Gross Domestic Product Future Expectation
Global economic growth is defined as the sustainable increase in the welfare of the economy of the whole world as opposed to that of a state, region, or city. It covers such areas as industrial structure, improvement in public health, reduction in illiteracy levels, demography, and equal distribution of income. As the world experiences economic growth, economic transformation is felt, this s also occurs in the social, political, and cultural spheres of life. As a result of economic performance improvement, profound and multidimensional changes occur in societies and ultimately in the whole world.
Various factors influence the rate at which global living standards grow (Wenzel, 2009 p.163). There are three broad categories put forth by economic theories that try to crack this nutshell:
- Advancement in science and knowledge necessary for the production
- Individual skill improvement
Incentives are a must in any economic decision and have an impact on skills and knowledge accumulation. The wealth of nations mainly increases with increasing knowledge. Knowledge and technology have forever inspired advancement since the prehistoric era. Knowledge is social capital and grows when others too add to it. Many ideas when brought together contribute to economic growth and ultimately to a higher level of GDP. Technological advancement and scientific progress lead to a world in which living standards rise at a very fast rate.
Measurement of Economic Growth
Methods of measuring economic growth aim at quantifying the rise in the welfare of the society and to put into numerical form these broad economic and social changes. Gross domestic product (GNP) and gross domestic product (GDP) are among the most effective measures of economic growth.
GDP has over the years proved to be one of the most effective economic indicators for various governments and businesses. It brings together varying economic activities into a single figure with the possibility of breaking it up into its contributing parts. GDP invaluably measures the aggregate production which enables the extraction of a certain piece of information regarding a given sector. GDP could work to show an indication of potential future consumption because components like the corporate taxes, information on research investment and human capital lead to an increase in lasting economic welfare.
GDP is easily quantifiable, is standardized globally, and therefore readily available from most countries, this makes it the widest measure of income that exists. These features make the GDP the best available base where comparative analysis can be done. It also gives the stage in the business cycle of development and has therefore emerged as the prime economic yardstick in policymaking.
GDP measures goods and services produced by a country within a given period in most cases a year. The calculation of GDP entails considering the market value of goods and the services offered and using this value to arrive at a figure. This figure is then used to gauge the rate at which the economy is growing and the general economic state of the country in consideration. The calculation of GDP is arrived at by including the entire private and the state spending, the goods, and services produced by these sectors, and the exports. Further, the GDP is adjusted to take care of the imports and the inflation that might arise. The figure arrived attends to reflect the accurate total sum of the said nation (Wenzel, 2009 p.166).
Nominal GDP is calculated at current prices as opposed to previous prices (Brux, 2007). Nominal GDP is only considered when policymakers and economists are interested in information regarding that year alone. Real GDP is that number economists want to use when comparing data for different periods. Whereas real GDP is adjustable to take care of inflation, it is not possible to do so for nominal GDP. Gross domestic product is only used to measure the economic health of nations and the standards of living. A high GDP is an indication of high economic growth and improved living standards (Brux, 2007 p.174).
Global Economic Growth
Global growth is largely influenced by policy. Economic growth determines the economic paths that nations in the world may take in the future. Long-term economic growth fundamentally determines whether the poor developing nations will catch up with the developed ones or will retrogress and fall further behind the developed countries.
Different theories attempt to analyze economic growth but the most effective of these theories are the traditional Solow growth model and theories based on the concepts of endogenous growth.
The Solow model of economic growth emphasized capital accumulation, population, and technological advancement as a catalyst for economic growth. According to this model, it is postulated that market-based economies eventually stabilize and acquire a constant growth rate when the technological and population growths are in sync. Robert Solow (1956) in his theory views the world as one in which output, Y, depends on the production function Y= F (K, L),
With K representing the capital stock while L represents the labor force.
Solow postulated that when inputs were doubled, output too doubled thus showing that production function has constant returns to scale. Holding one of the inputs constant leads to a lowered output level, this is referred to as the law of diminishing returns. This model is facilitated by savings and varying the ratios of capital to labor.
Solow’s model presents a good example of how to continue global growth since capital stock equals investment while investment represents output that is saved.
