Economic Growth is defined as the way that the real income of an economy increases over time. This generally signifies that the economy is wealthier and producing more, individuals are better off, and that living standards are higher.
A more technical definition would go into the way that Economic Growth is measured – usually in terms of the Gross Domestic Product – the sum total of the value of a country’s output over the course of a year. However GDP figures can be misleading – for example, a growing economy may have rising output levels but also may have a growing birth rate which negates any positive effect on the standards of living. Alternatively, figures that show clear growth in terms of wealth may be ignoring the fact that inflation rates are rising also, thereby negating the power of said growth.
Normally, Real Income as used when looking at Economic Growth takes the GDP figures and then takes out the effect of inflation rates (by forming an index) thereby creating a reasonable set of statistics from which to draw conclusions.
Economic Growth is clearly seen as a desirable objective for all economies. It is obviously important for the UK to keep growing at a similar rate as other rich economies globally, in order to remain competitive in terms of trade. The main advantages of economic growth include:
a) Higher levels of Employment – or lower unemployment, however you look at it! An economy where demand is rising and businesses are growing is likely to have in it ample capacity to employ more and more people in its growing industry.
b) If growth leads to higher employment and higher wages, then it follows that Gov’t tax revenues increase also. This might allow the Gov’t to replenish some of the Budget Deficit.
c) Living Standards – tend to improve in a growing economy. Living Standards are generally measured in real GDP per capita, so if Real GDP really is increasing positively against the birth rate, it follows that at least on paper, living standards would improve! However, derived wealth such as that gotten through (fast) economic growth, is not always evenly distributed, so an increase in living standards might be optimistic generalising in a way.
Other benefits include increased opportunity for investment, increased business success and confidence (especially overseas), etc.
Reasons for growth are complex and numerous. Basically, Growth comes about as a result of the increased efficiency in the use of resources or Factors of Production. There are a few factors that can directly affect the levels of growth.
Firstly, Investment. Capital Investment into a firm or an economy provides the opportunity for development, expansion, research, and possible higher levels of Productivity. This ties in with the second, Technological Advances. These lead to the availability of better equipment, which improve the manufacturing of goods or services, or help to create better ways of managing jobs and people. Investment can also be stretched to link with the third factor, Education and training. Education and training work to make people more productive and effectively, act as investments into what is known as Human Capital’. These three interlinked factors have significant effects on growth rates.
Every government uses various policies based around the afore-mentioned factors to try to increase [or at the very least stabilise] growth rates.
1) Reduction in Interest rates. The Monetary Policy Committees job of manipulating the Interest Rates has a huge and outward rippling effect on the whole economy. Firstly a reduction in Interest Rates would discourage saving as the returns on a sum of money in the bank would decrease. Therefore spending by the individual would increase. This is supplemented by the fact that it would be cheaper to borrow money as loans are cheaper to pay off if the interest rates are lower.
This includes mortgages on houses, so for homeowners, the good news would be more disposable income. Of course, Loans would become cheaper to business firms also, so perhaps they would be more encouraged to make those large capital investments, in research and development – buying more up to date equipment etc. that higher interest/payback rates had made seem an unsavoury prospect.
A decrease in the UK Interest Rates could also discourage speculative investment into the currency. This means that the value of the Pound Sterling would fall, or not grow as fast as before. For our economy, that would be a fairly positive thing, as it would make our goods and services more affordable abroad (and indeed nationally, maybe even discouraging the buying of so many imported goods/services).
Economically, so far this all sounds very positive. Increased Business Investment can only mean increased productivity and efficiency, so UK goods and services would become better and cheaper – in other words, more competitive. If money was used to develop the workforce through training and education, it would undoubtedly go towards strengthening the productivity of the nation in a long-term way. More spending by the individual consumer would also translate as higher revenue for firms, allowing them to make similar productive investment and creating easier opportunity to expand and develop. If the currency factor was big enough such that it had an impact on our export levels and general consumption of UK goods & services, this would surely lead to higher GDP figures.
However the negative and quite probable effect of manipulating the Interest Rates in this manner is to do with Inflation. Inflation is the sustained increase in the average price of goods/services in an economy over time. Increased Spending can be traced back to Increased Demand. If Aggregate Demand (appearing as spending) increases at such a pace that production cannot keep up, businesses will be forced to raise their prices in order to control it. This sort of Inflation is known as Demand-Pull Inflation.
Inflation has numerous consequences for the economy. Briefly –
– If wages weren’t accordingly increased, Real Earnings would effectively go down, i.e, the purchasing power of a wage is decreased so it is not of the same value anymore. Although wages are likely to be negotiated with significant rises in inflation rates, this problem does manifest especially in positions that aren’t particularly highly paid in the first place, increasing the poverty Gap and, in the worst cases, having a detrimental effect on the standard of living for individuals.
– Inflation increases Uncertainty. Tampering with the interest rates causes the inflation rate to be more volatile and susceptible to change. This makes it very difficult for firms and even individuals, to plan their spending and for firms only, expected revenue.
– Due to workers and Trade Union Leaders putting pressure on firms to increase wages in accordance with inflation, Industrial Relations can deteriorate. If this leads to strike action in times of high demand, the consequences can be very bad indeed, causing prices to spiral upwards.
All in all, intervention in the interest rates could quite possibly increase Growth figures, but it could have a negative effect on the economy through its knock-on effect on Inflation Rates. Economists such as Milton Friedman and Keynes looked into gov’t intervention in the circular flow of money this way, and advised prudent management’ of the monetary system.
