Wednesday, February 2, 2011

Term Paper on Economic Growth

Term Paper on Economic Growth

What is economic growth and how is it measured. What are some of the factors that inhibit growth. Using specific examples, show how some countries have achieved high rates of economic development.

Economic growth is the ability of a nation to expand it productive capacity, resulting in an increased aptitude to satisfy the material wants of the nation. It occurs as a consequence of the increased availability of goods and services available for consumption and/or investment by the people.

Economic growth is measured as the rate of change of the total output of all final goods and services produced within a nation over a specified period of time (usually a year). Gross Domestic Product (GDP) is the most common measure of economic growth, measuring the total market value of final goods and services in a nation during a twelve month period.

The Australian Bureau of Statistics (ABS) measures economic growth in four ways by GDP (at average 1989-90 prices (that is, the calculation of real GDP)):
1. GDP (P) - is a production measure of GDP which calculates the value added in each stage of production in the production of final goods and services;
2. GDP (E) - is an expenditure measure which calculates GDP according to the total expenditure of consumers, business and governments within a nation on final outputs (that is, sales receipts on final goods and services);
3. GDP (I) - is the total of incomes received by the owners of productive goods and services (for example, wages; salaries; supplements; and gross operating surplus); and
4. GDP (A) - is an average of GDP (P), GDP (E) and GDP (I) measures of GDP to achieve a standard measure of the rate of economic growth.


There are a large number of factors which inhibit the economic growth of a nation, that is, there is a large number of components within a nation's economy which hinder the rate of economic growth. These components can include:

- Scarcity of Physical Capital - nations which have low economic growth rates often find it difficult to accumulate capital as they find themselves caught in the trap of underdevelopment. That is to say that nations with low per capita incomes have low savings rates due to the need to spend money on goods and services (such as foods) to survive. These low savings cause there to be a shortage of funds available for investment in capital goods resulting in the low productivity rates of labour, maintaining the low level of incomes. Similarly, the low per capita incomes limit the size of markets for goods and services, due to the restrictions on consumers' disposable incomes since they have low incomes. This results in a weak demand for goods and services reducing the available funds to business firms available for investment in capital goods, and the cycle continues.

- Low levels of Domestic Savings - economic growth is limited when there are low levels of savings. This is a major problem when there are also low income levels within the nation as savings are required for the nation to have investment. As a result of this, low savings levels obstruct the accumulation of new capital. Due to the lack of capital, the productivity of labour remains low impeding on the rate of economic development.

- Lack of Supporting Infrastructure - as a result of insufficient infrastructure, the economic growth of a nation can be lessened. The inadequacy of infrastructure, such as roads, railways, public transport and communication networks can result in labour being used below their productive potential (that is, labour is under utilised) as labour may not be able to reach the business/industry (e.g. finance) to which it has the comparative advantage, and consequently the rate of economic development is lowered.

- Population Problems - excessive population growth rates (often in excess of four times that of developed nations) can impede the rate of economic growth within a nation. High birth rates (50 per 1000 population) and declining death rates (due to advances in medical science) have resulted in this rapid population growth. The high population growth rate places increasing pressure on scarce resources, and if combined with the population growth rate outstripping the growth of real GDP, a decline in real GDP per capita (economic growth) can occur.

- Trade Problems - the economic growth of a nation can be hindered by their dependence on a narrow export base comprising principally of primary products (agriculture and mining). These commodity prices are often subject to large and unfavourable movements on world markets and nations dependent on these products often face great challenges in selling their goods on export markets due to the protectionist policies of other nations. Also, these primary products often are forced into competition with synthetic substitutes limiting the potential for increased production, and impeding the rate of economic growth.

- Foreign Debt Problems - as a consequence of current account problems experienced by the nation, often due to their lack of export products and markets, and their substantial demand for consumer and capital goods. Frequently funds were required to balance the budget and this diverted the funds away from investment resulting in reduced rates of economic growth.

- Lack of Appropriate Technology - as an effect of the lack of appropriate technology, the economic growth of a nation can be lowered. This is due to introduced technology (such as machinery) being labour replacing, increasing the rate of unemployment in labour intensive industries (such as textiles)

- Institutional Problems -F institutional aspects of a nation can inhibit the rate of economic growth as political instability and corruption can undermine foreign investor confidence as there is a possibility that their investment may be undermined by political situations such as riots. Similarly, social and cultural obstacles can inhibit the adaptation of new technology to increase productivity if it conflicts with traditional customs, limiting the rate of economic growth.

Some nations have managed to achieve high levels of economic growth and development. To achieve these high levels of growth, these nations have adopted strategies including:

- Encouraging Investment
In 1962 Korea adopted a governmental policy to guarantee foreign investment within the country. This guarantee increased the international confidence of investors in the Korean economy as their investment was guaranteed by the state. The political stability of Korea was also well known within the international community due to the strong, repressive government which implemented many policies, such as reducing tariffs and initiating tax holidays which increased the incentives for investment from foreign investors.

- Capital Accumulation
Large investments in infrastructure by the Taiwanese, such as ports, railroads and nuclear power plants have increased the economic growth rates of Taiwan as the supporting infrastructure for industries has been provided increasing the ability of a business firm to develop new markets for their goods and services as well as encourage businesses to invest in capital which increases the productivity of the business and the satisfaction of consumer wants. Also, the Taiwanese government reduced the business tax rate from 32.5% to 18% and provided monetary incentives to businesses for the accumulation of capital.

