GDP is significant because it provides information on the size and performance of an economy. The pace of increase in real GDP is frequently used as a gauge of the economy’s overall health. An increase in real GDP is viewed as a sign that the economy is performing well in general.
What is GDP and what does it mean?
- It indicates the total value of all commodities and services produced inside a country’s borders over a given time period.
- Economists can use GDP to evaluate if a country’s economy is expanding or contracting.
- GDP can be used by investors to make investment decisions; a weak economy means lower earnings and stock values.
Is GDP growth required?
The majority of things do not continue to expand indefinitely. If a person grew at the same rate throughout his life, he would become enormous and possibly die (or else rule the world). Despite this, the majority of economists agree that the economy must always grow. And at a rapid pace, for the country’s and people’s benefit.
According to conventional wisdom, GDP growth, which counts the value of goods and services generated in an economy each year, is critical to a country’s stability and prosperity. Economists claim that growth is the reason why each generation is better off than its parents’ generation. “More growth is better, period,” Northwestern economist Robert Gordon told me.
However, some economists are now questioning this viewpoint, claiming that it is more sensible to focus on well-being indicators rather than growth.
After all, despite a three percent annual growth rate over the last 60 years (which is fairly strong), 43 million Americans remain in poverty, and most people’s earnings have remained practically flat since the Reagan administration ended. In reality, despite positive economic growth in all but two of the years since 2000, households’ median income in 2014 was 4% lower than it was in 2000. For more than a half-century, developed countries have concentrated on how to make their economies expand faster in the hopes of improving the lives of their entire people. But what if expansion isn’t the only way to improve a society’s level of living?
“Many of us believe that a multi-dimensional approach that catches what people care about would be beneficial,” Michael Spence, a Nobel Laureate and emeritus professor at Stanford, told me. “Many elements are missing from growth: health, distributional features of growth patterns, a sense of security, many sorts of freedoms, leisure generally defined, and more.”
Spence and his supporters aren’t advocating for the economy to cease growing or even shrink (though there is a group of people who do believe that). Instead, they argue that it may be healthier for the economy to accept a slower but still good growth rate while focusing on policies that address issues like inequality and access to services. This proposal is, perhaps, a bit idealistic, but giving it serious thought can reveal the flaws in the present growth-first strategy.
It’s not only that maximizing growth doesn’t always benefit people; it’s also that rapid growth can have unintended consequences, such as when the pursuit of growth is used to push through policies that are intended to boost GDP but may harm millions of people. Companies frequently claim that fewer rules would allow them to grow faster and produce more, yet reducing laws could lead to increased pollution and factory accidents. Other times, initiatives that may be required for the country’s long-term existence are disregarded for fear of harming GDP. Conservatives, for example, oppose climate agreements because they claim that reducing greenhouse gas emissions will diminish GDP by trillions of dollars. “According to Peter Victor, an economist and environmental scientist at York University in Toronto, “the pursuit of expansion can be rather harmful.”
Victor, Spence, and other economists have begun to consider the implications of a society that does not prioritize growth. They claim that a country can survive even if its growth is modest. Instead, a government may focus on making its citizens secure and happy, and pursue policies to accomplish that aim. This could entail assisting individuals in working less hours, consuming fewer resources, or spending more time with their family. They claim that such a country would be a better place for everyone.
Is an increase in GDP beneficial?
- The gross domestic product (GDP) is the total monetary worth of all products and services exchanged in a given economy.
- GDP growth signifies economic strength, whereas GDP decline indicates economic weakness.
- When GDP is derived through economic devastation, such as a car accident or a natural disaster, rather than truly productive activity, it can provide misleading information.
- By integrating more variables in the calculation, the Genuine Progress Indicator aims to enhance GDP.
What function does GDP play in India?
The Gross Domestic Product, or GDP, is a measure of a country’s economic health. It depicts the whole value of a country’s production, which includes all purchases of goods and services produced by the country, as well as services used by individuals, businesses, foreigners, and government agencies.
