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Using relevant macroeconomic theory explain how governments might generate economic growth

ASSIGNMENT TITLE

Using relevant macroeconomic theory explain how governments might generate economic growth

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Using relevant macroeconomic theory explain how governments might generate economic growth
Table of Contents ASSIGNMENT TITLE ....................................................................................................... 0 1.0 INTRODUCTION ........................................................................................................ 2 2.0 ECONOMIC GROWTH:.............................................................................................. 2 2.1 UK productivity growth slumps in 2005-2010 ......................................................... 5 3.0 GOVERNMENT POLICIES TO IMPROVE THE TREND GROWTH RATE ......... 9 4.0 ECONOMIC GROWTH AND CAUSATION DIFFERENT THEORIES OF ECONOMIC GROWTH ................................................................................................... 10 4.1 Neo-Classical Growth theory.................................................................................. 10 4.2 Endogenous Growth Theory ................................................................................... 11 5.0 CONCLUSION ........................................................................................................... 12 6.0 REFERENCES ........................................................................................................... 13

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Using relevant macroeconomic theory explain how governments might generate economic growth
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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Using relevant macroeconomic theory explain how governments might generate economic growth

Among the factors influencing the economic growth, UK trading 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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Using relevant macroeconomic theory explain how governments might generate economic growth

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% of trend growth rate per year. The growth rate is susceptible to fluctuation as per the economys overall strength or its health or its supplyside. According to the estimates of OECD about the earlier years of this decade and also

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Using relevant macroeconomic theory explain how governments might generate economic growth
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 of Capital Investment as a national incomes share 2. 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 labor supply can be expanded. 4. Encouragements of more number of research and development in association with application of innovations 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 UK and in most the countrys major competitors.

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Using relevant macroeconomic theory explain how governments might generate economic growth

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

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Using relevant macroeconomic theory explain how governments might generate economic growth

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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Using relevant macroeconomic theory explain how governments might generate economic growth

(OECD, 2010) The diagram below shows the effect of long run aggregate supplys increase.

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Using relevant macroeconomic theory explain how governments might generate economic growth
(OECD, 2010)

3.0 GOVERNMENT POLICIES TO IMPROVE THE TREND GROWTH RATE


During 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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Using relevant macroeconomic theory explain how governments might generate economic growth 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 of productivity 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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Using relevant macroeconomic theory explain how governments might generate economic growth

(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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Using relevant macroeconomic theory explain how governments might generate economic growth
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 technological progress. New capital investments should match with its returns. There must not be any scope for 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 research and development. With the protection of patents and private property rights in the research and development sectors, the business and entrepreneurs get effective incentives. If investment is made in human capital, by the means of quantitative and qualitative training and education, a country can get its essential growth in the long term. With a view to emancipate innovation, investment, sourcing new jobs, government must encourage new business and new entrepreneurship.

5.0 CONCLUSION
To 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. Page 12

Using relevant macroeconomic theory explain how governments might generate economic growth

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, Cengage Learning. 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

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