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Economic Growth
Insistent demands for higher standards of living have put great pressures on governments to achieve faster rates of economic growth. In the more affluent societies there has been some reaction against the pressures for more rapid growth. Opponents of growth maintain that the costs of growth in terms of damage to the environment and the 'quality of life' are disproportionately high. Nevertheless, the demands for more consumption and more, leisure are strong enough to make growth a major objective of economic policy.
The meaning of economic growth
In general usage, economic growth is taken to mean any increase in the Gross National Product, but for several reasons this is a rather misleading use of the term. First of all, GNP is measured in terms of money values so that inflation will increase the figure from one year to another. If we are to use the concept of growth to indicate changes in real income, the annual GNP figures must be corrected for price changes before any valid comparisons can be made. Secondly, changes in real GNP do not necessarily indicate corresponding changes in economic welfare. These are more accurately indicated by changes in real income per head so that changes in GNP should be related to changes in population. We should also take account of the composition of total output when relating growth to living standards. A massive increase in defence spending would show up as a large increase in GNP, but it would be misleading to use this as an indication of an improvement in material living standards.
There is one further distinction to be made. When an economy is functioning with excess capacity, GNP may be increased by putting the unemployed resources to work. Economists do not usually describe an increase in GNP which arises from a fall in unemployment as economic growth because the extra output is a one-and-for-all gain. The problem of economic growth is how to increase output when all resources are fully employed; it refers, therefore, to an increase in the country's productive potential. This means that economic growth can only be measured between periods when the utilization of resources, or rates of unemployment, were very similar.
The desirability of economic growth
Growth is an important objective of economic policy because it is the key to higher standards of living. It is eco¬nomical growth which has made it possible for millions of people to escape from the miseries of long hours of a back-breaking toil, deplorable living conditions, a low expectan¬cy of life and other features of low income societies. Furthermore, people have come to expect economic growth — we expect our children to have a better life (in the mate¬rial sense) than we have had.
From the government's point of view, economic growth is desirable because it brings in increasing revenues from a given structure of tax rates. It means that more and better schools, hospitals, and other social services can be provided without resorting to the politically unpopular measure of raising the rates of taxation. Economic growth also makes it easier (politically) to carry out policies of income distribu¬tion which favour the less well off. If real income per head is increasing, a more than proportionate share of the incre¬ment can be allocated to lower income groups and a less than proportionate share to the higher income groups. No one need be worse off.
Of great importance is the cumulative nature of eco¬nomic growth. We must use compound interest calcula¬tions to work out the longer term effects of particular growth rates. For example, a country which maintains a growth rate of 3 percent per annum will achieve a doubling of real income in 24 years. It is this aspect of growth which explains why relatively small differences in national growth rates can, in a matter of 10 or 15 years, lead to large absolute differences in living standards. It also explains why the differences in real income between a rich country and a poor country can widen even when they are both experi¬encing the same rate of growth... A 3 percent increase on pound m. is a much greater increase in absolute terms than 3 percent on 1000 pounds.
The causes of growth
Economists have identified several factors which determine the rate of growth, but there is a lot of dis¬agreement on the relative importance of these factors. It is obvious that, on the supply side, economic growth will depend upon the increase in the quantity and quality of the factors of production and the efficiency with which they are combined. But the demand side is also important. The incentives to increase capacity and output will clear¬ly depend upon the level of aggregate demand. The object of demand management is not merely to bring planned spending up to a certain level and hold it there, it must be steadily raised to take account of the desired or attainable rate of growth.