How can GDP be increased?
- AD stands for aggregate demand (consumer spending, investment levels, government spending, exports-imports)
- AS stands for aggregate supply (Productive capacity, the efficiency of economy, labour productivity)
To increase economic growth
1. An increase in total demand
- Lower interest rates lower borrowing costs and boost consumer spending and investment.
- Increased real wages when nominal salaries rise faster than inflation, consumers have more money to spend.
- Depreciation reduces the cost of exports while raising the cost of imports, increasing domestic demand.
- Growing wealth, such as rising house values, encourages people to spend more (since they are more confident and can refinance their home).
This represents a rise in total supply (productive capacity). This can happen as a result of:
- In the nineteenth century, new technologies such as steam power and telegrams aided productivity. In the twenty-first century, the internet, artificial intelligence, and computers are all helping to boost productivity.
- Workers become more productive when new management approaches, such as better industrial relations, are introduced.
- Increased net migration, with a particular emphasis on workers with in-demand skills (e.g. builders, fruit pickers)
- Infrastructure improvements, greater education spending, and other public-sector investments are examples of public-sector investment.
To what extent can the government increase economic growth?
A government can use demand-side and supply-side policies to try to influence the rate of economic growth.
- Cutting taxes to raise disposable income and encourage spending is known as expansionary fiscal policy. Lower taxes, on the other hand, will increase the budget deficit and lead to more borrowing. When there is a drop in consumer expenditure, an expansionary fiscal policy is most appropriate.
- Cutting interest rates can promote domestic demand. Expansionary monetary policy (currently usually set by an independent Central Bank).
- Stability. The government’s primary job is to maintain economic and political stability, which allows for normal economic activity to occur. Uncertainty and political polarization can deter investment and growth.
- Infrastructure investment, such as new roads, railway lines, and broadband internet, boosts productivity and lowers traffic congestion.
Factors beyond the government’s influence
- It is difficult for the government to influence the rate of technical innovation because it tends to come from the private sector.
- The private sector is in charge of labor relations and employee motivation. At best, the government has a minimal impact on employee morale and motivation.
- Entrepreneurs are primarily self-motivated when it comes to starting a firm. Government restrictions and tax rates can have an impact on a business owner’s willingness to take risks.
- The amount of money saved has an impact on growth (e.g. see Harrod-Domar model) Higher savings enable higher investment, yet influencing savings might be difficult for the government.
- Willingness to put forth the effort. The vanquished countries of Germany and Japan had fast economic development in the postwar period, indicating a desire to rebuild after the war. The UK economy was less dynamic, which could be due to different views toward employment and a willingness to try new things.
- Any economy is influenced significantly by global growth. It is extremely difficult for a single economy to avoid the costs of a global recession. The credit crunch of 2009, for example, had a detrimental impact on economic development in OECD countries.
In 2009, the United States, France, and the United Kingdom all went into recession. The greater recovery in the United States, on the other hand, could be attributed to different governmental measures. 2009/10 fiscal policy was expansionary, and monetary policy was looser.
Governments frequently overestimate their ability to boost productivity growth. Without government intervention, the private sector drives the majority of technological advancement. Supply-side measures can help boost efficiency to some level, but how much they can boost growth rates is questionable.
For example, after the 1980s supply-side measures, the government looked for a supply-side miracle that would allow for a significantly quicker pace of economic growth. The Lawson boom of the 1980s, however, proved unsustainable, and the UK’s growth rate stayed relatively constant at roughly 2.5 percent. Supply-side initiatives, at the very least, will take a long time to implement; for example, improving labor productivity through education and training will take many years.
There is far more scope for the government to increase growth rates in developing economies with significant infrastructure failures and a lack of basic amenities.
The potential for higher growth rates is greatly increased by providing basic levels of education and infrastructure.
