What is Economic Growth?
Economic growth is the amount of production in a country or region over a certain period of time. While financial ministers may keep track of these growth numbers every month, generally it is the quarterly and annual numbers that attract the most attention. In addition to production, measured through the gross domestic product (GDP), local governments and individuals may use a different standard to measure economic growth.
If the GDP of a country one year is $100 billion US Dollars (USD) and the next year is $125 USD billion, then there has been economic growth of 25%. If, on the other hand, the GDP was only $75 USD billion, the growth would be -25%. In most cases, it is still referred to as growth, even if it is a contraction of the economy.
Most consider economic growth to be one of the surest signs of a country’s overall health. More commerce means more jobs, and more jobs mean more consumption, leading to more production. This can be a very good circle to get into. Like most things, however, this growth tends to come and go in cycles.
If a country has two quarters of lower GDP than the previous quarter, it is said to be in a recession. Recessions tend to come twice a decade historically, and some are more severe than others. Prolonged recession is called a depression, although the definition of a depression has never been set by economists. Suffice it to say that economic numbers are generally on the negative side for many quarters.
For some jurisdictions, economic growth is better measured through other means, though these are usually local anomalies. For example, a city receiving most of its money through property taxes may consider it growth if property values go up. They may deduce because property values have increased, people are making improvements. If they are making improvements, growth is taking place. This may or may not be an accurate assumption.
The public at large may be tempted to measure economic change through job creation numbers. This is especially important to the general public, who are often not interested in production numbers. If jobs are being created, that means wealth is being created and spread. This may be, perhaps, one of the best measures of economic growth. If jobs are not being created or are being lost, this generally leads to a depressed economic state, especially for those affected individuals and perhaps for the region at large.
Economic growth means different things to different people. While economists, governments and individuals may all have their own opinions about what should constitute it, the truth is that all of these things working together help create an overall healthy economy. Without one piece, the entire puzzle may fall apart.
I have a lot of really basic questions I'm trying to get a handle on. So here's the first question: I gather that population growth is not necessary for economic growth. Could someone explain that.
It's true that economic growth, means different things to different households, due to the fact that what an investor earns is quite different from what a consumer earns, despite the fact that the investor is also a consumer.
It also includes the increase in production capacity and the standard of living.
Mutsy- That's a good question. The Federal Reserve sets interest rates so they are directly related to monetary policy.
When the US borrows money they create a debt that needs to be repaid. When partnering countries lend us money we have to offer them interest on that money which is when the interest rates begin to creep up as the government prints more money to pay its bills.
Sometimes the Federal Reserve will lower interest rates in order to stimulate economic growth. When interest rates are low people tend to borrow more money and buy higher ticket items like houses and cars.
Currently the prime rate is set at 3%. Economic growth in the housing sector has lagged because increased governmental interventions that have caused banks to be more cautious in lending money making it more difficult for the average person to qualify for a loan.
If supply side economics were at work here, and the regulations for the banks were lowered, there would be a slew of economic activity.
Oasis11-I understand the whole thing about creating jobs, but what do interest rates have to do economic growth news?
That's a good point. An introduction to modern economic growth should be the study of the U.S. economy.
Although in the early 80's when President Reagan was president, there was a huge recession that lagged over from the previous Carter administration.
President Reagan lowered tax rates from 70% which was the top tax rate at the time, to 28%. In addition, he also cut taxes for businesses and reduced the capital gains tax to 15%.
Early in the presidency of Ronald Reagan, Congress passed the Economic Recovery and Tax Act, which lowered taxes by 25 per cent at the time. The President continued to lower taxes until the top tax rate was 28%.
As a result, 20 million jobs were created, and the American people across the board saw an increase of 15% in their income.
In addition, by the end of the Reagan presidency, interest rates were cut in half to 10.7%, from a President Carter high of 21%. This proved that supply-side economics was the only way to create an economic growth package that would be sustainable.
Economic growth news has been lacking lately. In order for the economy to grow, jobs have to be created. Jobs are only created when businesses begin to hire more employees. In order for businesses to hire more employees, there has to be economic incentives for them to do so.
Lowering business taxes and providing tax incentives for businesses to hire employees will limit unemployment economic growth. When people have jobs, they are more upwardly mobile tend to purchase more goods and services.
This action also spurs further economic growth. But businesses are in business to make money so he has to make financial sense for them to hire people. A business is not created for the sole purpose of hiring people but for the ability to earn a profit and make money.
Therefore, the government can stimulate business growth in the private sector by cutting taxes which will allow businesses to hire more employees in order to become more profitable.
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