How to Define an Economic Growth - Essay Example

HERE HERE YOUR HERE HERE Economic Growth Economic growth is defined as “an increase in real GDP” (Boyes and Melvin,401). In similar respect, real GDP represents a measure “of the quantity of final goods or services produced, obtained by eliminating the influence of price changes from the nominal GDP statistics” (Boyes and Melvin, 134). Put together, economic growth can be defined as increases in real GDP after adjustments have been made, statistically, to reflect constant prices of goods and services output. Less formally, economic growth represents any measurable increase in the output of goods and services in a nation or local region which provides business with competitive advantage or even business expansion. For example, a community which has struggled with jobs provision might have an investment company build a manufacturing plant in this struggling region. After its launch, more jobs are provided, giving a better quality of life to workers and other stakeholders in the community and new products and services are now available to consumer or business markets. In this situation, economic growth occurred when new business developed in this area, sustaining better urban development and consumerism. With this definition in mind, economic growth can be measured in several ways. First, the consumer price index can be used to measure growth, which involves “a measure of the average price of goods and services purchased by the typical household” (Boyes and Melvin, 139). For example, on the consumer market, consumers have many product and service options at their disposal in today’s society, such as medical care, transportation, housing, recreation, or education (to name only a few). The consumer price index shows what types of products are being purchased by consumer households, which is also known as a cost of living index, to show whether or not a region has experienced growth at the consumer spending level. In similar respect, economic growth can also be measured by analyzing the annual reports of different businesses in multiple industries to witness expenditures versus revenues to determine whether the company has made a profit and contributed to the community through higher jobs provision or corporate social responsibility efforts. Economic growth can also be measured by examining historical GDP growth over a specific period and then charting these changes on a visual graph. For example, economists select a base year for comparison, perhaps one year where growth was noticeable at the financial level, and then using this base year to determine whether significant growth has occurred over the passing years. An economist might select 1997 as the base year when growth in a region was strong, and then review economic data spanning a 12 year period to determine the level to which growth has occurred. These types of measurements are common in business industries and at the economist level. Economic growth can also be measured using what is known as the gross national product inventory (GNP), which is “gross domestic product plus receipts of factor income from the rest of the world minus payments of factor income to the rest of the world” (Boyes and Melvin, 130). Essentially, this measurement tool looks at the goods and services produced nationally, takes into consideration finances received through business investment or similar activities globally, and then subtracts financial payments to come up with a solid financial growth figure. This type of measurement is done at the advanced level and involves having accurate data of what is being produced (GDP), income received, and payments delivered to international clients or business partners. Having described economic growth and the tools by which to measure it, it is important to know the potential advantages and disadvantages which economic growth can bring to a region. One advantage is in jobs creation, offering more jobs for community consumers to enhance social and family lifestyle. As businesses succeed and gross domestic product numbers continue to rise, the financial health of firms allows for higher employee benefits, better health insurance, or even services offered by companies such as daycare for small children. When businesses are in a success pattern and have managed to earn considerable profit, they have the opportunity to extend these successes to employees through benefits redevelopment without necessarily harming the company’s long-term profit expectations. Employees who are content with their job positions and their benefits are likely to provide superior motivation to increase product or service outputs, therefore improving future business outputs for financial success at the business level. If a business or industry is succeeding at the profit level, employee benefits such as daycare give families new flexibility and can even allow for both parents to be active in the workforce, therefore improving household income considerably. Economic growth can also bring more entrepreneurship in a country when the business or investment environment becomes favorable for launching new and innovative business concepts. “In the international arena, entrepreneurship proved to support struggling economies” (De Wet Fourie, 35). There are many investment capitalists willing to provide financial support to new entrepreneurial ventures when their own financial portfolios have achieved success and profit is flowing. When economic growth in a country or region is high, entrepreneurs can launch any variety of new consumer-oriented products or services which enhance personal lifestyle and improve the social condition. There are, of course, disadvantages to economic growth, which include the creation of certain bubbles in different markets, including investment or home-building. For example, over the last decade or more, growth in housing construction created better living conditions for consumers and brought considerable profit to construction companies. When the housing market looks to be experiencing economic growth, investors often use different investment strategies, such as converting mortgages into bonds, involving “packaging these loans into various securities and sold to investors” (Ergungor, 1). This is something which had been occurring for many years while the United States was experiencing high economic growth and banks/investors were using mortgage packaging to secure different housing loans. When all of this occurs, it sometimes creates an investment bubble which pops, creating losses for investors when these mortgages transferred into other securities are no longer secured due to high foreclosure rates or slowdowns in new housing construction or the construction of new commercial real estate. Basically, economic growth can create a period where growth becomes stagnant and losses begin to occur. Pulte Homes, the country’s largest home builder, has issues a “grim warning for 2010” because of this described bubble (Hagerty and Murray, A3). Economic growth in one area of industry can also create negative outcomes in other industries. For example, growth in the foods retail industry based on high consumer demand might allow retailers to raise prices on many of its products simply to ensure even more profitability. At the personal consumer level, however, rising prices in many areas of consumer products, such as foods retail, can cause them to have less disposable income to spend in other industries. The U.S., in 2009, reported an expected 3.5 percent increase in broad inflation (Murray, A2). This removes 3.5 percent of disposable income, for items such as recreation or restaurant dining, therefore these industries begin to lose profit and economic growth in the region is affected negatively. Finally, businesses in the U.S. have provided economic growth to developing countries around the world by investing in new business opportunities on foreign soil. The reason for much of this transfer of business to foreign territories is due to the high return-on-investment received when foreign currencies are much lower than that of the U.S. However, as these regions become more developed and their own GDP increases, the value of their currency rises and companies do not receive the same profit they had become used to. Foreign competition and currency value can erode the value of the dollar and also cause businesses to lose market share in the very regions these companies helped to develop. Works Cited Boyes, W. and M. Melvin. Economics, 6th edition. Houghton Mifflin Company, Boston. de Wet Fourie, Leon. “Establishing a Culture of Entrepreneurship as a Contributor to Sustainable Economic Growth”. Journal of Global Business and Technology, Huntington Station, 2008. Vol. 4, Iss. 2, pp.34-42. Ergungor, O.E. “Covered bonds: A new way to fund residential mortgages”. Federal Reserve Bank of Cleveland. Accessed 19 November, 2009 at http://www.clevelandfed.org/research/commentary/2008/0708.cfm Hagerty, J. and S. Murray. “U.S. News: Fear of double dip in housing – Home starts tumble and mortgage delinquencies rise, casting cloud over recovery”. Wall Street Journal, New York. November 19, 2009, p.A3. Murray, Sara. “Consumers unlikely to keep pace – With jobs scarce, eyes turn to exports and business investment to drive growth”. Wall Street Journal, New York. October 30, 2009, p.A2. Read More