Economic Growth: Rise in Prod. Leads to Increase in Average Marginal Prod - Essay Sample

Introduction

Economic growth is the estimate of the production of goods and services within a specific time frame (Chappelow, 2019). Most countries calculate their economic growth after one year. A plethora of governments uses the gross national product (GNP) or the gross domestic product (GDP) to calculate the economic growth of a nation. However, there are other metrics considered in the calculation. The increase in production leads to a rise in average marginal productivity. This leads to an increase in incomes, which inspires most consumers to spend more money on certain goods, which increases the living standards of the citizens in the country. Economic growth is essential to a country because it reduces poverty, reduces the levels of unemployment, and reduces debt to GDP ratios (Van den Berg, 2016). This means that with a good economy, all government services will run smoothly. The living standards of the citizens will be elevated.

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Policies for Economic Growth

The policies implemented by most governments are focused on trying to increase the demand and supply of goods. Most governments often try to ensure that there is a balance between demand and supply so that the economy's productivity can be stable (Castano et al., 2016, 5281). The two main types of policies that can be implemented by the government to ensure economic growth include the demand-side policies and supply-side policies.

Demand Side Policies

The primary aim of demand-side policies is to increase the demand for goods in a country. This means the country is exporting more products to other nations or an increase in internal trade. The government adopts this policy during a recession (Easterly, 2005, 1020). Recession is when a country is growing at a slow rate. If a country is experiencing a negative output gap, then demand-side policies are essential in improving the economy of the nation. However, in case a country is at full capacity, the outcome of this policy can be detrimental because increasing the demand for goods can cause inflation. The government has to implement these demand slide policies at the right time if they are to increase the GDP of the nation. The demand slide policy involves using two types of policies, which include monetary policy and fiscal policy.

Monetary policy is the most common form of the policy used by most governments to influence the economic growth of the nation. Sometimes the government is compelled to decrease the interest rates so that the demand for goods and services can increase (Pettinger, 2019). The reduction of interest rates involves a decrease in the cost of borrowing, and it provides a platform for consumer borrowing (Noman and Khudri, 2015, 25). The presence of lower interest rates means that most consumers will prefer to spend money other than saving it. This policy can have both negative and positive outcomes. The positive outcome is that the consumers will flood in banks trying to borrow money for spending because the interest rate has been capped off. However, it might not boost spending because the same consumers are also trying to pay off other debts. For example, in 2009, the United Kingdom government reduced the interest rate by 0.5%, but the expenditure by the consumers was subdued (Broadberry et al., 2015, 1275). Interest rates should be cut at the right time because cutting them at the wrong time might lead to future housing and asset bubble, which might destabilize the economy.

Fiscal policy is where the government aggravates the demand for goods by lowering the tax rates and increasing government expenditure (Pettinger, 2019). Decreasing the income tax will increase disposable income, which will encourage more consumers to spend money. When the government spends more money, it leads to more jobs and provides economic stimulus. However, this policy also has a negative outcome when implemented by the government. The primary disadvantage of this policy is that it can increase government borrowing. The government will have to look for more money, and they will be compelled to get it from the private sector. The primary outcome for this is that the country will languish in debts. This also affects the private sector. The most positive result of using this policy is that it helps to increase the saving ratio of the government, which will boost the economy. This policy is not beneficial because it makes a country languish in debts, which might have adverse effects on the economy of the country.

Supply-Side Policies

Supply-side policies are another policy that the government can implement. This policy is meant to help the government produce more goods and raise the economy. One of these policies is lower income taxes. When the income tax is low, it creates an incentive that people need to work to increase the labor supply of the nation. When the income tax is excess, cutting them might encourage people to work more. However, this policy also has a negative outcome. It makes people work long hours to compensate for the insufficient labor force. This policy is good because the taxes are reduced, which lowers the living conditions of people living in the country.

Flexible labor markets is another policy that can be instituted by the government to increase the economic growth of a nation. Many firms are usually discouraged from hiring any workers when the labor market is highly regulated. For example, countries like France have a higher labor market restriction, which makes it hard to fire workers. Having a flexible labor market means an increase in economic growth in the future. However, another outcome of this policy is that there will be an increase in job security, which might affect labor productivity.

Benefits of Economic Growth

Economic growth is beneficial to a country because it increases the GDP of a nation, which increases the national output, income, and expenditure of the nation (Pettinger, 2019). The primary benefits of economic growth are higher living standards, high income, and better resources like better healthcare and education. Each government should strive to ensure that the country is growing economically so that the citizens can have better lives. Economic growth also means various developments happening in the country. This means the government is using its resources to ensure economic development and not borrowing to increase the national debt of the country.

