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Understanding Economic Growth

Economic growth is inflation adjusted increase in the production of goods and services over a specific period. It is measured by the increase in a country’s total output or real
21 Apr 2018 10:00
Understanding Economic Growth
Shoran Devi

Economic growth is inflation adjusted increase in the production of goods and services over a specific period.

It is measured by the increase in a country’s total output or real Gross Domestic Product (GDP) or Gross National Product (GNP).

The Gross Domestic Product (GDP) of a country is the total value of all final goods and services produced.

Therefore, an increase in GDP is the increase in a country’s production.

Market participants observe economic growth to analyse the different stages of the business cycle the economy is in.

Business cycle is the natural rise and fall of economic growth over time and is broadly used for making informed financial decisions.

The four stages of business cycle are expansion, peak, contraction and trough.

Expansion

When the economy is growing in a sustainable manner, it is said to be in an expansion phase while an economic contraction, also called negative growth, is a decline in gross domestic product.

Peak

When the expansion transitions into the contraction phase whereas trough is the fourth phase when the economy transitions from the contraction phase to the expansion phase.

It is when the economy hits bottom of the business cycle.

Economic growth is referred to by policy-makers, investors, analysts and other market participants to determine the health of an economy.

As the country’s GDP increases, it is more productive which leads to more people being employed.

This in-turn positively impacts national income and so improves the standard of living.

Higher economic growth also leads to higher revenue collection for government in terms of tax income, which improves the spending capacity for government such as improving infrastructure or services or to reduce the budget deficit.

However, if growth is too far beyond a healthy growth rate, it overheats the economy creating asset bubbles as too much money chases too few goods and services and so inflating prices.

Policy-makers therefore, closely monitor the economic growth statistics to decide on appropriate macro-economic policy measures to manage the economic stability.

The two policies the government uses to influence economic growth and inflation are Monetary and Fiscal policy.

Monetary policy involvesmanaging the interest rate to influence the money supply while fiscal policy involves the government managing tax rates and levels of government spending to influence aggregate demand in the economy.

If the economy is growing rapidly causing increased money supply and surging inflation rate, then the central bankmay increase interest rates to lower the supply of money to discourage spending.

Or alternatively, they may reduce the interest rates to encourage investment and spending leading to increase in economic activity.

The government can also boost demand by cutting tax and increasing government spending.

Lower income tax will increase disposable income and encourage consumer spending.

Higher government spending will create jobs and provide an economic stimulus.

Similarly, during a period of rapid economic expansion, the government may need to increase taxes and lower government spending to discourage excess demand and to create a budget surplus.

Economic growth is instrumental in reducing poverty and improving the quality of life in developing countries.

In that regard, it is worthy to note that the accommodative policies of the government has allowed the Fijian economy to grow remarkably and despite the adverse effects of Tropical Cyclone Winston and the floods in 2016, the Fijian economy is expected to record a growth for the ninth consecutive year, this year.

Feedback: maraia.vula@fijisun.com.fj

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