The private sector is responsible for the majority of productivity increases. With a few exceptions, private companies are responsible for the majority of technical advancements. The great majority of productivity gains in the UK is due to new technologies developed by the private sector. I doubt the government’s ability to invest in new technologies to enhance productivity growth at this rate. (Though it is possible especially in times of conflict)
Economic growth in the UK
The UK economy has risen at a rate of 2.5 percent each year on average since 1945. Most economists believe that the UK’s productive capacity can grow at a rate of roughly 2.5 percent per year on average. The underlying trend rate is also known as the ‘trend rate of growth.’
Even when the government pursued supply-side reforms, they were largely ineffective in changing the long-run trend rate. (For example, in the 1980s, supply-side policies had minimal effect on the long-run trend rate.)
The graph below demonstrates how, since 2008, actual GDP has fallen below the trend rate. Because of the recession and a considerable drop in aggregate demand, this happened.
- Improved private-sector technology that allows for increased labor productivity (e.g. development of computers enables greater productivity)
- Infrastructure investment, such as the construction of new roads and train lines. The government is mostly responsible for this.
Is growth at zero possible?
The growth of demand must be confined to zero in order to achieve zero growth, and the forces of demand must remain at zero in order for a zero growth economy to be sustainable. Economic activity is quantified in terms of gross domestic product (GDP) in this article, which is mostly related to market activities.
What role does GDP play in economic growth?
Gross domestic product (GDP) growth that is faster boosts the economy’s overall size and strengthens fiscal conditions. Growth in per capita GDP that is widely shared raises the material standard of living of the average American.
What role does economics play in our daily lives?
Our daily lives are influenced by economics in both visible and subtle ways. Individually, economics shapes many of the decisions we must make regarding job, leisure, spending, and how much to save. Macroeconomic patterns such as inflation, interest rates, and economic growth can have an impact on our lives.
Summary why economics is important
- Our living standards are influenced by macroeconomic factors such as inflation, economic growth, and employment chances.
- Externalities are a good example of a problem that has to be understood. We may not like paying gasoline taxes, but when we consider that they assist to minimize pollution and congestion, and that the tax collected is used to subsidize public transportation, we view things differently.
Economic choices opportunity cost
We are frequently confronted with decisions to make. It could be a question of time. For instance, on a weekend:
We could also opt to spend 8 hours of free time (sleeping in, Facebook e.t.c.)
There is a cost associated with each option. We don’t have time to study since we earn 8*7.83 = 62.64 as an opportunity cost. This could result in lower exam scores, and thus lower future earning potential. Choosing to maximize our short-term income (making 62 per day) may diminish our lifetime earnings and be a poor decision unless working at a caf has no impact on our future earnings. We may consider work experience to be more valuable than a paper on allocative efficiency.
The issue is that when deciding whether to study, work, or pursue leisure, we may overlook or overlook long-term consequences. We may come to regret our decision to spend all of our free time earning 62 later in life. Economists believe that education is a merit good, which means that people may undervalue the advantages of studying. Education underconsumption is an example of market failure.
We can make better selections if we consider opportunity cost. We may take the most gratifying or simplest course of action if we act on instinct, but the best decision in the short term may not be the greatest in the long run.
A production possibility frontier depicting a straightforward trade-off between working time and leisure time.
Work
Work is another vital aspect of life. Which job will bring you the greatest joy? It’s not just about landing a well-paying job; we get the most joy from our jobs when we feel like we’re a part of the process and have some control. Behavioral economists such as Dan Ariely have studied labor motives and discovered that income/bonuses are less essential than neoliberal economic theory suggests.
Nudges and rational behaviour
Individuals are supposed to be rational and utility maximising in classical economics. In other words, it is assumed that we make decisions in order to maximize our economic welfare by spending money solely on products that satisfy us.
Behavioral economists, on the other hand, point out that we are frequently influenced by irrational and non-utility maximising impulses. For example, companies that ‘nudge’ us to make decisions that are harmful to our well-being for example, super-sized servings that we don’t need yet make us less healthy.
