How Can We Improve Our Economy – Economic growth is the increase in the production of economic goods and services in one period compared to the previous period. It can be measured in nominal or real terms (adjusted to eliminate inflation). Traditionally, overall economic growth is measured in terms of gross national product (GDP) or gross domestic product (GDP), although alternative measures are sometimes used.
Simply put, economic growth refers to an increase in total output in an economy, which is generally reflected in an increase in national income. Often, but not necessarily, aggregate gains in output are associated with increased average marginal productivity. This leads to an increase in income, prompting consumers to open their wallets and buy more, which means a higher material standard of living and quality of life.
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In economics, growth is typically modeled as a function of natural capital, human capital, labor and technology. Simply put, increasing the quantity and quality of the working-age population, the tools with which they work, and the available recipes for combining labor, capital, and raw materials will increase economic output.
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The economy moves through different periods of activity. This movement is called the ‘business cycle’. It consists of four steps:
A single business cycle dates from peak to peak or trough to trough. Such cycles are usually irregular in duration and there may be a period of contraction during dilation and vice versa.
Since World War II, the US economy has experienced more expansions than contractions. Between 1945 and 2019, the average expansion lasted about 65 months, while the average contraction lasted only 11 months. However, the Great Recession lasted for 18 months from December 2007 to June 2009. It was followed by the longest expansion on record in 128 months stretching back to 2020 and the onset of the COVID-19 pandemic.
Governments often try to stimulate economic growth by lowering interest rates, making it cheaper to borrow money. However, this only lasts for a long time. Eventually, as happened in 2022, interest rates will have to rise to fight inflation and prevent the economy from boiling over.
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The most common measure of economic growth is real GDP. It is the total value of goods and services produced in an economy using value adjusted to eliminate the effects of inflation. There are three different ways of looking at real GDP.
The most popular way to measure economic growth, GDP is calculated by adding up all the money spent by consumers, businesses, and the government over a period of time. The formula is: GDP = Consumer Expenditure + Business Investment + Government Expenditure + Net Exports.
Of course, measuring the value of a commodity is difficult. Some goods and services are considered more valuable than others. For example, a smartphone is more expensive than a pair of socks. Growth should be measured in value of goods and services and not in quantity.
Another problem is that not all people place the same value on the same goods and services. A heater is more valuable to Alaskans, while an air conditioner is more valuable to Florida residents. Some people prefer steak to fish and vice versa. Because value is subjective, it is very difficult to measure for all individuals.
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A common approach is to use current market value. In the United States, it is measured in US dollars and added together to produce gross measures of output, including GDP.
There is an alternative to GDP. For example, the World Bank uses gross national income per capita, which includes income of repatriated citizens working abroad, to measure economic growth, rank countries for analytical purposes, and determine creditworthiness.
The first is to increase the quantity of physical capital goods in the economy. Adding capital to the economy leads to an increase in labor productivity. Newer, better and more equipment means workers can produce more output each period. For a simple example, a net fisherman will catch more fish per hour than a pole fisherman. However, two things are critical in this process.
Someone in the economy must first engage in some form of saving (sacrificing their current consumption) to free up resources to create new capital. Also, the new capital needs to be of the right kind, in the right place and at the right time so that workers can actually use it productively.
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A second method of producing economic growth is technological progress. An example of this is the invention of gasoline fuel. Before the power-generating power of gasoline was discovered, oil had relatively little economic value. The use of gasoline became a better and more productive method of transporting goods in the process and more efficiently delivering the finished goods.
Improved technology allows workers to produce more with the same stock of capital goods by combining them in more productive ways. Like capital growth, the rate of technological development depends largely on the rate of saving and investment, as they are required to engage in research and development (R&D).
Another way to create economic growth is to increase the labor force. All else being equal, more workers create more economic goods and services. In the 19th century, part of the strong economic growth in the US was a large influx of cheap and productive immigrant labor. However, like capital-based development, this process has some important preconditions.
An increase in the labor force will increase the amount of output that new workers need to use for basic subsistence, so new workers must be at least productive enough to make up for it and not be net consumers. Also, as with additions to capital, it is important that the right kinds of labor flow to the right jobs in the right places in combination with the right kinds of complementary capital goods to realize their productive potential.
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The last method is to increase human capital. This means that workers become more proficient in their craft, increasing their productivity through skill training, trial and error, or more practice. Saving, investing and specialization are the most stable and easily controlled methods.
Human capital in this context can also refer to social and institutional capital. Behavioral trends toward higher social trust and reciprocity, along with political or economic innovations such as better protection of property rights, are the kind of human capital that can increase an economy’s productivity.
In the simplest terms, economic growth means more is available to more people, so governments try to create it. However, it is not about money, goods and services. Politics comes into the equation. How economic growth is used to fuel social progress.
According to a 10-year survey by the United Nations Global Institute for Economic Research, “most countries that have demonstrated success in reducing poverty and increasing access to public goods rely on strong economic growth.” If profits flow only to an elite, growth will not last.
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Taxes affect economic growth, at least in the short run, through their effect on demand. Tax cuts boost demand by increasing personal disposable income and encouraging businesses to hire and invest. However, the magnitude of the impact depends on the strength of the economy. If it is running close to capacity, the effect will be small. If it performs well below its potential, the impact will be more pronounced. The Congressional Budget Office (CBO) estimates that the effect in the second case is three times higher than in the first.
CBO also found that tax cuts are generally less effective at stimulating economic growth as government spending increases. This is because more spending increases demand, while tax cuts increase both saving and demand. One way to mitigate this effect is to target tax cuts at low- and middle-income households, which are less likely to invest money in savings.
Other words and terms for economic growth include “wave”, “prosperity”, “economic growth”, “economic boom”, “economic boom”, “industrial development” and “economic boom”.
Economic growth occurs when there is an increase in the production of goods and services in a period of time compared to the previous period. It is generally calculated based on GDP, which is an indicator of a country’s economic health. However, how widely the results of development are shared is an important factor in its maintenance, not to mention social health and progress.
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