YFF - Factors that Influence Economic Growth (Lesson)

Factors that Influence Economic Growth

Introduction 

There are many different measures of economic growth. Some are measured by the federal government and some are measured by private entities. There are three primary measures of economic growth which corresponds to the three most important economic goals for a country:

measures of economic growth Measurement corresponds to goal GDP to Economic Growth Unemployment to full employment Inflation to Price stability   

GDP

Gross Domestic Product (GDP) measures all of the new production in an economy during a given time period. GDP looks at production within a nation's borders. The more a country produces, the more jobs they have and the more wages people earn. This means they have more money to spend. So, looking at GDP gives you an indication of how an economy is growing or shrinking.

We can calculate GDP by adding up the following:

GDP = C+I+E+G Consumer Spending Investments Exports Government Spending 

 

Unemployment

Unemployment is measured by determining the percentage of unemployed persons in the labor force. The labor force is comprised of all persons over the age of 16, not retired or institutionalized (in prison or a mental hospital), who are willing and able to work. To be considered willing to work, you must have looked for work in the past four weeks. Housewives, house-husbands, students and others who choose not to work are not counted as unemployed.

An economy with a low unemployment rate is considered to have a growing economy, and a country with a high unemployment rate is considered to have a receding or shrinking economy.

To find the unemployment rate, we divide the number of unemployed by the labor force and multiply by 100.

Example problem to demonstrate how to find the unemployment rate using the formula discussed above.  

Inflation

 The basic idea of inflation is that money today is not worth as much as money yesterday. Most of us would automatically think that inflation is bad and that deflation is good. However, the impact of inflation depends on your individual circumstances. Some people are hurt by inflation and some gain from inflation.

For example, you go to a store to buy a candy bar for a $1. A year later you go back to buy the same candy bar, but the price has increased to $1.25. You still have only $1, but the price has increased. The price of the candy bar has been “inflated.” Adults are particularly worried about inflation when discussing “big ticket items” like cars and homes. But inflation also affects things like rent and groceries! We just don’t notice it so much on small purchases like food each week. When inflation rises, but people’s paychecks stay the same, they have to spend more to buy the same things they used to buy.

What are some of the consequences of inflation? Incomes shrink because purchasing power shrinks. Further, there is a change in wealth. Some assets increase in value because of a rise in price while others shrink in value because interest earnings do not generally keep up with inflation.

 

 

Four Factors that Influence Economic Growth

Natural Resources - Countries that have a wealth of natural resources are able to utilize these resources at a cheaper rate as opposed to importing them from other countries. Countries that have a surplus of natural resources are able to sell the extra to other countries for a profit. 

Human Capital - Human Capital is the amount of education, training, or skilled labor that the citizens have within a country. If the government invests in human capital, it is beneficial to the overall growth of the economy.  The citizens are more productive and generally produce more goods and services. Furthermore, a country's literacy rate directly affects the overall health of an economy. The Higher the literacy rate, the more productive and valuable the citizens.

Capital Goods - The increase in GDP is directly related to the amount of capital goods available within a country. Capital goods include factories, machines, buildings, and technology. Capital goods increase the production of goods and services within a country. The more capital goods a country has, the more to produce and sell.

Entrepreneurship - Entrepreneurs are important to the overall economy of a country. Entrepreneurs are risk-takers and inventors that are not afraid to take risks in order to earn a profit.  Entrepreneurs utilize natural resources, capital goods, and human capital in order to produce a good or service. Countries with high GDP's generally have more entrepreneurs than countries with lower GDP's.

 

A Word About Trade

Countries hope to achieve a balance of trade where they export more than they import. In other words, they sell more goods to foreign nations than they import into their own country. This means that the country is making a profit off of trade.

A negative balance of trade is called a trade deficit. This is when a country imports more than they export. This means that the country is not able to produce what they need, and they are spending more money on foreign goods than they are making from selling goods to other countries.

So, nations hope to have a favorable trade surplus. They are ok with a balance of trade. They are distressed about trade deficits.

Problems with Trade: Imported goods sell for cheaper prices than products that are made at home. It can destroy new industries that are trying to enter the market.There is a concern over the dependency on foreign goods. How do Countries protect against these problems? Tariffs - taxes placed on imports to increase their prices in the country's market Quotas - some foreign goods are so cheap that adding tariffs to them still won't protect domestic industries. If this is the case, the government sets a quota (limit) on how many of these foreign goods can be brought into the country. Inspections - many foreign goods have to go through rigorous inspections before they can enter a country 

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Tariffs and Quotas

Tariffs are taxes that are placed on goods imported from another country. The taxes increase the prices of the goods, making them less attractive to consumers. Countries can impose tariffs to increase revenue or to protect domestic industries from foreign competition.

By making imported goods more expensive, tariffs can make domestically-produced goods more attractive to consumers. However, tariffs can hurt consumers because they can cause an increase in prices because of lack of competition.

Quotas are limits on the imported goods entering a country. For example, if a country wants to protect its car makers and help them sell more cars, they can impose a quota on how many foreign-made cars are brought into their country in a year. Quotas typically hurt consumers while domestic and foreign producers benefit by receiving higher prices for their goods.

 

Consider this...

If free trade is so great, then why aren't there any countries that practice completely free trade? This video goes through the basic arguments given for restricting trade. Watch "Episode 35: Why Do Countries Restrict Trade?" by Dr. Mary J. McGlasson to find out.

  

 

 

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Think About This

 

Now that you have investigated unemployment, tariffs, quotas and other economic terms and concepts and their real-world applications, it’s time to move on to the next lesson!

 

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