Economic Growth
and some limitations thereof
Economic growth usually refers to an increase in Real GDP: % growth in output, above the rate of inflation
Can refer to actual or potential growth:
Potential growth refers to increases in the capacity of an economy (which may not yet be utilised) -i.e. a new factory built but not yet operational
Actual growth refers to realised increases -i.e. a new factory built and operational
The first is trickier to measure; relying upon inference, assumption, & approximation
Economic growth is often assumed to follow a trend
Conditions which drive growth are explored in the sections on aggregate demand and aggregate supply.
Broadly-speaking:
-Expansions in capacity (investment, innovation, training, demographic change) should produce potential growth.
-Actual growth should follow so long as demand and spending are sufficient for such capacity to be put to use.
Economies fluctuate about trend-lines
-above: during boom / recovery, when rates of growth are higher than average
-below: during slump / downturn, when rates of growth are lower than average: possibly even negative real GDP growth, aka decline, during recession
A positive output gap is sometimes said to exist when an economy is operating above trend
-assumed to be ‘overheating’ + placing great stress on resources
A negative output gap is sometimes said to exist when an economy is operating below trend
-assumed to be suffering from inefficiencies + underutilised capacity
In practice, since trend-lines represent best-estimates, establishing the existence and size of output gaps can prove tricky.
Reasons for fluctuation around the trend-rate of growth:
Take an introductory macroeconomics course and you might be led to believe that the economic cycle is the mutually-exclusive product of either exogenous or endogenous variables
Reality is less of a zero-sum game
-endogenous: conditions internal to an economy
-i.e. people spend more as incomes rise; firms are bullish and invest; economy begins to overheat; inflation leads to cut-backs in spending; firms lose confidence and slow investment; economy slumps; existing capital needs replacement; investment made; jobs created; cycle begins again
-exogeneous: external conditions
-supply-side & demand-side shocks (may be positive or negative)
-i.e. falling oil prices: lower costs of production; lower prices; more disposable income and spending; greater investment; boom
-i.e. rising oil prices: higher costs of production; higher prices; reduced disposable income and spending; reduced investment; slump
Long-run trend rates change over time: developing countries often scale rapidly, though it is improbable that real GDP could continue grow an annual rate of 10% indefinitely
Shocks might negatively or positively debase long-run trend rates of growth.
-War might cripple the capacity of an invaded country.
-Protracted war might raise the trend rate of growth for a country supplying munitions.
Growth is often assumed positive, and contiguous with:
-greater spending power
-lower unemployment
-wider choice of goods & services
-technological improvements / quality of life developments (health, life-expectancy, etc)
Growth is not without potential downsides:
-environment: expanded economic capacity may strain resources
-inequalities: may be worsened where the benefits of growth are not experienced by all
Note also the limits of GDP as a metric: as a measure of output, GDP imperfectly captures the specificities of economic and social change.
Happiness, for instance, is often assumed a proximate precipitant of economic growth.
-some have questioned the extent of this observation:
Easterlin Paradox: happiness does not trend upward at the same rate as growth indefinitely.
-as wants and needs are met, marginal gains in happiness fall below rates of growth.
-how many iPhones does any one person need?
-advanced by the economist Richard Easterlin (1974)
For more on the limits of GDP as a measure click below: