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You are required to write a report that examines the view ‘The pursuit of economic growth is in a nations’ long term interest’.

Research and analyse this view and write a Report that summarises your findings ensuring that you cover both the advantages and the disadvantages of economic growth in the long term.

Advantages of Economic Growth

Economic Growth & Nations’ Long Term Interest

The factors affecting nations’ long term interest can be categorised into macro factors (Political set up, Social forces, Legal framework, Advancement in Technology, Economy etc.) and micro economic factors (Economic growth, state of Inflation, employment level, poverty, equality of income etc.). Economic Growth is just one micro aspect that is related to promoting Nations’ long term interest (Aghion & Durlauf  2005).

Sound Economy does not include only one parameter i.e. economic growth and mentioning again economic growth alone cannot guarantee nation’s long term interest. There are other factors related to welfare that also play a critical role in promoting Nations’ interest (Barro & Sala-i-Martin 2004).

 It is pertinent to discuss the advantages along with disadvantages of achieving only positive economic growth. Along with benefits of economic growth, there are many perils also associated Economic Growth (Rostow 1991).

  1. More employment

Economic Growth simply means increase in Production. Production can only be increased if more employees are hired. So Economic Growth provides employment opportunities to society

(Soubbotina 2004).

  1. High Standard of Living

Economic Growth increases the income of people. Consequently, consumer buys more goods and services and this activity uplifts their Standard of Living.

  1. Less Government Borrowing and more revenue

As production is increased in case of economic growth, revenue from tax on production decreases the burden of debt on Government (Spence 2016). Spence, A.M., 2016

  1. More Public Services

With increased revenue from Economic Growth, Government provides more services to public by providing better infrastructure and other utilities.

  1. Increase in Investment

Since the demand of goods increases in case of Economic Growth. Consequently, investment in economy also increases and this further pushes virtuous circle of Economic Growth.

It has already been mentioned previously that achieving only economic growth does not serve nation’s long term interest. There may be economic growth (by increase in production of Military Goods) and then also the situation of society, in general, is deteriorating. Following are the disadvantages of Economic Growth:

  1. Increase in equality of Income

It may be possible that there is an increase in GDP of an economy, however “Gini-Coefficient” is increasing. Increase in “Gini coefficient” indicates that the income/wealth of elite class of rich people is increasing, however the income level of masses of people is diminishing.

  1. No change in components that affects welfare of people

Increasing GDP does not guarantee alleviation of poverty, more employment, more and better Education, better health to the people. For economists, the focus of attention is welfare rather than wealth. There is no beneficial impact on Economy if GDP is increasing but Welfare of masses of people is not increasing.

  1. Depletion of non-renewable sources of energy

Disadvantages of Economic Growth

It is general phenomenon that whenever an economy increases production (experience Economic Growth), there is more usage of fossil fuels. So Economic Growth to a certain extent results in depletion of valuable non-renewable sources of energy.

  1. Environmental Degradation

Consequent to use of more fossil fuels while increasing production, emissions of gas and release of chemical substance increases and it creates a havoc for Environment in the long run.

  1. Risk of Inflation

Increase in GDP poses danger of cost-push inflation and Demand pull inflation. As a result, interest rates also rises which in turn affects performance of domestic companies in International Market.

  1. Effect of Growth rate nullified by Increasing population

The above mechanism can be explained by example. There is 10 per cent increase in growth rate of economy. However, at the same time population of a country increases by 18 per cent. So the net result would be low income per capita, although there has been Economic Growth.

Economics is related to choice making behaviour since wants are unlimited and resources are limited. So an economy has to make choice of goods which can be produced with limited resources and sacrifice other goods as resources are limited and wants are unlimited (Salas-Velasco, 2017).

 This can be better understood by Production Possibility Frontier.

Combination

Units of Computer

Units of Watches

A

0

70

B

1

69

C

2

68

D

3

65

E

4

60

F

5

55

G

6

48

H

7

39

I

8

24

J

9

0


The above-mentioned figure shows the different combinations of Goods which an economy can produce given the limited resources.

Let’s assume that economy chooses option C and uses limited resources to produce 2 computers and 68 watches. Now if economy decides to choose option D then it will produce 3 computer (one more computer) and 65 watches (sacrifice 3 watches that is called opportunity cost).

It is important to mention that a particular point is lying left to PPF. At this point there will be underutilisation of resources – some resources would be left. At this point 2 computers and 40 watches can be produced. No economy would prefer to underutilise resources as it has scarce resources and unlimited wants.

Adding further one point is lying on the right side of PPF. It is impractical to reach at that point (70 watches and 8 computers) since resources are scarce. So this point is called point of market inefficiency.

Similarly Individuals and firms also face the same economic issue of having limited resources and unlimited wants.

Every Individual has limited resources and unlimited wants. So he makes choices and this choice making behaviour comes within the domain of Economics.

Similarly, every firm has limited resources for production but unlimited options. So firm also has to follow choice making behaviour.

Micro and Macro Factors Affecting a Nation's Long Term Interest

Before discussing how resources are allocated in Command Economy and Mixed Economy it is important to define the Economic System.

Economic System is a mechanism followed in economy that determines

  1. What Goods and services are to be produced?
  2. How those goods will be produced?
  3. How they are distributed among the people?

Based on the criteria of Government participation in economic decision making, three types of Economic System are prevalent:

  1. Free Market Economy:It is prevalent in United States of America and other countries.
  2. In Free Economy, resources are owned by private organisations.
  3. The decisions are governed by profit motive
  4. There is higher degree of Competition
  5. The criteria of decision making is earning profits.
  6. Consumers have large number of choices.

To conclude, decisions are taken in following way

  1. What is to be produced is determined by consumers.
  2. The decision of how to produce is determined by producers
  3. The decision of for whom to produce is determined by purchasing power of consumers.
  1. Command Economy– Former Soviet Union is an example of Command Economy.
  2. The resources are owned by State i.e. Government.
  3. Economy is centrally planned by Government.
  4. There is limited choice available to consumers.

The Economic decisions are take in following ways

  1. What to produce is determined by policies of Government
  2. How to produce is determined by Government.
  3. For whom to produce is also determined by Government.

Command Economy is basically state-owned and state run (Gregory, 2013).

Now many Command Economy are transforming Mixed Economy (Schutz 2016).

  1. Mixed Economy– Economy of United Kingdom  is an example of Mixed Economy.

 Mixed Economy is the most prevalent Economy across the Globe (Ikeda 2002).

  1. Co-existence and participation of both State Government and Private Organisations
  2. Government form policies and makes decision for Public Sector and Public cause.
  3. Individuals and Business class take decision related to private sector in which they are operating.
  4. Government plays a dominant role when compared to private sector.

Complete decision making related to economy is in the hands of State (Krehm 1975).

Decision in Mixed Economy is taken in a following manner

  1. What is to be produced is determined partly by Government and partly by Consumers.
  2. How to produce is determined partly by private player (having profit-motive) and partly by Government with the motive of social desirability.
  3. For whom to produce is determined by both Government and Private sector.

The Mixed Economy is alternative to extremes of Capitalism and Mixed Economy (Shonfield & Shonfield).

In Economics, calculating costs and benefits of an organisation is not an end. It extends to social costs and benefits also. Every Business Organisation affects society. In other words, every business has social costs and benefits also attached with it. Consequently, society has to bear some costs (unfavourable impact of business on society) and takes privilege of achieving social benefit (favourable impact of business on society).

This can be illustrated with an example of establishment of Chemical Company in a particular area.

Costs

Benefits

Private Cost and benefit

Cost of construction of a company.

Revenue earned by company from sales.

Social Cost and benefit

Ill health due to release of chemicals that causes pollution.

Employment provided to people residing nearby to the place where company is established.


Economic Analysis is concerned with the study of those forces that decides choice making behaviour in case of scarce resources and unlimited wants. It uses both qualitative and quantitative methods.  For Instance, in case of launching of new cold-drink company, team of people will use theory of demand and provide data as an input for forecasting demand at various prices.

Economic Analysis equips decision makers with understanding of the way market functions and responds to changes. Moreover, it helps Government in deciding tax rates along with the appraisal financial health of a state. It helps in estimating economic environment along with strengths and weaknesses.

There are 2 fundamental approaches in Economics: Positive and Normative. Consequently there are two types of Economics: Positive Economics and Normative Economics. Positive Economics is concerned   is concerned with the actual/real situation – establishing cause and effect relationship that is based on facts. Example Actual Demand in an Automobile Company.

Normative economics is concerned with what ought to be – What is ideal? Economists set the benchmarks in Normative Economics. For Instance Economists predict that for economy to be healthy, 8 per cent GDP should be achieved.

Production Possibility Frontier

There are two methods of Economic Analysis: Deductive Method and Inductive Method

Deductive Method

Inductive Method

Reasoning starts from General and moves to Particular.

Reasoning starts from Particular and moves to General.

Start with Generalisation and then come to particular conclusion

Start with Particular observation and move to general conclusion

Example:

If in analysis, the general proposition is accepted that people remain more absent from their workplace, if they do not like their job. Here, Reasoning is from General to Particular.Example:

Sample of 1000 smokers is interviewed. It is found that 40 per cent people smoke because of relieving stress, then this is an instance of Inductive Reasoning. 

In the last eight years, house prices in London are escalating (Coppola 2017). For the first time in last eight years, house prices in London have went down. However, in rest of the United Kingdom, the house prices are still increasing. The average price of house from July, 2017 to September 2017 in London is nearly £ 4,71,760 that is down by approximately .6 per cent from July to September in the year 2016. In contrast, the average housing prices in United Kingdom is nearly £ 2,10,900. So, London is still expensive when compared to other cities in the United Kingdom (Kollewe 2017).

Following reasons can be attributed to escalation of House Prices in London

  1. High rate of Employment

Unemployment Rate is down to 4.3 per cent in London. Consequently, Demand of Houses is more in London (Diacon & Vine 2009).

  1. Lack of sufficient number of houses and Increasing Population

The population of London is still accelerating whereas the number of houses in London are limited in supply (Mattarocci & Pekdemir, 2017).

As per recent survey 1,75,000 more houses need to be built in the United Kingdom.

  1. Employment Level

Unemployment has fallen to 4.3 per cent in United Kingdom. So, there is more demand for houses by employed people in London.

  1. Lower Interest rates

Bank of England has not increased the lending rates since the year 2007 (Monagham 2017).

The interest rates of Banks in the United Kingdom has been low when compared to last decade (Roberts 2008).

  1. “Brexit Issue”

People who might have shifted are living where they are.

  1. More restriction of building new houses in London

The permission for granting of building new houses in London has been made more stringent. Consequentially, there is limited supply relative to demand of houses.

The government is considering (evaluating) following decisions in House Market

  1. In National Home Saving Scheme, the Government is considering to make contribution tax free to first-time buyers who have been saving from the last five years.
  2. To increase Stamp-duty threshold. The objective is to reduce burden on buyers who are purchasing houses for the first time.
  3. Decision related to Stamp Duty Holiday.

For any Economy to progress only Economic Growth is not the sole criteria. Economy would be sound when Welfare rather than Economic Growth is considered. The various aspect of Welfare which must be emphasised are Employment, Inflation, Health, Education, removing povert and inequality of income and other important considerations (Rodrick 2003).

References:

Aghion, P. & Durlauf, S.N., 2005, Handbook of Economic Growth, Elsevier, Amsterdam.

Barro, R.J. & Sala-i-Martin, X., 2004, Economic Growth, MIT Press, Massachusetts.

Coppola, F., ‘The London housing bubble was finally burst’, The Independent viewed 27 December 2017, fromhttps://www.independent.co.uk/voices/housing-market-property-london-south-east-burst-bubble-inflation-home-owner-a7918556.html

Diacon, D., Pattison, B. & Vine, J., 2009, The Future of Housing: Rethinking the UK housing System for the twenty-first century, BSHF.

Gregory, P., 2013, Behind the Façade of Stalin’s Command Economy, Hoover Institution Press, California.

Ikeda, S., 2002, Dynamics of the Mixed Economy: Towards a Theory of Interventionism, Routledge, Oxfordshire.

Kollewe, J., ‘London falling? UK house price growth to halve with Capital worst hit’, The Guardin, viewed 27 December 2017, fromhttps://www.theguardian.com/business/2017/nov/02/uk-house-price-growth-to-halve-london-worst-hit-savills

Krehm, W., 1975, Price in a Mixed Economy, COMER Publications.

Mattarocci, G. & Pekdemir, D., 2017, Logical Real Estate Investment and REIT in Europe, Springer, Berlin.

Monagham, A., 2017, ‘London House Prices fall for first time in eight years as rest of UK rises’, The Guardin, viewed 27 December 2017, from https://www.theguardian.com/business/2017/sep/29/london-house-prices-fall-for-first-time-in-eight-years-as-rest-of-uk-rises

Roberts, L., 2008, The Great Housing Bubble: Why did house Price fall? Monterey Cypress LLC, San Diego.

Rodrick, D., 2003, In Search of Prosperity, Princeton University Press, New Jersey.

Rostow, W.W., 1991, The stages of Economic Growth: A Non-Communist Manifesto, Cambridge University Press, Cambridge.

Salas-Velasco, M., 2017, ‘Production Efficiency measurement and its determinants across OECD Countries: The Role of Business Sophistication and Innovation’, Economic Analysis and Policy 57, 60-73, viewed on 27 December 2017, from https://www.sciencedirect.com/science/article/pii/S0313592616302417

Schutz, E.A., 2016, Markets and Power: The 21st Century Command Economy, Routledge, Oxfordshire.

Shonfield, A. & Shonfield, Z., 1984, In Defence of Mixed Economy, Oxford University Press, Oxford.

Soubbotina, T.P., 2004, Beyond Economic Growth, World Bank Publications, Washington.

Spence, A.M., 2016, ‘Has Growth and Convergence of Developing Economies Been Derailed?’Review of Economic Analysis 8(1), 1-16, viewed on 27 December 2017, from https://rofea.org/index.php?journal=journal&page=article&op=view&path%5B%5D=247b

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