- Expansion of Export Industries
From 1958, the Taiwanese government initiating policies which favoured industries which exported their goods and services as they realised that exports provided the nation with many benefits. These benefits included foreign currency earnings, reduced current account deficits and greater economic independence as they required fewer loans to balance their budget. Policies initiated by the Taiwanese government included the promotion of Taiwanese exports in other nations, 5-year tax holidays for export orientated industries. These incentives encouraged Taiwanese business firms to invest in capital which increased their productive capacity, and hence rate of economic development.
Korea developed light industries for export which were complementary to, but not in competition with, export industries developed by Japan, the European Community and the US. This allowed the Korea to improve its economic growth rate by reducing its current account deficit by increasing the value of its exports, increasing the nominal value of funds available for investment by Korean firms as fewer loans were required to cover the current account deficit.

- Sectoral Balance
The Taiwanese government provided incentives for Taiwanese business firms to shift away from primary industries (agriculture and mining) to secondary and tertiary industries (manufacturing and services) through the transfer of capital from agricultural production to industrial through the compulsory collection of rice and government controlled supply resulting in short term funds being made available for the development of these industries. These secondary and tertiary industries are more profitable to the Taiwanese nation as they add value to the raw product and are more easily exported to other nations improving the balance of trade and encouraging these business firms to increase their production, hence encouraging high rates of economic growth.

- Government Regulation of Agricultural Production
The compulsory collection and government controlled supply (and price) or rice deterred many Taiwanese farmers from producing rice. To compensate for this, the Taiwanese government provided guarantees for the price of other agricultural products, such as sugar cane, maize and mushrooms resulting in diversified agricultural production and cheap food for workers, encouraging the level of savings and consumer demand for other products to increase as a result of greater disposable income, subsequently increasing demand for goods and services, and encouraging these firms to invest to increase production and hence a high rate of economic growth was achieved.

- Import Replacement (or Substitution)
Both Taiwanese and Korean bureaucratic institutes for planned economic development initiated industries for import substitution, such as textiles, to replace the importation of these goods and services with those produced in the governments own state, that is, the government set up industries to produce goods and services to replace those which were imported. The aim of this strategy is to reduce the current account deficit by reducing the cost of imports. By reducing the current account deficit the government can free up funds for investment in infrastructure or support to another industry to increase the productivity of a nation, hence promoting high rates of economic growth.

- Distribution of Income
Both Korea and Taiwan initiated land reforms after the Japanese government left the control of the nation to the respective governments. Both governments confiscated land previously held by the Japanese and land in excess of 7.4 acres in Taiwan and 3 hectares in Korea. The confiscated land was then redistributed to landless tenants in both countries with the number of people in both nations landless falling from around 50% to around 7%. This redistribution of land resulted in more intensive agriculture, and increased labour productivity, as people were now working for themselves rather than a landlord, and were able to reap the rewards of their hard work. As a result of the more intensive agriculture, crop yields grew, and hence high levels of economic growth occurred in both of these nations.
In Taiwan, rents for those people still landless fell by around 50% to a maximum of 37.5% of crop yields. In Korea a similar reduction of rents occurred for tenants, with the rents falling from around 40-60% to a maximum of 33% of total production. This resulted in a redistribution of income from the rich towards the poor increasing the disposable incomes of the poor. This extra disposable income was then either saved, where a business firm could then use the money for investment to increase their productive capacity, or spent on consumer goods and services, increasing the revenue of businesses, and hence their profits which they could then reinvest in increasing the productivity of the firm. This resulted in economic growth in both Korea and Taiwan as there was an expansion in the productive capacities of both nations.

- Controlling Population Growth Rates
To control their burgeoning population, China adopted a one child policy in the early 1980's to begin improving their level of economic growth in the new millenium (around 2010). China adopted this policy so that its scarce economic resources could be distributed to fewer people, that is, everyone receives a greater share of China's resources as there are fewer people to share them with. China's one child policy is the most brash policy aimed at reducing the population growth rate and the size of the population to increase real GDP per capita within China, and hence their rate of economic growth.

- Increased National Savings
Both the Korean and Taiwanese governments provided incentives to their people to save. Both nations had little consumer finance, which meant that all expensive goods and services, such as washing machines has to be saved up for. Limited social welfare and high interest rates have also encouraged people to save rather than spend as the interest earned on the money being saved can be used to supplement their income and support their lifestyles when they are too old, or retired, from work. Increased national savings also increases the amount of money available to business firms for investment in capital which increases their levels of production, increasing the rate of economic growth in both Korea and Taiwan.

There is no single strategy that any nation has used to achieve their high economic growth rate. Rather an integrated approach to promoting economic growth should be used within a nation, as well as dealing with economic growth inhibitors from a number of angles, for example to reduce the current account deficit, nations should not primarily increase exports, but also engage in import substitution to achieve high levels of economic growth.

Warning!!! All free sample term papers and college term paper examples on Economics topics are plagiarized and cannot be fully used in your high school, college or university education.

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