Economic growth




Thereare several approaches that can be used to define economic growth. Itis defined as the increase in market value of goods and services inthe economy within a given period. The value is measured afterinflation adjustment. Therefore, economic growth represents a generalincrease in the outputs (Acemoglu, 2011). in acountry is measured using the real gross domestic product (GDP). Therate of economic growth is calculated as the rate of change in grossdomestic product over a given period. This means that growth in theeconomy indicates an increase in GDP. It also indicates an expansionof the economy towards its productive potentials resulting intoincreased output (Acemoglu, 2011). has implication onother macroeconomic factors such as growth drivers and indicators.For example, economic growth is an indication of changes in physicalcapital stock, size and quality of human capital, technology, andfinancial institutions (Arnold, 2014).

Manybenefits are associated with steady economic growth in a country. Asa result, economic growth is the desire of many nations. However,there are some challenges related to long periods of economicexpansion. is associated with improved quality oflife. This is because it has a direct impact on the levels ofpoverty, employment opportunities, productivity of labor, disposableincome and quality of consumables available in the markets. It isalso linked with positive impacts on other aspects of life such asimproved health care services, educational availability andachievements, food security, social services and civil liberties(Acemoglu,2011).Increased productivity in the economy results in an increase in wagesand reduced earning disparity. A stronger economic system isself-sustaining. This is essential in reducing sovereignty debts andgovernment borrowing, both internally and externally. Increasedproductivity results in increased government revenue through taxesand other levies. Since the government is one of the largestspenders in the economy, the increased government spending sustains ahealthy economy. Additionally, there is increased investment inpublic services and infrastructures. Although there are negativeimpacts of economic growth, the benefits outweigh the challenges(Acemoglu,2011).

Thereare several problems that are likely to emerge as a result ofeconomic growth. However, this does not make expansion of the economyundesirable. As a result of increased demand compared to theaggregate supply, an expanding economy results in an increase incommodity prices. Consequently, structural inflation becomesinevitable (Acemoglu, 2011). The most significant negativeexternalities related to the fast expansion of the economy areenvironmental concerns and economic crimes. In the modern world,steady economic growth is supported by a well-developed manufacturingand service sectors as well as extensive agriculture. Thesedevelopments are linked to increased demand for energy andenvironmental pollution. A rise in gross domestic product orproductivity in the economy is accompanied by more industrialactivities and road congestions which increase demand for uncleanenergy (Shahbaz et al, 2013). It also increases the demand foragricultural commodities resulting in deforestation and extensiveagricultural activities. Other concerns included over-exploitation ofnatural resources and piling of domestic and industrial wastes. Avibrant economy will also attract unscrupulous business entities andorganized criminal groups. As a result, economic crimes and othersocial problems are likely to emerge in a rapidly growing economy(Maddison, 2014). Other social and economic evils such as incomeinequality and exploitation of workers are likely to be more common.For example, when the Chinese economy was growing rapidly in the lastthree decades, the Gini coefficient was also increasing swiftly.Statistics indicates that economic growth has a negative impact onincome inequalities. It is also important to note that the growth canbe unsustainable because of both macroeconomic and microeconomicfactors (Li et al, 2013). For example, if the economy depends onnatural resources, the growth will be affected by depletion of theresource.

Distinguishingbetween slow economic growth and economic growth is important.Usually, slow economic growth describes a stagnation of the economy.While economic growth is accompanied by increased productivity,stagnation is characterized by insignificant or no increase in grossdomestic product. Fast economic growth results in increased output,while a slow economic growth is associated with periods of panic andrecession. Consequently, it leads to a wide range of economicproblems at the national and individual level, mainly increasedunemployment and reduced disposable income (Acemoglu &amp Robinson,2012).

