- 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 we boost our country’s GDP growth?
Consumers will benefit from tax cuts and refunds because they will have more money in their pockets. In an ideal world, these customers spend a part of their money at numerous businesses, boosting sales, cash flow, and profits. Companies with more cash have the resources to raise finance, upgrade technology, expand, and grow. All of these behaviors boost productivity, which boosts economic growth. Proponents claim that tax cuts and refunds allow customers to stimulate the economy by injecting more money into it.
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 causes a rise in GDP?
In general, there are two basic causes of economic growth: increase in workforce size and increase in worker productivity (output per hour worked). Both can expand the economy’s overall size, but only substantial productivity growth can boost per capita GDP and income.
How can we make our country better?
Most of the world’s developed countries are in Europe and North America, according to the Human Development Index, while significant areas of Africa and Asia remain poor (South America falls somewhere in the middle). In addition to population growth issues, these developing countries must contend with political pressures centered on the employment of environmentally sustainable growth measurespressures that did not exist while the developed world was experiencing its growth boom. Five simple procedures are outlined below to assist in the development of a country and the growth of prospective international trading partners.
Five Easy Steps to Develop a Country
1. Pool your resources
Obviously, the lower the nation’s ecological footprint, the fewer resources an ordinary household needs. While people in developing nations may not be able to buy electric or hybrid cars, they can save money and oxygen by carpooling, riding bikes, and recycling grocery bags.
At the international level, there are already powerful figures calling for the link between poverty alleviation and climate change mitigation. Lord Nicholas Stern, chairman of the Grantham Research Institute on Climate Change and the Environment, cautioned against using high-carbon-intensive resources to assist underprivileged countries. He recently said, “The world is underinvesting in infrastructure, especially in developing countries where there are the greatest unmet requirements.” As a result, he urged governments not to segregate climate and environmental funds from foreign aid, noting that the two must work together to achieve long-term results.
2. Encourage education
From kindergarten fundamentals through sophisticated quantum physics courses at the university, all stages of education are crucial stepping stones to development. Each subject should be taught with the overarching aims of bettering one’s quality of life and improving one’s economic situation in mind. Terrorist groups can’t become stronger without education, and doctors and scientists can’t discover and treat diseases without it. It is one of the most important factors in assisting disadvantaged countries to help themselves. According to studies, the more average years children spend in school, the stronger a country’s economy grows.
3. Women must be empowered.
The most vulnerable groups in a developing country benefit the most from education. Women are the most common demographic among all of these categoriesfarmers, small-scale producers, disease victims, and terrorist groups. Children of both genders are vulnerable, but impoverished boys who do not die young or join terrorist groups are more likely than girls to have enough social mobility to receive an education and leave. Over 70% of girls aged seven to sixteen in Africa’s least educated countriesSomalia, Niger, Liberia, Mali, and Burkina Fasohave never attended school.
Countries may raise their incomes by an average of 23% by empowering women and equalizing educational opportunities. They can do so by building schools closer to rural areas so that farmers’ children don’t have to trek for hours each day to go to and from school, putting a pressure on their parents’ time and finances. As a result, neither parents nor children will feel compelled to choose between farm work and academics, and the poorest populations will be able to make progress.
4. Arrange for key political relations to be negotiated
Americans have witnessed personally what happens when big firms and lobbyists get too close to politicians. When it happens in third-world countries, the poorest and most vulnerable populations suffer the most. This frequently results in violent uprisings with a large number of victims on both sides. There’s a reason why international relations and politics are almost universal undergraduate majors. Aligning with people who wield significant political power and have pitifully few morals rarely benefits the poorer country. As a result, in order to achieve the biggest jumps in ecological, economic, and humanitarian growth, educated people must learn to carefully select their political allies.
5. Reform the food and relief distribution networks
Every day, millions of people throughout the world go hungry. Their problem arises from inefficient distribution networks, not from stinginess among foreign taxpayers. According to Senegalese entrepreneur Magatte Wade, the majority of taxpayer money flowing in from more affluent countries does not truly pay for African or Asian help, partly due to regulatory inadequacies and partly due to theft. She recommended, “Look no further than the people who make the majority of that money.” “That’s where the cash goes.”
Again, the rallying cry should be to assist Africans rather than unskilled aid workers who are unknowingly patronizing them. Rather of investing in resources, shipping, and energy expenses, she believes that Western countries should invest in local African enterprises so that people may better their own circumstances without having to rely on the whims of potentially corrupt and incompetent politicians.
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.
How may India’s GDP be increased?
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.