One of the benefits of economic growth is that the levels of unemployment will decrease (Depersio, 2019). When a country's economy is thriving, many jobs start to pop-up. For example, when a specific firm is selling more goods, they will be compelled to increase their production levels. An increase in production means that the firm will have to hire a higher labor force to help in achieving the production objectives of the firm. The firm will be compelled to hire more workers to increase the production output of the company.

Government borrowing decreases when the economy is thriving. When the economy is high, the government's revenue also increases. When the government is producing goods locally and exporting them to other countries, it increases the tax revenue of the government. The government will have more money to use on other developments like infrastructure, which prevents them from taking up loans for various projects. The government will also spend less money on multiple projects, like creating jobs because economic growth leads to more jobs. Economic growth plays a vital role in decreasing the debt to GDP ratio.

Economic growth is beneficial to a country because it improves the services the government renders to the public. When the tax revenue is high, the government has sufficient capital to spend on various services like education and health. The citizens will live better lives because they are educated, and they are living better lives. Having a good economy is imperative because it will attract investors to the country. Economic growth improves the market systems of a nation, which means that the ratio of demand and supply is equal. Such countries become gold mines for investors who are looking for places to start their businesses. An increase in investment leads to an increase in future economic growth. Also, when there is a higher investment, the unemployment levels decrease because most of these firms will be looking for people to work in their firms.

Economic growth is also beneficial to a country because the average income levels are increased. When the economy is growing, most consumers are compelled to spend more on goods so that they can enjoy excellent living standards. The main impact of increased average income is that the levels of poverty decreases, which leads to an increase in life expectancy. When the economy is high, most firms will be compelled to invest in research and development. When there is higher economic growth, most firms tend to invest more in research and development. The primary aim of this is to enhance invention and innovation. Most firms tend to take risks so that they can bring new goods into the market. Sometimes the market can get monotonous, and with increased competition, most firms tend to look for a way to become more relevant (Sepashvili, 2016, 174). These firms usually set aside some capital for research, which leads to more profit and an increase in the economy.

Conclusion

In conclusion, the economy of a country is usually controlled by the government. The policies instituted by the government will determine the economic growth of a nation. While some policies are good, other policies are destructive, and the citizens are left to suffer. However, economic growth is significant in the growth of a nation. Economic growth is the main reason why today, the United States of America is called a superpower nation. Their economy is very strong, which puts them a class above other countries. It is the civic duty of the government to ensure that the nation's economy is on an upward trajectory.

References

Broadberry, S., Campbell, B.M., Klein, A., Overton, M., and Van Leeuwen, B., 2015. British economic growth, 1270-1870. Cambridge University Press.

Castano, M.S., Mendez, M.T., and Galindo, M.A., 2016. The effect of public policies on entrepreneurial activity and economic growth. Journal of Business Research, 69(11), pp.5280-5285.

Chappelow, J. (2019). Economic Growth Definition. [online] Investopedia. Available at: https://www.investopedia.com/terms/e/economicgrowth.asp [Accessed 6 Dec. 2019].

Easterly, W., 2005. National policies and economic growth: a reappraisal. Handbook of economic growth, 1, pp.1015-1059.

Depersio, G. (2019). Ways Economic Growth Can Be Achieved. [online] Investopedia. Available at: https://www.investopedia.com/ask/answers/032415/what-are-some-ways-economic-growth-can-be-achieved.asp [Accessed 6 Dec. 2019].

Noman, S.M.S., and Khudri, M.M., 2015. The effects of monetary and fiscal policies on economic growth in Bangladesh. ELK Asia Pacific J Finance and Risk Management, 6(3), pp.21-34.

Pettinger, T. (2019). Policies for Economic Growth - Economics Help. [online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/5272/economics/policies-for-economic-growth/ [Accessed 6 Dec. 2019].

Pettinger, T. (2019). Benefits of economic growth - Economics Help. [online] Economicshelp.org. Available at: https://www.economicshelp.org/macroeconomics/economic-growth/benefits-growth/ [Accessed 6 Dec. 2019].

Sepashvili, E., 2016. The globalized world economy, innovations, and national policies for economic growth, pp. 174-176.

Van den Berg, H., 2016. Economic growth and development. World Scientific Publishing Company.