S is the rate of saving
Because technological progress is exogenous, income will tend to rise with the level of physical capital but this will not generate continue global growth. Sustained global growth occurs in the long run when the growth of the economy equals growth in the labor force and the increase in technology. Although the level of economic growth does not increase with increased saving, there is an increased level of GDP (Gould & Ruffin, 1993 p.19).
The endogenous growth models argue that long-term economic growth is influenced by economic incentives. Among this group of economic growth theories is the idea that inventions are intentional and that they generate technological excesses that tend to lower the cost of innovations in the future. This theory attempts to articulate the economic development behind technological advancement. According to the authors of this theory, technological inventions are motivated by the urge to make profits but not solely due to intellectual inquiry. The result of this move is productivity growth which could be related to the structure and policies that are practiced by the economy rather than being motivated by forces of nature and luck (Gould & Ruffin, 1993 p.17).
Because research and development are aimed at making a profit, the impact is that there is a fall in innovation while knowledge accumulates. It follows then that the rate of growth of the economy is dependent on the rate of introduction of new products.
Because new products arise from innovative minds, knowledge accumulates as technology advances. Unlike Solow’s growth model, the endogenous growth model does not exhibit the law of diminishing returns on capital when other factors of production are held constant. Accordingly, increasing the level of capital will lead to an ever-increasing growth rate and subsequently the level of GDP. Therefore, a large stock of available capital, a knowledgeable population, and a business environment favorable to knowledge accumulation may lead to faster income growth.
To correct the disparity between the poor and the rich countries, the two groups of economic growth theories offer factors that determine the level of the economic health of nations. However, the Solow and endogenous growth models have differing views and implications for what is vital when determining the rate of economic growth of countries in the world. These theories act as guides when trying to ensure uniform global growth.
The question that economists ask is whether the world behaves like the endogenous growth model which postulates that continued global growth and technological advancement are a result of economic factors or whether it behaves like Solow’s growth model whose technological advancement is influenced by exogenous factors. These questions’ importance is that developed countries might get to understand how they may help increase the GDP of countries lagging in economic development.
They also help countries influence their economic growth strategies. Studies however reveal that Solow’s growth model does not go well with economic projections leaving economists to depend on the endogenous growth model. According to the Endogenous growth model, a subsidy in higher education, for example, may give a more realistic reflection of what will happen on the ground.
As a result of a boost in the education sector (due to investment aimed at the accumulation of human knowledge) in a given country, there will be an increase in income and a continued growth rate. Research has further shown that both theories are similar in the short run prediction but differences arise in the long term prediction with the endogenous growth model correctly predicting continued growth while Solow’s model shows a gradual decline over time in economic growth and GDP (Shaw, 2010 p.31).
Suggestions to Continued Global Growth
Based on Solow’s model, the super economies could help improve global growth by increasing the level of investment in the developing world as a measure to increase technological progress. Technological advances in the developing parts of the world can help increase production possibilities. Technology enables economies to increase their output from the available resources. Developed economies should do this by budding entrepreneurs, supporting new inventions, and nurturing innovations. Investments in the poor economies will enable them to grow at a faster rate than the rich economies. Ultimately, over time, the per capita incomes in both the rich and the poor economies will converge (Shaw, 2010 p.32).
Trade patterns are largely influenced by the distribution of resources across countries in the world. Natural resources enable economies to process them into factors of production which are then exported into other countries. Evidence points out that resources are critical determinants of economic growth. Further evidence reveals that there is a strong link between resource abundance and the economic performance of a given state.
Increasing the resources in the poor economies could stimulate global growth by focusing on the GDP. This is even though most natural resources go beyond our production. However, resources such as machinery, tools, buildings, and educating the labor force would allow a greater amount of goods. Equipment investment can potentially increase the economic growth of countries and the world at large. Further, new technologies have tended to be propelled by new types of machines.
Investment in new machines was vital in the early 19th century when steam power was required for the steam engines. Power looms and spinning machines were also necessary for automatic textile manufacture. In the early twentieth century, motor vehicle production became possible with the heavy investment in high precision metal shaping machines that made it easy to change and modify parts and enabled assembly lines possible. It is, therefore, true to say that for continued global growth, developed economies must heavily invest in machinery and equipment which are strategic factors in economic growth and technological advancement (Shaw, 2010 p.37).