Thereare several microeconomic and macroeconomic factors that have adirect impact on economic growth rates in the short run and the longrun. They include increased capital investment, human capital andlabor productivity, discovery of raw materials and new technologyamong others (Hunt &amp Lautzenheiser, 2014). Traditionally, beforethe industrialization and technology development took control overeconomic progress, the gross domestic product was dependent onpopulation growth. As a result, countries with higher populationgrowth rate had a steady expansion of the economy. However, this waschecked by demand and supply of food and other essential resources aswell as diseases outbreaks, human conflicts and natural calamities.The phenomenon is supported by modern economic theories which arguedthat economic growth is dependent on productivity and consumption.While productivity in the contemporary society is reliant on theindustrial innovations and technology, the availability of humancapital played an essential role in the past (Hunt &ampLautzenheiser, 2014). Despite these changes, demographic factors haveenormous economic impacts. Changes in population and demographiccharacteristics have an impact on consumer power as well asproductivity of the economy. They have an influence on the rate ofunemployment and the level of participation in economic activities. For example, a youthful population has more contribution to theeconomy compared to the elderly members of the society. Additionally,changes such as increased number of women in employment reduce thenumber of dependents per household and thus accumulation of wealth.Demographic changes can also result in spending waves, which canspark economic growth (Arnold, 2014).

Today,output in an economy is dependent on the level of industrializationand advancement in technology. Countries that have more developedmanufacturing sectors and can adopt the most recent technologies havesustainable per capita growth. The main reason why technology canpromote sustainable productivity is because it supports massproduction. Technological advancement in the 20th century broughtabout automation in manufacturing and agriculture resulting intorapid increase in GDP. Other factors have a direct impact on economicgrowth. They included political institutions and stability in thecountry. The political systems adopted by nations, such ascapitalism, socialism, and communism has a direct impact on economicexpansion. They have a bearing on the policies adopted by thegovernment as well as economic freedoms. For example, some politicalsystems support policies that favor economic activities, investments,and development of supporting infrastructures (Maddison, 2014). Onthe other hand, political instability and uncertainty have adverseeffects on economic activities and productivity. They result inincreased economic and financial risks and less investment in basicinfrastructures. Consequently, it discourages productive economicactivities. For example, countries that have experienced violentpolitical competition, unstable governments and civil wars experiencea decline in productivity and thus economic slowdown (Maddison,2014).

Thegovernment plays a critical role in the economy. The actions andinactions by the government can result in economic growth orstagnation. The function is determined by the social, political andeconomic policies adopted by the government. It promotes economicgrowth by providing a legal and regulatory framework that supportbusiness activities. The structure creates an open and transparentsystem that is fair to all players. For example, several regulatoryagencies have legal mandate of implementing standards in specificsectors. It is also responsible for creating a stable environment inwhich business activities can thrive. It is done through policiesthat protect business organizations from economic and non-economicrisks such as inflation, economic recessions, crime or civil unrests(Acemoglu &amp Robinson, 2012). Economic activities are influencedby enabling infrastructures such as transport and communicationfacilities as well as training institutions. The government canaffect productivity of the economy through investment in thesesupporting structures. Another important role it can play in theeconomy is to facilitate businesses. For example, it can promotelocal and foreign direct investments in the country through promotionagencies and incentives. It can also offer direct and indirectassistance to business organizations through tariffs permits, taxholidays, subsidies, and social security. As stated earlier, thegovernment is a major consumer in the economy. Its expenditure canhave an enormous impact on the economy due to increased consumption,which increases the demand for the commodity in the market (Li etal., 2013).


Acemoglu,D. (2011). Introductionto modern economic growth.Princeton: Princeton University Press.

Acemoglu,D. &amp Robinson, J. A. (2012). WhyNations Fail: The Origins of Power, Prosperity, and Poverty. Crown Business division of Random House.

Arnold,R. (2014). Macroeconomics.Mason, OH: South-Western Cengage Learning.

Hunt,E. K. &amp Lautzenheiser, M. (2014). Historyof Economic Thought: A Critical Perspective.PHI Learning.

