What factors might contribute to a low or high growth rates in a country? There are three categories of factors that contribute to a low or high growth rates. These categories are the demand factor, the efficiency factor, and supply factors. Government spending or exports can lead to a higher to aggregate demand and higher economic growth. “Economic growth requires increases in total spending to realize the output gain made available by increased production capacity” (McConnell, 2012, p. 513). One way to accomplish this is by lowering interest rates. Lower interest rates make borrowing cheaper. This encourages consumers to spend more money.
Efficiency is attained when resources are used “…in the least costly way to produce the specific mix of goods and services that maximizes people’s well-being” (McConnell, 2012, p. 513). For example, when human resources are not being used to their full potential unemployment will increase. As unemployment increases, total spending will decrease. This will lower growth rates. Supply factors such as increases in natural resources, increases in human resources, increases in the supply of capital goods, and improvements in technology create a higher economic growth rate (McConnell, 2012, p. 512).
Why do some poor countries experience higher growth rates than others when all face the same challenges? Some poor countries experience higher growth rates than others because of its population, its infrastructure, its natural resources, or a combination of these. One example of government infrastructure are the policies related to patents and copyrights. Additionally, poorer countries tend to adopt more advanced technology from richer countries. Leader countries are constrained by technological process.
Why resources are no longer the most important indicators of economic growth disparity among countries? Which other economic and non-economic factors do you think explain the reasons behind growth disparities among countries? As technology improves, resources are no longer the most important indicators of economic growth disparity among countries. Other economic and non-economic factors that help explain growth disparities are greater education and training, improved resource allocation, increases in the quantity of capital, and economies of scale. This means that firms can produce each output with fewer resources.
How can sustainable long-run economic growth be realized? What are the roles of the government in achieving sustainable long-run economic growth? Sustainable long-run economic growth can be realized through institutional structures such as strong property rights, patents and copyrights, efficient financial institutions, literacy and widespread education, free trade, and a competitive market system (McConnell, 2012, pp. 511-512). Government can help achieve long-run economics growth by reinforcing these institutional structures. The government may need to invest in their infrastructure or create policies that help promote growth. China is a great example of long-term economic growth. China’s real output has grown over the past 25 years at a rate of nearly 9 percent per year, quadrupling real output over that period (McConnell, 2012, p. 522).
Rising income has led to more saving, greater capital investment, and more direct foreign investment, which has helped fuel growth. Per capita income has increased at an annual rate of 8 percent since 1980, despite China’s population expanding by 14 million people per year (McConnell, 2012, p. 522). Increased use of capital, better technology, labor reallocation from agriculture, and increased privatization has all contributed to greater productivity. China’s growth has been supported by a dramatic increase in exports ($5 billion in 1978 to $1.2 trillion in 2007) (McConnell, 2012, p. 522).
McConnell, C. Brue, S. & Flynn, S. (2012). Economics:Principles, Problems, and Policies (19 ed.). New York: McGraw-Hill/Irwin.
What are the limitations of the GDP in measuring total output and national welfare? What products (services) are excluded from the GDP computation? Gross domestic product(GDP) is defined as “the total market value of all final goods and services produced annually within the boundaries of the United States, whether by U.S. or foreign-supplied resources” (McConnell, 2012, p. G11). GDP has limitations when measuring total output and national welfare because it is a monetary value. GDP only counts final goods and ignores intermediate goods. If intermediate goods were allowed, multiple counting would occur. GDP is not necessarily a good measure of social welfare because it doesn’t adjust production for negative externalities. The reason that GDP is an imperfect measure of social welfare is that it does not measure many goods and services that have real economic value.
The most obvious case is leisure. Leisure is a normal good. GDP excludes non production transactions “because they have nothing to do with the generation of final goods” (McConnell, 2012, p. 487).There are two types financial transactions and secondhand sales. Financial transactions include public transfer payments, private transfer payments, and stock market transactions (McConnell, 2012, pp. 487-488). Also illegal goods and resource depletion are excluded. GDP is not reduced by pollution that is produced in processes. Is the GDP measure underestimating or overestimating national production and total income in the economy? Why? GDP is in fact underestimating national production and total national income because there are exclusions.
For example, if someone gets paid “under the table”, this illegal act is not included in the calculation. The same can be said regarding secondhand sales. These sales are happening even though they do not contribute to current production (McConnell, 2012, p. 488). Also, GDP does not take into account inflation. This reduces the actual increase in income.
What are the impacts of the shortcomings of the GDP as a measure of the national product and national welfare? As stated earlier, GDP has limitations. It is because of these limitations that a true economic picture cannot be seen. Nonmarket activities are the transactions outside the market, and hence there is no reliable price information about them. Unpaid work or “under the table” is not included. Leisure is ignored understating well-being. Improved product quality due to technological advances tends to improve welfare because they lower prices. This element is usually excluded from GDP. Finally, the underground economy understates GDP because this income is not included. If included, these activities would show a more accurate picture. Currently, the exclusion of the activities gives consumers as well as other countries a false sense of economic stability. GDP is portrayed to be higher than what it actually is.
McConnell, C. B. (2012). Economics:Principles, Problems, and Policies (19
ed.). New York: McGraw-Hill/Irwin.