Answer these questions before you read the text:
1. How do you understand “the Gross National Product” and “the Gross Domestic Product”?
2. Can you think of any reasons why high rates of inflation should be associated with serious falls in the rates of economic growth?
6.1 The meaning and measurement of economic growth
The average income of the 121 million Japanese is now higher than that of the 242 million Americans: $17 000 a year compared with $16 000. As recently as 1965, Japan’s average was only a quarter of America’s.
Source: The Economist, 25 October 1986
Economic growth refers to an increase in a country’s annual output of good and services. The measurement of output which is used to measure economic growth is normally the Gross National Product (GNP). However, the Gross Domestic Product (GDP) is also used for this purpose. Both these measures were explained on page 204.
The rate of economic growth is often used as a measurement of changes in the standard of living. This means that it is changes in real GNP which are important. Increases in GNP which are simply due to price increases cannot be treated as economic growth.
If changes in GNP are to be used to measure how the standard of living is changing, we must also take account of population changes. For example, if real GNP increases by 3% in one year, but total population also increases by 3% in the same year, these would be no change in the average standard of living. It is growth in output per person which makes higher living standards possible.
Economic growth can come about in two ways:
1. A country may have many people out of work and much capital and land lying idle. If these resources are put to work, GNP will increase.
This is described as short-run growth because, if other things do not change, there will be no further growth once full employment has been achieved.
2. Even when all resources are fully employed, however, economic growth is still possible. Increases in the supplies of labour and capital, and increases in the efficiency with which economic resources are being used, will lead to increases in total output. This is described as long-run growth.
5.1.1 Effects of different rates of growth
Chapter 23 described how quite small annual rates of increase can lead to large increases in the total population in relatively short periods of time. This also applies to economic growth. For example, if real GNP per head increases steadily at an annual rate of 2.5%, it would double in about 30 years. If this rate could be maintained, the average standard of living would quadruple in a person’s lifetime. This simple example helps us to understand the remarkable transformation of the Japanese economy. Between 1964 and 1973, this economy grew at about 10 % per annum.
If a rich country and a poor country have the same rates of economic growth, the difference in their living standards will not stay the same, it will be getting larger and larger. This is made clear in the following example:
Two countries, A and B, are both growing at a rate of 5 % per annum.
Country A’s GNP per head = 5000$
Country B’s GNP per head = 300$
Annual growth of Country A’s GNP per head=250$
Annual growth of Country B’s GNP per head = 15$
6.2 The benefits of economic growth
· Improvements in living standards
The main reason for desiring economic growth is to raise the living standards of the population. During the course of the present century, economic growth has enabled millions of people to escape from destitution and poverty.
In 1980, the real income per head in the UK was four times greater than in 1870. In Japan, it was 18 times greater.
More than half of the world’s population now lives in great poverty. For most of these people, the economic problem is getting enough to eat. Economic growth – more output per person – offers the only real hope of raising their living standards above a bare subsistence level.
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