Economic Growth

People Suffer from Bad EconomyWhile some people in many countries have such a thing called living standards others in the so called – developing countries – considers Education and Health care to be Luxuries. Not to mention, some  have no shelter to accommodate them or food to eat but somehow life goes on for them.

Everyone has a different answer! … for Why is that happening?  because of corruption, Maybe!
because of civil war, Maybe, or because of Bad Economy.

In this piece of writing we shall discuss some economic concepts that might make it clear a bit why is that happening?

Short answer is that Economists think these nations -the poor developing countries- have never experienced a sustained growth in their economy or have had period of growth, but offset by economic decline.

So basically you are telling me that these poor countries have bad economy because their economy has never been good before …. very smart LOL

Yeah, true but before thinking of it that way let’s see what is the reason which makes the economy better then try to understand the last statement one more time.

If we assume that a country has all the factors of production available, they have Capital to spend in the investment, they have labor, land and Technology, but in the other hand, they have political instability, fewer free market and a broken economic system,

would their resources allow them to build better economy?

Because better Economy does not happen by itself and because people of the nation are the ones to  make the economy grow the answer to the last question will be NO.

Growth does not happen in a day or two, it is a long journey. During Economic growth, they will be recessions and maybe depressions but while there is a steady economic growth, that is okay because there are other factors which can affect the economy.

The next graph represents the US economy since 1869. It is very clear that the output has increased dramatically since then. Not only the amount of output has increased but also the labor productivity has increased.

US output

Ups and downs in a steady long run economic growth is healthy ,in my opinion, because without this business cycle, other economic problems may occur such as high rate of inflation.

Economic will work well if we eliminate the factors which may affect the growing of they economy -believed by Classical Economists as a result of the invisible hand- and would be much better with some help from the government that implements the right policy in the right time -believed by Keynesiens-, so combining these two approaches and working them out would probably translate in a better economy.

Before we go much deeper, let’s first find out how are we supposed to know if an economy is growing? and what is the measurement instrument for that?

The most important term used is GDP (growth domestic product) which is the sum of the output coming from consumers, government, investments and the net exports (if we used the expenditure approach). Once we have that in hand we just put it in a yearly graph to see how the trend is looking like.

Nations consider themselves as if there is car race between them and each country tries to become the fastest growing economy from among the others. But what matters really is not to be the first in one particular cycle but to increase your GDP in each cycle in a steady way.

However, when there is inflation and that happens when prices become very high then economy experience a recession because people will not be able to buy things then business will close then another businesses will close until a depression comes where the government then realize that they have to do something with it so the increase their spending or decrease their taxes which makes people have some more money in their pocket then they spend it and consume more and businesses opens again and the country experience an economic growth.

So, yeah, each country experiences ups and downs in their economy, but what only matters is that growth should be steady in the long run, and for developing countries they should first eliminate the factors that are dragging them from accomplishing better economy.

 

 

 

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