The value of behavioural economics insights is that they allow us to become aware of elements that may cause us to make poor judgments. We can strive to ignore marketing nudges, which push us to buy things that aren’t truly good for us.
Behavioural economics and bias
The work of behavioural economics, which lays more emphasis on psychological components, is a recent development in economics. Are humans, for example, truly rational utility maximizers, as orthodox economic theory suggests? Humans are impacted by emotional elements such as loss aversion (we prefer the status quo to losing what we have) and current time period bias, according to behavioral economics.
Importance of the macroeconomy on our daily lives
We don’t usually look to leading economic indicators first when making decisions. However, how people feel about the economy might influence how they make decisions. Those who are knowledgeable of the current economic situation, for example, may be aware of the depth of the recession, which increases the likelihood of a time of low interest rates. This means that if you could get a mortgage, your monthly payments would be lower, but saving would be ineffective.
The poor situation of the economy and high unemployment rate, on the other hand, may inspire students to continue their studies. Given the high rate of youth unemployment, it makes more sense to spend three years earning a degree than than jumping right into the job market.
The only difficulty is that there are a lot of other kids who believe the same way. As a result, competition for university spots is heating up.
How to survive a period of inflation?
What if we were to live in an era of significant inflation? How would this effect our financial well-being?
Unless we can get an interest rate higher than inflation, the real worth of our money will depreciate. Taking out index-linked savings savings accounts and bonds that pay an interest rate linked to the inflation rate may be a good idea during periods of high inflation.
If we can’t get a reasonable interest rate, we can invest in commodities or assets that will hold their value better than regular savings accounts.
How will we be affected by rising interest rates?
If interest rates rise, the cost of mortgage payments, as well as interest on loans and credit cards, will rise. It might be a concern for people who are overly reliant on credit. Higher interest rates can also cause the economy to slow down and increase the chance of job loss.
Affordability of a mortgage In the late 1980s, high interest rates caused mortgage payments to consume more than half of a household’s take-home earnings.
Investing
What can economics teach us about investing in the stock market or the property market?
Avoid getting caught up in asset booms, where investor optimism gets carried away and people end up buying shares/assets even though the price has become inflated, according to one cautionary tale.
Externalities
We frequently overlook externalities while deciding what to purchase and generate. Driving into the city center, for example, may add to pollution and congestion. Driving has a bigger social cost than it does a private cost. Would embracing a congestion charge improve our living standards? At first look, the answer appears to be no: we pay higher taxes. However, if external expenses exist, a higher tax can result in a more socially efficient level.
Limitations of economics
Last but not least, is economics overvalued? Do we place too much emphasis on maximizing wealth, profit, and GDP as a society? In some ways, orthodox economics encourages us to perceive life through the lens of money. However, it is possible that as a result of this, we are missing out on more essential concerns such as spiritual awareness, environmental care, concern for others, and finding the right work/life balance.
What are some of the benefits of GDP?
- GDP allows policymakers and central banks to determine whether the economy is contracting or increasing and take appropriate action as soon as possible.
- It also enables policymakers, economists, and businesses to assess the influence of factors such as monetary and fiscal policy, economic shocks, and tax and expenditure plans.
- The expenditure, income, or value-added approaches can all be used to determine GDP.
What happens if the GDP is excessively high?
- Individual investors must develop a level of understanding of GDP and inflation that will aid their decision-making without overwhelming them with unneeded information.
- Most companies will not be able to expand their earnings (which is the key driver of stock performance) if overall economic activity is dropping or simply holding steady; nevertheless, too much GDP growth is also harmful.
- Inflation is caused by GDP growth over time, and if allowed unchecked, inflation can turn into hyperinflation.
- Most economists nowadays think that a moderate bit of inflation, around 1% to 2% per year, is more useful to the economy than harmful.
