How to Measure Economic Growth

Introduction

Economic growth is the increase in real GDP where values of goods and services are produced in a given economy. The annual percentage increase in GDP measures an increase in the economic growth.

Question 1a

The rate of growth in 2014 in real GDP will be calculated by finding the differences between the 2014 GDP and 2013 GDP and then dividing by the GDP of 2013, which is the base year and multiplying by 100% (Pearson, 2015).

 

% GDP =

Hence,

Therefore, the growth rate = 1.526%

Question 1b

For this question, the rule of 70 can be used to estimate the GDP growth. In this case, we will divide 70 by the GDP rate of growth of the given country. The rate of economic growth calculated in “Question 1a” above could be used to calculate the number of years the GDP would take for this particular country to double. In essence, the 70 rule estimates the years it would take for a particular variable to double (Pearson, 2015). Therefore, 70 will be divided by the growth rate of the variable, a situation that will estimate the years the variable would take to double.

Years for the GDP to double =

Hence,  = 45.87

Therefore, it would take approximately 46 years for the GDP to double.

Question 2

Sources of Human Capital

Human capital investment is enhanced by the increase in knowledge and skills, a situation that increases the productivity of labor. For instance, the investment made while attending college is a good example of sources of human capital because, as the cost of education increase, there is a huge expectation of productivity as well as a big prospect of higher returns in future in the form of income (Schultz, 2003). However, human capital has some implications regarding economic growth. The first aspect indicates that there is inequality in labor because people with a higher education qualification will tend to be more productive compared to their counterparts. The reason individuals spend a lot in the education system can be compared to the money spent by companies on the capital goods to increase the profits.

Secondly, productivity is affected by the individual’s state of health and fitness because employees who are ill and unhealthy cannot be productive; therefore, they may not contribute much to the national output. Schultz (2003) avers that health is a fundamental input for the future development of an economy. In addition, a healthy individual is more productive than an unhealthy person is. Therefore, as a source of human capital, health services receive money to ensure the well-being of the employees who are expected to propel the economic growth. Preventive, curative, and social medicine, clean water provision, and good sanitation are critical expenses related to the health. Consequently, the expenditures above influence the increase of a healthy workforce, which forms the human capital.

Thirdly, there is the on-job training, which is an expenditure incurred by the firms and acts as a source of human capital. In this aspect, the worker may receive training from the firm under the supervision of a trained, experienced, and skilled worker. On the other hand, the worker may receive training in off-campus training where they are sent to undergo training elsewhere, which is related to their job description. Many firms insist on this source of human capital because through the on-job training the workers become more efficient and productive, which benefits the firm after training (Schultz, 2003). Therefore, the resources used on the job training forms the human capital since, at the end of the engagement; the firm gets more efficient and skilled employees who will increase the productivity.

Question 3

The Law of Diminishing Returns

The law of diminishing states that if a variable factor is increased to a fixed quantity of another factor per unit time, then the increment in the total output will initially increase, but it will start to decrease behold some point (Hall & Lieberman, 2008). In fact, the law of diminishing return is mostly applied in two perspectives, including the field of industry and agriculture. For instance, population growth will affect the size of the labor by increasing the labor force. However, as the labor force increases, the capital per worker will correspondingly decrease because the capital per worker will be less. Therefore, the output per worker will also reduce (Pearson, 2015).

The law of diminishing return can be demonstrated when a firm increases one of its input units ceteris paribus; hence, the marginal product of the added unit will decline with time. For instance, when a firm adds more workers while the capital remains constant, the marginal product of the added workers will decline (Hall, & Lieberman, 2008). However, this does not indicate that the output falls after more workers are added, but it indicates that the output of the added worker will be less than the previous worker. In essence, the reason for this effect is evident in that when labor is added without adding capital, the increased number of workers will have to share the available unit of capital making them less productive. Mathematically, the theory of the diminishing law of returns indicates that the function of production assumes the concave shape where the output will rise as input rises but as a slowing rate. 

Question 4

Government Raises Tax and Uses Revenue to Engage in Spending

The government can often raise the tax as a fiscal policy to alter economic growth. The government can either use the tax to support domestic spending or fund investment (Weil, 2008). When the government raises taxes and uses the yielded revenue to engage in spending instead of investment, the amount of total investment for individuals and firms decreases. In this aspect, there is less capital deepening, and the amount available for investment falls. Consequently, when the government uses the taxes collected to enhance investment; for instance, to build infrastructures such as buildings, roads, and airports, then capital deepening is promoted. When the government tax individuals and fails to use the revenue for investment, the individuals’ disposable income and their purchasing power reduce (Barro, 1989). In this aspect, the amount that individuals initially invested is affected, and they cannot invest anymore. Therefore, they concentrate on consumption rather than investment because the amount of money available for investment has been taken away in the form of taxes. In essence, the country’s economic growth decreases because the government is not increasing the capital per worker, which is based on the investment initiated by the government.

As the above analysis shows, economic growth is a multi-dimensional aspect that requires a well thought-out approach. The government must ensure that the policies implemented do not jeopardize the efforts of the citizens and the investment made by the private sector because this will not enhance capital deepening. It is advisable to involve all the stakeholders through policy consensus, which will strike a balance in contributing to the economic growth.

 

References

Barro, R. (1989). “The Ricardian approach to budget deficits.” Journal of Economic Perspectives 3, (2): 37–54.

Hall, R. E., & Lieberman, M. (2008). Microeconomics: Principles and applications. Mason, OH: Thomson/South-Western.

Pearson (2015). Economic growth. Retrieved from http://www.pearsoncustom.com/mct-comprehensive/asset.php?isbn=1269879944&id=12298

Schultz, T. P. (2003). Human capital, schooling and health. Economics & Human Biology, 1(2), 207-221.

Weil, D. (2008). “Fiscal policy.” The Concise Encyclopedia of Economics. Library of Economics and Liberty. Retrieved January 5, 2016 from http://www.econlib.org/library/Enc/FiscalPolicy.html