Macro Economic Theories

7/28/2019 Macro Economic Theories

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Using relevant macroeconomic theory explain how

governments might generate economic growth

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ASSIGNMENT TITLE

Using relevant macroeconomic theory explain how governments might generate

economic growth


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Table of Contents

ASSIGNMENT TITLE ....................................................................................................... 01.0 INTRODUCTION ........................................................................................................ 22.0 ECONOMIC GROWTH:.............................................................................................. 2

2.1 UK productivity growth slumps in 2005-2010 ......................................................... 53.0 GOVERNMENT POLICIES TO IMPROVE THE TREND GROWTH RATE ......... 94.0 ECONOMIC GROWTH AND CAUSATIONDIFFERENT THEORIES OFECONOMIC GROWTH ................................................................................................... 10

4.1 Neo-Classical Growth theory .................................................................................. 104.2 Endogenous Growth Theory ................................................................................... 11

5.0 CONCLUSION ........................................................................................................... 126.0 REFERENCES ........................................................................................................... 13


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1.0 INTRODUCTION

The present assignment is on using relevant macroeconomic theories, how governments

might generate economic growth. Many economists have been expressing their views

about economic drives roles in an economy. Among some of these ideas we are

discussing about factors which are linked with supply-side that determines the growths

trend rate of those countries that are competing in the global economy.

2.0 ECONOMIC GROWTH:

When an economy is potentially productive for a long term basis, is said to be leading

towards economic growth (Allen et al, 2010).

If a country is smoothly progressing with its national output on a long term basis, the

situation is termed as Economic Growth (Mansfield, 2010). The measurement of trend

rate depends upon the long-run macroeconomic data, in the range of 20 years or more, so

that it can identify economic cycles different stages and finally calculates about average

rates of growth in a bottom to bottom or peak to peak system (Paul, 2008).

Long-term economic growth rate can also be seen as an economys underlying speed

limit, which means this is an expectation of an economys fast growth over some years

without causing any long-term pressure of inflation (Nellis & Parter, 2009; Atmanand,

2009).


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Among the factors influencing the economic growth, UKtrading partners demand

conditions fiscal and monetary policy and changes and business and consumer

confidence do temporarily impact on the growth. The factors casting enduring effects on

the average growth on economy over a long term period are productivity growth and rates

of population.

Source: HM Treasury


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The above charts describes about the UKs potential national income over last 3

decades through a calculated way. Two important points are to be noted from the chart

are 1) every nation wants its annual national income to increase fast at a regular order,

because of positive effects of spending of capital investments, innovations and

technological changes and 2) Long-term basis average growth rate of national income in

a potential way.

UK experiences almost 2.5% oftrend growth rate per year. The growth rate is

susceptible to fluctuation as per the economys overall strength or its health or its supply-

side. According to the estimates of OECD about the earlier years of this decade and also


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during 1990s, the trend growth rate was a little upside than 2.5%. It is a too high

expectation that it should reach 3%.

Numbers of things are involved to make the trend growth rate higher for the UKs

economy. As per the opinion of Samuelson & Nordhaus, (2010), they are:

1. Raising spending ofCapital Investmentas a national incomes share2. Both labor supply and capital inputs should be contributive to achieve higher

productivity.

3. Encouraging the migration of high productivity labor so that the size of laborsupply can be expanded.

4. Encouragements of more number ofresearch and development in associationwith application ofinnovations throughout the economy.

2.1 UK productivity growth slumps in 2005-2010

After the recession of 1990, the slowest rate of UKs annual growth of productivity was

0.8% in 2005. Many factors are responsible for this; one of them was slowdown in 2005.

An economy is not optimally utilizing its worker as it uses when its economy is stronger

the economy will experience weaker output and weaker demand. More the weak

productivity performance more will be the supply side deficiencies (Allen et al, 2010).

The reasons behind the weak productivity are gaps of skill in industry and transfer of

economy related recourses in those public sectors, which are effected by lower

productivity (Atmanand, 2009). Among the other roadblocks of productivity growth are

persistently poor spending on research and development and the systems of red tape in

the business environment. If little progress is made in reducing the productivity gap, the

situation is known as low productivity growth (Mansfield, 2010), which has been

observed in the UKand in most the countrys major competitors.


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Source: Adapted from news report, June 2010, (OECD, 2010)


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The above chart is interestingly showing the differing growth rates among the countries.

The chart has been sourced from OECD figures, showing Ireland achieving faster growth

through its national income with potentials. The country show its 7% boom period in

1990 that helped the countrys GDP to double every 10 years. Although the trend rate

slowed down but persisted with more than double figure, among the average Euro Zone

countries. Spain also showed its relative growth in GDP. Hungary showed its 4% growth

rate due to rising income and inward investment, although a middle income country.


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(OECD, 2010)

The diagram below shows the effect oflong run aggregate supplys increase.


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(OECD, 2010)

3.0 GOVERNMENT POLICIES TO IMPROVE THE TREND

GROWTH RATEDuring the last 20 years government has encouraged entrepreneurship, made efforts to

raise investments and increased incentives in the work places. Following factors,

according to Nellis & David Parter (2009), help in potential output in a long term basis.