2) The New Deal – The New Deal plan was originally formulated to get more young people (18-25 yr olds) off the “dole” and into work, contributing to the economy. From a certain angle, every person who is out of work and claiming Unemployment Benefits/Job Seekers Allowance acts as a drain on the economy, hampering its growth and leeching on resources/money that could otherwise be used to expand and improve the country generally. New Deal is something of a cross between an employment agency (with guaranteed placements!) and a training service. It quotes itself as being “created to help the unemployed get into work, by closing the gap between the skills employers want and the skills people can offer”
Once you sign up for New Deal, you are more or less immediately put into a position where you (or will be in a better position to) give back something to the economy. You more or less can’t get off that track until you are in real long-term employment. The options are:
1) Full time Education and Training – This aims for people to gain skills and qualifications to help them prove themselves to be fit for work and to make them more employable.
2) Voluntary Sector – this puts people into a position where they are serving the community/economy in some way, which is then rewarded with a wage’ from the government. This allows people to have some time to think about what kind of work they’d like to go into eventually without being a total drain on the economy. Also it allows people to show future employers favourable qualities such as motivation and commitment.
3) Environment Task Force – this is similar to the previous option except that the work is more environmental based. Again it allows productive time for reflection, and helps people develop/prove favourable personal qualities.
4) Employment Option – It could be that New Deal find a work placement for you. If this happens, accepting the job is imperative.
Recently New Deal has expanded to encompass in its target: Over-25s, Disabled Persons, the Self-Unemployed (!) and Lone Parents
The New Deal seems like a good long-term strategy to increase the output of the country by getting more people putting into it. Some of the leakage on the economy is eradicated, and so more of what is created gets to stay in the country. (the Circular Flow is maintained and allowed to grow, slowly but sustained)
However the Main Drawback would be the cost that it takes to set up the New Deal in the first place. It is costing the UK Government – a substantial investment for a system that only shows its benefits in the long-term! The risk would be the drain on the economy whilst this money is “work in progress”.
3) Emphasis on Key Skills in Education – The Education and Employment Secretary David Blunkett announced reforms to raise the skill levels of the workforce. This theme of raising skill levels begins in Education, and is a theme that has provoked a lot of study and development in recent months, and recognised particularly by the DfEE. Originally developed by the NCVQ (National Council for Vocational Qualifications), they include:
Communication, Numeracy skills, Information Technology and Computer literacy, team-work, problem solving, being able to improve on their own learning and performance, and handling/presenting data
These skills are common to most jobs in varying proportions; acquiring them would make one more aware of their own strengths & weaknesses, more motivated, productive and employable.
The development of these skills is being made integral to GNVQ, NVQ and A-level courses. Their importance is being pushed in other higher/further education areas also, as they are seen to be universally positive human qualities. The official definition being “essential skills which people need to order to function effectively as members of a flexible, adaptable and competitive workforce. They are also invaluable in helping people function within society and for lifelong learning.”
Again, this seems like a strategy with solid foundations BUT once implemented would take a long time to show its effects, as the people whom it would effect would still be moving through education. Also, again, it could take a lot of money if the Gov’t is to ensure that the principles are carried out to any substantial effect at all. A lot of money Is being used on developing programs for common implementation in education establishments and on studies at numerous universities into the effects of honing these skills.
There are some possible drawbacks to Economic Growth, including the inflationary risk discussed earlier. Other disadvantages include increased levels of inequality, as wealth does not tend to be equally distributed, and the possibility of externalities, such as pollution & congestion from a more active economy, having a detrimental effect on society. However these are risks outweighed by the benefits of maintaining a prosperous and growing economy, and creating a wealthier, healthier population.
From the above mentioned strategies I would probably advocate the second option – that is, the New Deal.
I have not opted for monetary intervention as I think that manipulating the economy in this way can be very volatile and dangerous. In recent times, the trend for maintaining the economy, which has been steadily growing, has included gradual increases to the interest rates, or leaving it at a static rate. Although it would definitely have big and fast effects, lowering the Interest Rate goes completely against the grain of what seems to be working well enough and I think it is a bad idea to upset this contented situation. I think the risk of inflation would be quite imminent and devastating if it happened, hitting the poor hardest as always. The Gov’t would then be forced to pay out a lot of money through Welfare, which defies the whole point of maintaining/boosting the circular flow anyway.
I have not chosen the option of improving key Skills. Though I definitely agree with it in principle, and I firmly advocate the use of long-term development strategy, I would not choose it as a significant way to boost the growth of the economy as any effect it would have on growth would take a long time to manifest. However I don’t deny that improving the skills of the workforce is a good way to increase the productivity of the economy. But if asked to choose a strategy with growth in mind, this would not be fast or substantial enough.
To get the best of both worlds then? New Deal is also a long-term strategy and I think it works in a very similar way to The key Skills option, though not in such a focused way. It still works on developing the workforce, which should slowly and surely lead to growth in the GDP for the economy and has the added bonus of de-leeching the economy and getting unemployment down, getting more people putting something back in! I think it’s a good idea in particular to develop the younger workforce so they can carry the principles through, so the economy can reap the fullest value of its investment. The amount of money involved could have been enough to turn me against this if it became a strain on the economy. However the money is not to be and has not been raised by sudden tax increases, it has been from a chest of carefully saved Gov’t spending money. Thus I am encouraged and convinced that this is the most sensible option to help to give a healthy sustained level of growth.