Economic Growth Essay Example | Topics and Well Written Essays - 1000 words

Economic Growth - Essay Example Economic growth is widely defined as ‘the sustained increase in real per capita incomes’ (Gould, pp. 1, 1972). The definition can be broken down into small pieces. The growth that occurs should be ‘sustained’ because short-term changes in the economy do not count. There should be an increase in ‘real’ income. This takes into account inflation, which cuts down the monetary value of goods and services. Moreover, the definition includes ‘per capita’ for it has to ensure that the increase in the income is distributed evenly across the population. Economic growth is shown by a shift in the Production Possibility Curve (PPC) of a curve outwards since it indicates that there is an increase in the capacity to produce goods (Mukherjee, pp. 239, 2002). Broadly, economic growth encompasses living standards in various countries as well. Economic growth is a global topic and quite a compelling one (Weil, pp. 19, 2009). It is also a topic, which has been studied since the days of Adam Smith (Helpman, pp. ix, 2005). Economic growth is bound to be desirable when the benefits to the economy and the society are more than the costs. In economic terms, these costs and benefits are termed externalities. In essence, if social welfare has increased, then the economic growth has been desirable. Essentially, economic growth leads to an increase in national income. It achieves that through more investment whether private or government funded, leading to an expansion in consumption. The advocates of economic growth place great emphasis on the increment of material possessions. Economic growth therefore increases living standards.... 32, 2004). This increase in national income can be shown through a diagram: (Intermediate Economics, n.p, n.d) As shown in the diagram, as the aggregate expenditure (AE) which consists of Consumption and Investment among other things increase, the national income increases from A to B. In this sense, an increase in investment might also spur off employment opportunities. Therefore, increases in economic growth may indicate more jobs have been created, thus balancing the economic cycle (Clarke, Islam, pp. 32, 2004). Proponents of growth further argue that an increase in growth leads the society to increase social welfare in the sense that there is redistribution of income from the wealthy to the poor. This has been achieved through increased incomes, which are progressively taxed leading to an increase in social security payments for the poor (Karl E, pp. 676, 2007). There is an accelerator effect of growth on capital investment. Because aggregate demand increases in times of economic growth due to an increase in national income, more output is produced. This encourages investment in capital machinery. In addition, during times of economic growth, there is a boost in business confidence. Investors would want to invest in an economy where the aggregate demand is high for they can pursue better profits (Tutor2u.net, N.P. n.d). As mentioned above, economic growth leads to an increase in the ‘Aggregate Demand’ (AD) of a country. If the aggregate supply (AS) is not keeping up with the increase in AD, then there might to inflation. Therefore, there is a trade off between inflation and economic growth. Inflation is particularly harmful for a country for it erodes the value of the currency. (Harper College, n.p, n.d). In the diagram above, it can be seen that