The expansion of an economy in order to produce more goods and services for a specific period of time is known as economic growth. This is an outward shift of the possibilities for production in an economy.
There are different maximum possibilities of two goods when it employs all the available resources fully when given the existing state of technology shown by Economic growth.
Measuring Economic Growth
There have been various methods proposed for measuring economic growth. One of those methods includes measuring the overall capacity of a country to produce goods and services. Also, the money value of GNP can change with the change in prices.
Thus, it becomes necessary to measure economic growth using real income or constant rupees. There can be an increase in GNP if it is followed by a higher rate of a growing population. This may lead to no change or deterioration in the living standards of the people.
Thus, real GNP per capita is measured when real GNP is divided by the population. So, when the numerator grows faster than the denominator, the real GNP for capita will increase. Along with this, the quality of life will also improve.
Browse more Topics under National Income
- The concept of National Income
- Measurement of National Income
- The concept of Consumption, Saving, and Investment
- Economic Fluctuations
Various Components of Economic Growth
There is various competition using which economic growth of a country is measured. These are the size of a population, percentage of a population that forms labor, the number of labor hours that are actually worked by labors, and labor productivity.
The size of the population helps when the demand is enlarged. Thus, it paves the way for producing more quantity of output. Also, L/P which is a fraction of the population that forms the labor force will be high when the productive capacity of an economy increases.
Also, the total number of labor hours is the length that the actual average labor has worked. Thus, it has a direct impact on the economic growth rate. Also, labor productivity is said to have a direct bearing on the GNP level. The more productive a labor will be, the more will be the total output in the industry.
The Relation between Growth and Stability
Financial stability is a must for economic growth. Because a stable economy can help in forming the capital due to the continuous flow of foreign income. Furthermore, stability in an economy is necessary for a rapid rise in productivity. Also, when the prices are stable, companies can make ‘easy’ profits.
Furthermore, they can repay their debt when the currency depreciates. Thus, there needs to be an existence of the well managed financial institution. This can easily quicken economic growth. So, this is done by mobilizing the savings for purposes like investments.
When the businesses are run in a capitalistic economy it is likely to have ups and downs. These fluctuations that take the shape of a wave are known as the business cycle or trade cycle. There are 4 phases through which trade cycles are passed. They are prosperity, recession, depression, and recovery.
Practice Questions on Economic Growth
Q. The economic growth in India is possible only when there is a
A. Population growth
B. Technical progress of the global economy
C. Capital formation
D. All of the above
Answer: C. Capital formation