Li,R., Yi M. &amp Li, Y. (2013) &quotThe relationship between law andeconomic growth: A paradox in China Cities,&quot AsianSocial Science,9(9): 19-30.

Maddison,A. (2014). EconomicGrowth in the West: Comparative Experience in Europe and NorthAmerica. Routledge, ISBN 1136788492.

Shahbaz,M. et al. (2013). , energy consumption, financialdevelopment, international trade and CO2 emissions in Indonesia,Renewableand Sustainable Energy Reviews.Volume 25, September 2013, Pages 109–121.

Tucker,I. (2014). Microeconomicsfor today.Thomson.



Allcountries in the modern world set goals that can help them achievecertain levels of economic growth in every financial year. Economicgrowth is represented by the capacity of a country to produce moreservices and products in a given year as compared to the previousfiscal periods (Gale, 2014). Some of the most critical factors thatindicate economic growth include a change in the living standards ofcitizens and the rate of inflation. This paper will focus on reasonswhy the economy should grow, the effects of rapid as well as slowgrowth rate, factors contributing to short- and long-run growth,areas where the national government can either hurt or help economicgrowth.

Whythe economy should grow

Economicgrowth is a positive thing that should be facilitated and be allowedto happen. Economic growth has a direct influence in all otherfactors (including politics, culture, and social) that determine thenational progress. For an instant, the rate at which the nationaleconomy grows has a positive association with the living standard aswell as the overall quality of life of the members of the society(Gale, 2014). Moreover, economic growth increases the capacity of agiven country to meet emerging needs (such as employment) of itsgrowing population. Therefore, the progress of the national economyis crucial and should be facilitated by all means.

Rapidversus slow economic growth

Arapid economic growth has advantages and disadvantages to a country.One of the key benefits associated with a rapid economic growth is adrastic stimulation of investment. This leads to the emergence andgrowth of domestic enterprises. This helps the country createemployment opportunities and increase the average incomes ofindividual citizens as well as households (Byers, Cutler &ampDavies, 2014). In addition, a rapid economic growth is associatedwith an increase in tax revenue that can be generated from domesticmarket (Byers, Cutler &amp Davies, 2014). This reduces the need forpublic borrowing, thus lowering the government debt.

However,a rapid growth of the national economy is considered to beunsustainable because demand tends to increase more than supply. Thisforces the prices to rise at an unreasonable rate. The rise in costof services and goods represents an increase in inflation. Thisresults in a rapid increase in the cost of living, since the poorcitizens cannot access the basic items (Byers, Cutler &amp Davies,2014). Consequently, the gap between the rich and the poor continuesto expand at an exponential rate. The rapid growth also creates apotential burst, since the affected country can enter into a seriousrecession or economic crisis once the economic cycle reaches theclimax.

Aslow economic growth rate has more adverse effects than benefits. Itlimits the productivity of domestic companies, which in turn reducestheir ability to make profits that can fuel their expansion. In thelong-run, these domestic companies fail to create enough jobs to meetthe needs of the growing population, which worsens the issue ofunemployment (Byers, Cutler &amp Davies, 2014). A decrease in theparticipation of the labor force in economic progress, coupled withthe inability of domestic companies to make incomes that can sustainthem, subjects a large population of citizens to the risk of livingbelow the poverty line. In such a scenario, the government earns lessmoney from corporate tax and income tax, which implies that it cannotoffer quality services to its citizens. However, a few economistsargue that a slow economic growth is more sustainable and it shieldsthe affected countries from financial crisis, since there are noeconomic bubbles (Byers, Cutler &amp Davies, 2014).

Factorscontributing to long-run and short-run economic growth

Thereare three key factors that contribute towards a long-run economicgrowth. First, the development of infrastructure (such as airports,railroads, and roads) helps companies reduce the cost of production,which leads to long-term growth (Mester, 2015). In addition, adecline in the cost of production helps domestic companies competefairly in the international market. This leads to a sustainablegrowth in export trade and a long-run economic growth. Secondly, awell developed human capital supplies a highly productive labor forcethat contributes towards a long-run economic growth. The quality ofhuman capital is determined by the level of education, motivation,and training. Third, development in technology increases theproductivity, efficiency, and quality of products offered by domesticcompanies, which helps them to compete in any economic segment(Mester, 2015). This helps individual companies to grow in thelong-run.

