock to countries with a solid track record of economic growth, political stability, and a stable currency. Investors prefer to save in dollars and euros since these currencies have historically held their value well due to robust and stable economic performance.
An economy with a track record of bad performance (low growth, fluctuating inflation rate), on the other hand, is considerably more likely to have a volatile currency. For example, a drop in the price of oil prompted investors to sell currencies such as the Russian Rouble and the Venezuelan Bolivar, causing these economies to weaken significantly.
In the short term, if an economy sees relatively high rates of economic growth, interest rates are likely to rise as the Central Bank responds by raising interest rates in response to stronger growth and potential inflationary pressures.
Higher interest rates result in ‘hot money flows,’ in which foreigners want to save in that country to benefit from higher returns. The exchange rate rises as a result of this.
Since emerging from recession in 2010, the US economy has outperformed several of its competitors, including the Eurozone, Japan, and the United Kingdom. The US economy has grown faster, and unemployment has dropped to 4%. As a result, the US has raised interest rates faster than Japan and the Eurozone, two of its biggest competitors. As a result, the value of the dollar has increased by almost 20% since 2009. This backs up the theory that a strong currency follows a time of robust growth.
This has been a moment of economic uncertainty, with the global economy still reeling from the effects of the financial crisis. The US dollar’s position as a worldwide reserve currency makes it a relatively safe choice when compared to the alternatives.
The sudden rise of the dollar in the middle of the 2008-2009 recession is an interesting point on the graph. Between mid-2008 and mid-2009, the dollar appreciated by almost 20% in just a few months. This was despite the fact that:
This demonstrates that the link between a robust economy and a strong currency can be broken in the near run. In 2008-09, a global crisis of trust drove investors to flee emerging nations in search of “relative safety” in the United States. As a result, the dollar appreciated despite a relatively weak economy in the short run. The dollar’s rise in this situation was primarily owing to the United States’ long-term reputation.
Weak dollar 2000-2008
The excellent economic performance of the 1990s resulted in a dollar appreciation, as one might expect.
However, the decade from 2002 to 2008 was likewise characterized by robust economic growth, although the dollar suffered a significant loss (about 25%). The relatively strong US performance in the 2000s appeared to have a negative link with a strong dollar.
A significant current account imbalance exists. The United States’ expansion in the 2000s was marked by a current account deficit (imports greater than exports). A current account deficit tends to put downward pressure on a currency since demand for imported goods is stronger than demand for domestic ones.
This demonstrates that it is contingent on the type of’strong economic development.’ When growth is driven by exports and fueled by increased productivity, the currency tends to do better. When growth is driven by consumers and reliant on imports the currency tends to weaken.
Another consideration is that currencies are exchanged on currency exchanges and are susceptible to market sentiment. A lengthy depreciation in the currency might sometimes be viewed as a simple’market correction’ to a past overvaluation. There isn’t always a direct correlation between a currency’s performance and the economy’s.
What is the formula for GDP?
Gross domestic product (GDP) equals private consumption + gross private investment + government investment + government spending + (exports Minus imports).
GDP is usually computed using international standards by the country’s official statistical agency. GDP is calculated in the United States by the Bureau of Economic Analysis, which is part of the Commerce Department. The System of National Accounts, compiled in 1993 by the International Monetary Fund (IMF), the European Commission, and the Organization for Economic Cooperation and Development (OECD), is the international standard for estimating GDP.
Is a higher or lower GDP preferable?
Gross domestic product (GDP) has traditionally been used by economists to gauge economic success. If GDP is increasing, the economy is doing well and the country is progressing. On the other side, if GDP declines, the economy may be in jeopardy, and the country may be losing ground.
In 2021, what would India’s GDP be?
In its second advance estimates of national accounts released on Monday, the National Statistical Office (NSO) forecasted the country’s growth for 2021-22 at 8.9%, slightly lower than the 9.2% estimated in its first advance estimates released in January.
Furthermore, the National Statistics Office (NSO) reduced its estimates of GDP contraction for the coronavirus pandemic-affected last fiscal year (2020-21) to 6.6 percent. The previous projection was for a 7.3% decrease.
In April-June 2020, the Indian economy contracted 23.8 percent, and in July-September 2020, it contracted 6.6 percent.
“While an adverse base was expected to flatten growth in Q3 FY2022, the NSO’s initial estimates are far below our expectations (6.2 percent for GDP), with a marginal increase in manufacturing and a contraction in construction that is surprising given the heavy rains in the southern states,” said Aditi Nayar, Chief Economist at ICRA.