Developed countries should attempt to improve the legal system of impoverished economies. These are the rules that influence the interactions between people who act together in the production process. Poor economies in the world should be encouraged to put forth legal innovations that promote cooperation and encourage people to produce only those goods that are demanded by the consumers which stimulate possibilities of production. It has been realized that poor legal systems fail to realize the full production potential. A country like the USA has a high GDP due to its laws that enforce private property rights and provide protection to individual property leading to very successful marketplaces.
Countries should too be encouraged to review tax rates which encourage people to work hard. Very high taxes could reduce the rate at which people work leading to a lowered production and subsequently a lowered GDP. If people are encouraged to work hard, their living standards will increase leading to an increased GDP.
The endogenous growth model correctly predicts that investment in education can lead to an increased level of GDP.
Developed countries should help maintain political stabilities in developing parts of the world as continued political instability decreases GDP. Political stability is measured by gauging the number of government revolutions and politically motivated assassinations. Increasing political instabilities in the Arab world today especially in Tunisia, Egypt, Libya, Algeria, Ivory Coast, Lebanon among others are resulting in lowered Global GDP.
In a bid to stabilize the world economy, developed and politically stable countries like the USA, UK, France, Italy, Germany, and Canada are airing their voice in an attempt to maintain continued global growth. GDP in these countries has already nose-dived and with them have gone several other economies that depend on the troubled countries. A good example of how political instability might affect global and national GDP is South Korea’s GDP growth per capita which grew at a mere 5.25 percent rather than 6.25 percent between 1960 and 1985. Iraq and Afghanistan have also lost a considerable percentage of their annual per capita growth which has consequently affected the global GDP.
GDP increases when government spending is low meaning that growth and investment are high. Political instability increases government spending on security and causes high taxation rates in a bid to raise funds leading to lowered private savings. This in turn lowers the national and global GDP. Unstable governments create an insecure future and in the process scare away investors and lower incentives to invest.
The developed governments could also help increase global GDP by opening them to international trade. Countries that are open to international trade have been shown to grow much faster than those with closed economies. The USA and other developed economies should advocate for all countries to pursue outward-oriented pro-trade policies. This is very successful especially among the four Asian Tigers that continue to experience up to 8 percent economic growth per year in the recent past. Countries lagging in economic growth like those in Africa and Latin America have closed economies while their GDP does not exceed 5 percent a year.
Opening up to international trade leads to faster technological progress with increased economic growth as the cost of developing new technologies is lowered because technology is easily imported. International trade becomes important as it makes products and technologies easily available.
In conclusion, in a bid to continue global growth, the developed economies should emphasize those factors that are associated with a rise in physical capital investment such as education investment, capital savings, equipment investment, and an increase in the level of human capital which leads to technological advancement and economic growth. They should avoid those factors that reduce investments and those that interfere with the functioning of the markets such as high government spending, political and social instability, barriers to trade, and socialism.
For a long time, questions on what and how uniform global growth could be achieved have always been asked. Economists such as Malthus once said that increasing the population growth and combining low resources and falling productivity was a sure way to result in a subsistence income. However, with modern technological progress, the question of plenitude is out of the picture as new products appear that replace the already existing ones displaying an increasing technology at an ever-increasing rate.
Endogenous growth models arose to try and explain why there was unequal economic growth between countries and why countries with steady economies grow much faster than their poor counterparts. The reason for the rise of endogenous growth theory was to answer the too many questions left answered by the traditional Solow model about the disparity in growth across countries and how technological progress acted to promote global economic growth.
Technological advancement has been proved to be the prime mover of global economic growth and for any achievements to be visible, developed economies like the USA must put effort to promote investment in this sector. A strong relationship exists between investment and global growth. Other factors important in global growth are political stability, well-defined legal systems that advocate for property rights, equipment investment, removal of trade barriers, and lower government spending. When the above has been reached, long-run growth predictions are of the endogenous growth theory will be easily achievable.
Brux, J. M. (2007). Economic Issues and Policy. New York: Cengage learning.
Gould, M. D. & Ruffin, J. R. (1993). What determines economic growth? Federal Reserve Bank of Dallas.
Shaw, B. (2010). GDP: A Business Perspective: Wealth, Environment And Well-Being. New York: VDM Verlag.
Wenzel, T. (2009). Beyond GDP: Measuring the Wealth of Nations. New York: GRIN Verlag.