Similarly,there are three factors that lead to short-run economic growth. Thefirst one is a sudden change in commodity prices. For example, asudden decrease in the price of oil causes a positive shock in theglobal economic (Dritsakis, Varelas &amp Adamopoulos, 2012). Itreduces inflation, which boosts the rate of economic growth in theshort-run. Secondly, weather conditions change from time-to-time, andthe impact on the national economy is short-lived. Third, politicalstability has a direct impact on economic activities. Politicalstability attracts investors, which promotes the national economy.

Areaswhere the government can hurt or help economic growth

Thegovernment is the major stakeholder that influences the direction ofeconomic growth depending on the policies created to regulatedifferent areas of the national economy. For example, public spendingis one of the key areas that determine whether the government willsupport or hurt economic growth. A government that spends most of itsresources to finance recurrent expenses hurts the economy by reducingthe amount spent on development projects, such as infrastructure(Shapiro, 2016).

Inaddition, the type of laws and fiscal as well as monetary policiesthat the government creates can either promote or limit the nationaleconomy. For an instant, laws and tax policies that reduce the easewith which foreign companies can enter the local market reduce theinflow of foreign direct investment, which hurts the long-run growthof the national economy (Shapiro, 2016). The current businessenvironment is characterized by an increase in liberalization andinterdependence among nations. This implies that the government canonly help economic growth by opening its borders and creatingpolicies that encourage domestic companies to invest in the foreignmarkets. This way, the government will be able to take advantage ofthe concept comparative advantage by exporting goods that can beproduced locally in a more efficient way and importing those that areexpensive to manufacture domestically.

Researchand development is another area that requires a lot of governmentsupport in order to ensure that its output has a positive impact onthe national economy. The competitiveness of the modern enterprisesis highly influenced by the level of innovation and technology thatis employed in their operations (Bayza &amp Tasel, 2012). Agovernment that provides more resources to research and developmentprojects enhance the competitiveness of the local companies bysupplying them with innovative methods of production, thus boostingthe national economy.

Inconclusion, the growth of the national economy is the target of everycountry since it determines the living standards of all citizens. Arapid growth rate helps the country overcome unemployment challenges,but it expands inflation and the gap between the poor and the rich. Aslower growth rate, on the other hand, leads to the establishment ofa stable economy. However, it limits the capacity of the governmentto address challenges (such as unemployment) that affect the county.Factors that contribute towards a long-run growth in the nationaleconomy include technology, infrastructure, and human capital.Short-run growth is affected by commodity prices, weather, andpolitical stability. The government can either help or hurt thegrowth in the national economy through its contribution in differentareas, such as law, policies, public spending, and research anddevelopment.


Bayza,E. &amp Tasel, F. (2012). Research and development: Source ofeconomic growth. Socialand Behavioral Sciences,58, 744-753.

Byers,S., Cutler, H., &amp Davies, S. (2014). Estimating costs andbenefits of economic growth: A CGE-based study of tax incentives in arapidly growing region. TheJournal of Regional Analysis and Policy,34 (2), 1-20.

Dritsakis,N., Varelas, E. &amp Adamopoulos, A. (2012). Themain determinants of economic growth: An empirical investigation withgranger causality analysis for Greece.Egnatia: University of Macedonia.

Gale,G. (2014). Effectsof income tax changes on economic growth.National Economy: Economic Studies at Brookings.

Mester,J. (2015). Long-runeconomic growth.New York, NY: New York University.

Shapiro,G. (2016). Six ways to create economic growth. Forbes.Retrieved July 4, 2016, from