1) The growth of the labour force

With the governments effort increase in employment rate is possible, this in turn, creates

higher outputs of services and goods.

2 ) The growth of the nations stock of capital

When the capital investment is raised, the GDP will be improved; workers will have

more capital to work, new technology can also be harnessed, which all will lead to

efficient and higher level of productivity in the long run.

3) The trend rate of growth of productivity of labour and capital.

Most of the countries, growth productivity only drives the country for a long term. For

this situation markets need to be made more competitive in association with better

productivity. Other than this, there must be increment in the workforce or human capital

4) Technological improvements

To reduce the goods and service related supply costs, technology improvements are must.


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4.0 ECONOMIC GROWTH AND CAUSATION DIFFERENT

THEORIES OF ECONOMIC GROWTH

Although economists are grappling with the issues of developments and growth, little

success could be seen. A few of the thoughts are cited below:

4.1 Neo-Classical Growth theory

The term was devised 40 years ago by Robert Solow, the Nobel Prize winner (Hirschey,

2010). According to him if capital investment is increased in a sustained order, the

growth will be temporary (Mansfield, 2010).

In case labour, capital and output grow at a same rate, a steady-state growth path can be

achieved, further it will also stabilize capital per worker and output per worker (Wasahik,

2010).

Neo-classical economists, supporting Sorrows view, opine that increase in labor

supply, higher level ofproductivity of capital and labor can contribute to trend rate of

growth in long term basis (Hirschey, 2010).

As there are differences in the rates of technological changes among the countries, the

growth rates are sure to vary (Wasahik, 2010).

Many economists have accepted that productivity is significant as a contributor to the

long term growth and also the source of supply-side performance (Samuelson &Nordhaus, 2010; Hirschey, 2010 and Paul, 2008). IMF have suggested that UK has to

improve its productivity factors for its long term prospect, to match with her competitors.


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(OECD, 2010)

4.2 Endogenous Growth Theory

Economists, such as Salvatore, (2008); Paul, (2008) and Wasahik, (2010) supporting

Endogenous Growth Theory, view that productivity improvement is dependent on extra

investment in human capital and faster pace of innovation. They urge that both private

sector institution and government should encourage innovation, if needed they should be

encouraged with incentives. The proof is evident through the applications of software,

electronics, biotechnology and telecommunications.

Economists Samuelson & Nordhaus, 2010, supporting endogenous Growth Theory, view

that there is a need for exploitation of positive externalities, for leading towards a an

economy which is fathomed by high valued-added knowledge, having the capacity of

maintaining competitive advantage, within the global economy, which is growing fast.


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The endogenous growth theorys main pints are as below (Samuelson & Nordhaus, 2010;

Salvatore, 2008; Paul, 2008 and Wasahik, 2010):

A growth model should not be considered as constant to the rate of technologicalprogress.

New capital investments should match with its returns. There must not be any scopefor law of diminishing return in this matter. The endogenous growth theory

supporters strongly support the potentials in the economies of scale, almost in every

market and industry.

The key to technological progress is best expected from private sector based researchand development.

With the protection of patents and private property rights in the research anddevelopment sectors, the business and entrepreneurs get effective incentives.

If investment is made in human capital, by the means of quantitative and qualitativetraining and education, a country can get its essential growth in the long term.

With a view to emancipate innovation, investment, sourcing new jobs, governmentmust encourage new business and new entrepreneurship.

5.0 CONCLUSIONTo experience the economic growth, an increase in the capacity in economy is a must for

producing services and goods through the improvements in the production frontier. By

following the policy of non-inflationary increase in output on a long term basis, trend

growth can be achieved, which should also look into the increase in the capacity of

productivity. With the increase in the quality and/or quantity of the factor resources,

growth can be achieved. Health, the knowledge level and the skill of the work force are

known as human capital. The higher level of human capital quality ensures higher level

of productivity. Educational qualification is not referred as the actual skill level, which is

being considered in these days as the powerful economic growth driver. With the

networks of shared values and networks, social capital is represented, leading to greater

mutual trust and social cooperation.


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If growth is the target, innovation must be the means, because it lowers the costs while it

creates the new market, demand sources, profits and revenue for businesses and both

international and domestic markets.

6.0 REFERENCES

1. Allen, Wegelt, Doherty & Mansfield, 2010, Managerial Economics - Theory,Application & Cases, 7th Ed., Viva-Norton Student Ed.

2. Mark Hirschey, 2010, Managerial Economics An Integrative Approach, CengageLearning.

3. Dominik Salvatore, 2008, Managerial Economics, 6th Ed. Oxford University Press. 4. Robert Wasahik, 2010, Managerial Economics: A Strategic Approach, 2nd Ed.

Routledge Publications.

5. Samuelson & Nordhaus, 2010, Economics 19th Ed., Tata McGraw Hills.6. Atmanand, 2009, Managerial Economics, Excel Publishing.7. Sumitra Paul, 2008, Managerial Economics, Macmillan.8. Jospeh G. Nellis & David Parter (2009), Principles of Business Economics, 2nd Ed.

Pearson Ed.,

9. OECD, 2010, Global economic report, OECD.com, accessed on 1/8/2012

Macro Economic Theories

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