The Importance of Economic Growth - Essay Example

?Running Head: Economic Growth Economic Growth [Institute’s Economic Growth Economic growth is one of the major macroeconomic objectives. Economic growth is regarded as a necessary and desirable feature of modern economies (Victor, pp.5, 2008). Economic growth is widely defined as ‘the sustained increase in real per capita incomes’ (Gould, pp. 1, 1972). The definition can be broken down into small pieces. The growth that occurs should be ‘sustained’ because short-term changes in the economy do not count. There should be an increase in ‘real’ income. This takes into account inflation, which cuts down the monetary value of goods and services. Moreover, the definition includes ‘per capita’ for it has to ensure that the increase in the income is distributed evenly across the population. Economic growth is shown by a shift in the Production Possibility Curve (PPC) of a curve outwards since it indicates that there is an increase in the capacity to produce goods (Mukherjee, pp. 239, 2002). Broadly, economic growth encompasses living standards in various countries as well. Economic growth is a global topic and quite a compelling one (Weil, pp. 19, 2009). It is also a topic, which has been studied since the days of Adam Smith (Helpman, pp. ix, 2005). Since economic growth leads to an increase in the Gross Domestic Product of a country, that is, an increase in national income, it is thought to have brought major benefits to the economy as a whole. However, there might be some negative aspects to economic growth as well. Therefore, the paper shall critically examine whether economic growth is desirable. Economic growth is bound to be desirable when the benefits to the economy and the society are more than the costs. In economic terms, these costs and benefits are termed externalities. In essence, if social welfare has increased, then the economic growth has been desirable. Essentially, economic growth leads to an increase in national income. It achieves that through more investment whether private or government funded, leading to an expansion in consumption. The advocates of economic growth place great emphasis on the increment of material possessions. Economic growth therefore increases living standards (Clarke, Islam, pp. 32, 2004). This increase in national income can be shown through a diagram: (Intermediate Economics, n.p, n.d) As shown in the diagram, as the aggregate expenditure (AE) which consists of Consumption and Investment among other things increase, the national income increases from A to B. In this sense, an increase in investment might also spur off employment opportunities. Therefore, increases in economic growth may indicate more jobs have been created, thus balancing the economic cycle (Clarke, Islam, pp. 32, 2004). Proponents of growth further argue that an increase in growth leads the society to increase social welfare in the sense that there is redistribution of income from the wealthy to the poor. This has been achieved through increased incomes, which are progressively taxed leading to an increase in social security payments for the poor (Karl E, pp. 676, 2007). There is an accelerator effect of growth on capital investment. Because aggregate demand increases in times of economic growth due to an increase in national income, more output is produced. This encourages investment in capital machinery. In addition, during times of economic growth, there is a boost in business confidence. Investors would want to invest in an economy where the aggregate demand is high for they can pursue better profits (Tutor2u.net, N.P. n.d). As mentioned above, economic growth leads to an increase in the ‘Aggregate Demand’ (AD) of a country. If the aggregate supply (AS) is not keeping up with the increase in AD, then there might to inflation. Therefore, there is a trade off between inflation and economic growth. Inflation is particularly harmful for a country for it erodes the value of the currency. (Harper College, n.p, n.d). In the diagram above, it can be seen that a shift from AD to AD’ has lead to an increase in the price level. Therefore, inflation might be one of the costs of economic growth. Therefore, governments are faced with the dilemma whether to pursue economic growth and risk inflation. Although, economic growth might be increasing, and it is judged as one of the indicators of increased living standards, but at the same time, when more industries are set up, this has resulted in pollution. Therefore, the question arises whether this economic growth was beneficial to the society as whole. An increase in pollution levels hardly indicate increased living standards. In reality, it indicates long run expenditure on health services. In addition, sometimes with growth, more wants are created that previously did not exist. For example, people lived very well before consumer durables, such as washing machines and microwave ovens were invented. However, now they are nearly considered a need. Therefore, economic growth helps creating wants, which did not previously exist (Karl E, pp. 677, 2007). Another very important problem of economic growth is that it causes environmental damage. For example, the striping of the mines has led to environmental degradation. The waste from these mines is not disposed off, while the mining continues. Moreover, industries have disposed off their chemical waste, which has seeped into water and air, thus causing pollution. It will actually cost millions to clean up (Karl E, pp. 679, 2007). Furthermore, one aspect of economic growth is that it benefits only a certain part of the population. Critics cite the example that if benefits were supposed to trickle down to the poor, then why that is the number of homeless people have actually increased (Karl E, pp. 679, 2007). The world has a finite number of resources. The pursuit of economic growth has eaten up these resources faster than it should have. Therefore, there are fewer resources for the future generations (Karl E, pp.677, 2007). Although the major argument for economic growth is that of increased living standards, it has to be understood that it cannot be increased merely by an increase in national income. Several other indicators show increased living standards. This might include the quality of education, health, and medicine among other factors. Sometimes, an increase in national income might be brought about by an increase in government expenditure on defense. Although defense indirectly increases living standards since it provides security, as such it does not increase the quality of life. Hence, the term ‘economic development’ might be apt to measure the living standards of the economy. Economic development is a broader concept that is qualitative. Economic development also includes the increase in the production of goods and services. Therefore, economic growth is a prelude for economic development (Mukherjee, pp. 239, 2002). However, economic growth should not be the only concern for the governments worldwide. Therefore, there are trade-offs between different macroeconomic objectivities of government. It is up to the government to decide what and when, it is suitable. References Aggregate Supply/Aggregate Demand Model. (n.d.). Harper College, Palatine, IL. Retrieved on May 10, 2011, from http://www.harpercollege.edu/mhealy/eco212i/lectures/asad/asad.htm Clarke, M., & N. Islam, S. M. 2004. “Macroeconomic Analysis.” Economic growth and social welfare: operationalising normative social choice theory. Amsterdam: Elsevier. E, C. K. 2007. Principle of Economics. Pearson Education Ltd. Gould, J. 1972. “Growth and Development in History.” Economic growth in history: survey and analysis (p.1). London: Methuen and Co Ltd. Helpman, E. 2005. “Preface.” The Mystery of Economic Growth. New Delhi: Academic Publishers. Intermediate Macroeconomics - The Keynesian Model. n.d. Lidderdale.com Home Page. Retrieved on May 10, 2011: http://www.lidderdale.com/econ/311/ch5Lect.html Macroeconomics-Costs and Benefits of Economic growth. N.d. Tutor2u.net.Retrieved on May 10, 2011: http://tutor2u.net/economics/revision-notes/a2-macro-economic-growth-costs-benefits.html Mukherjee, S. 2002. “Economic Growth and Development.” Isc Economics for Class Xii. Mumbai: Allied Publishers Private Ltd. Victor, P. A. 2008. ”The idea of economic growth.” Managing without growth: slower by design, not disaster. Cheltenham: Edward Elgar Publishing Limited. Weil, D. N. 2009. Preface. Economic Growth. Addison: Pearson Education Ltd. Read More