“GDP at constant (2011-12) prices is estimated at Rs 38.22 trillion in Q3 of 2021-22, up from Rs 36.26 trillion in Q3 of 2020-21, indicating an increase of 5.4 percent,” according to an official release.
According to the announcement, real GDP (GDP) or Gross Domestic Product (GDP) at constant (2011-12) prices is expected to reach Rs 147.72 trillion in 2021-22, up from Rs 135.58 trillion in the first updated estimate announced on January 31, 2022.
GDP growth is expected to be 8.9% in 2021-22, compared to a decline of 6.6 percent in 2020-21.
In terms of value, GDP in October-December 2021-22 was Rs 38,22,159 crore, up from Rs 36,22,220 crore in the same period of 2020-21.
According to NSO data, the manufacturing sector’s Gross Value Added (GVA) growth remained nearly steady at 0.2 percent in the third quarter of 2021-22, compared to 8.4 percent a year ago.
GVA growth in the farm sector was weak in the third quarter, at 2.6 percent, compared to 4.1 percent a year before.
GVA in the construction sector decreased by 2.8%, compared to 6.6% rise a year ago.
The electricity, gas, water supply, and other utility services segment grew by 3.7 percent in the third quarter of current fiscal year, compared to 1.5 percent growth the previous year.
Similarly, trade, hotel, transportation, communication, and broadcasting services expanded by 6.1 percent, compared to a decline of 10.1 percent a year ago.
In Q3 FY22, financial, real estate, and professional services growth was 4.6 percent, compared to 10.3 percent in Q3 FY21.
During the quarter under examination, public administration, defense, and other services expanded by 16.8%, compared to a decrease of 2.9 percent a year earlier.
Meanwhile, China’s economy grew by 4% between October and December of 2021.
“India’s GDP growth for Q3FY22 was a touch lower than our forecast of 5.7 percent, as the manufacturing sector grew slowly and the construction industry experienced unanticipated de-growth.” We have, however, decisively emerged from the pandemic recession, with all sectors of the economy showing signs of recovery.
“Going ahead, unlock trade will help growth in Q4FY22, as most governments have eliminated pandemic-related limitations, but weak rural demand and geopolitical shock from the Russia-Ukraine conflict may impair global growth and supply chains.” The impending pass-through of higher oil and gas costs could affect domestic demand mood, according to Elara Capital economist Garima Kapoor.
“Strong growth in the services sector and a pick-up in private final consumption expenditure drove India’s real GDP growth to 5.4 percent in Q3.” While agriculture’s growth slowed in Q3, the construction sector’s growth became negative.
“On the plus side, actual expenditure levels in both the private and public sectors are greater than they were before the pandemic.
“Given the encouraging trends in government revenues and spending until January 2022, as well as the upward revision in the nominal GDP growth rate for FY22, the fiscal deficit to GDP ratio for FY22 may come out better than what the (federal) budget projected,” said Rupa Rege Nitsure, group chief economist, L&T Financial Holdings.
“The growth number is pretty disappointing,” Sujan Hajra, chief economist of Mumbai-based Anand Rathi Securities, said, citing weaker rural consumer demand and investments as reasons.
After crude prices soared beyond $100 a barrel, India, which imports virtually all of its oil, might face a wider trade imbalance, a weaker rupee, and greater inflation, with a knock to GDP considered as the main concern.
“We believe the fiscal and monetary policy accommodation will remain, given the geopolitical volatility and crude oil prices,” Hajra added.
According to Nomura, a 10% increase in oil prices would shave 0.2 percentage points off India’s GDP growth while adding 0.3 to 0.4 percentage points to retail inflation.
Widening sanctions against Russia are likely to have a ripple impact on India, according to Sakshi Gupta, senior economist at HDFC Bank.
“We see a 20-30 basis point downside risk to our base predictions,” she said. For the time being, HDFC expects the GDP to rise 8.2% in the coming fiscal year.
What causes a drop in GDP?
Shifts in demand, rising interest rates, government expenditure cuts, and other factors can cause a country’s real GDP to fall. It’s critical for you to understand how this figure changes over time as a business owner so you can alter your sales methods accordingly.
What are the four variables that influence GDP?
Personal consumption, business investment, government spending, and net exports are the four components of GDP domestic product. 1 This reveals what a country excels at producing. The gross domestic product (GDP) is the overall economic output of a country for a given year. It’s the same as how much money is spent in that economy.
How can India boost its GDP?
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 fact that China’s government has