Economic growth Assignment PDF
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Added on 2021-05-31
Economic growth Assignment PDF
Added on 2021-05-31
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ContentsQuestion 1...................................................................................................................................................11)Can Growth make us poorer?..........................................................................................................11.2 Is it possible that the Marginal Costs Can become bigger than Marginal Benefits?..........................21.3 Is GDP a good measure to measure economic growth?....................................................................3Question 2...................................................................................................................................................4Question 3...............................................................................................................................................6
Question 1Economic growth is a short term view of the physical growth of the economy of a country. It is apivotal part of the larger goal of the economic development of a country. Economic developmentof refers to the development of a economy from various aspects and is often measured in qualitative terms. The Gross Domestic Product of a country describes the total amount of goods and services produced within a given country. However, this data does not directly provide an idea of the impact on an individual and provide a limited understanding of the various aspects of development. For example, Gross Domestic Product per capita is an indicator of an increase in the national wealth. Higher happiness can be a result from a higher household income (GDP per capita) as it helps wipe out the stark deprivations such as food supplies. However, a higher income does not necessarily mean more happiness. In some cases, higher incomes can lead to more life style related diseases such as diabetes, eating disorders. [ CITATION Joh12 \l 1033 ]1)Can Growth make us poorer?The GDP of a country is often measured , as the total value of goods and services produced during a given year. Natural resources and human capital must be invested in order to achieve a given GDP growth. Natural resources are often limited and the production of natural resources , often, cannot be capped. Figure 1 Total GDP as Aggregate of GDP of Country A and GDP of Country B
Source: Prepared by Author Adapted from [ CITATION Pau04 \l 1033 ]Let us take an example of two countries, Country A and Country B. Country A has a GDP of $200 billion while country B has GDP of $150 Billion. However, in order to achieve the desired growth, Country A had to sacrifice a large part of its large forest, in order to achieve the desired growth. If the forest had been retained, the value of resources from the forest such as timber, silk and other natural resources would have added $75 billion , in the next five years.In this calculation, Country A is better off, according to GDP as a measure of wealth. However, this measure did not put a value on the forest as an asset that has been retained. The Gross Domestic Product of a country does not account for goods that do not have a price or are intermediate goods. Moreover, GDP does not account for the negative externalities or net the social costs that were possibly accrued due to the production of the various goods and services incountry i.e. it did not account for the intermediate goods that were sacrificed in order to achieve this GDP and possibly led to environmental damage. The GDP also, did not account for the possible social benefits or the possible positive externalities (such as better air quality) that couldbe achieved from maintaining the forest or natural resources. Country A would be better off onlyif the social costs of demolishing the forests would be less than the opportunity costs of the total benefits that would have provided by the forests were not cut down. Similarly, Country B would be better off only if the future value projected for the forests is greater than the net gains ie $50billion.[ CITATION Ric \l 1033 ][ CITATION Ken11 \l 1033 ]1.2 Is it possible that the Marginal Costs Can become bigger than Marginal Benefits?According to Daly, (2013), “Even if it is theoretically possible that someday the marginal cost ofgrowth will become greater than the marginal benefit, there is no empirical evidence that this hashappened yet.” The concept of Marginal Costs and Benefits can be explained with the help of the concept of negative externalities and deadweight costs.‘Negative externalities’ are mathematically denoted as the deviation (negative) of Marginal Private Cost or (MPC) from the Marginal Social Costs. Lipsey & Chrystal, (2011) have explained private costs as “Private costs are those costs that are incurred by parties that are
involved directly in the Economic activity”. Similarly, social costs have been explained as“Social costs are those costs that are borne by the society” Lipsey & Chrystal, (2011). Hence, Marginal Private Costs refer to the producer’ private s cost of producing the last unit produced orproviding services to the last consumer serviced. Producers price goods according to ‘willingnessto pay’ of consumers. The ‘Marginal Social Cost’ is the value of the impact that is borne by the society due to the production of that last unit of goods or services. Negative externalities reduce the social good i.e. they have a harmful effect or they cause inconvenience to the general public. [ CITATION Ric \l 1033 ]. The diagram given below depicts negative externalities and the ‘loss of social good’ resulting from the producing goods and services. The Marginal Private Costs in the diagram below depict the cost of producing the good or service. Deadweight loss is the difference between the two.[ CITATION Ril05 \l 1033 ]. The loss of social good is the loss of efficiency and this loss of efficiency is calculated a ‘deadweight loss’. Figure2 Negative Externalities: Marginal Costs becoming greater than Marginal Benfits Source: [ CITATION Ril05 \l 1033 ]1.3 Is GDP a good measure to measure economic growth?In figure 2, The Total GDP of a the two countries is reflected as the Total GDP. Although the GDP of the Country A is greater, it diminishes the total value of the GDP because of it’s limited Marginal propensity to save.
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