University of California
Type of paper: Thesis/Dissertation Chapter
The relationship between economic growth and economic development
Economic development seem to be quite different from economic growth but the two seem to be reinforcing each other. Economic development implies sustainable increase in the living standards of a given country’s citizenry. The increase in the living standards or welfare means the increase in the per capita income, better education and health facilities, improved housing facilities, increased employment opportunities and environmental protection among other related factors according to Peter’s economy and business issues .
There is a very significant relationship between economic growth and economic development, where each ensures the emergence of the other. Economic growth is necessary for attaining economic development because it is out of the increased output level in the economy that the needs of the citizenry can be meant, and above all it is through Investments that job opportunities can be created which will in turn increase the per capita income of the citizens of a given country.
Increase in consumption implies that the citizens’ welfare has improved if an assumption of a constant population size is held, thus economic growth influencing economic development. Economic development on the other hand also reinforces economic growth, economic development is certain to improve efficient use of the scarce resources.
for example through the improved education and health standard of the population efficiency in their performance if ensure and for that reason the productivity of labour as a resource is improved which will in turn contribute positively to the Gross domestic product hence economic growth. Therefore economic growth and economic development are inseparable factors in an economy which reinforce each other. The importance of economic growth globally
Given the above mentioned relationship that exists between economic growth and economic development, it can be deduced that economic growth is required for to reinforce economic development which is the desire for for all economies of the world. The importance of economics growth in the world is explained as follows: i) Production acceleration Economic growth normally occurs in a situation where the consumption of goods and services increase, implying that the stock of goods which was initially produced has been used up, therefore paving way for more production.
From the same reasoning, economic growth is certain to ensure the smooth running of the production units because they do not have to keep a huge stock of the goods that are produced and this will also ensure that the capital that is held in the production process yield returns, otherwise the production units will be forced to close down because they will be unable to realize the capital returns and the goods produced will be filling up the space which will hinder further production. Economic growth through increased consumption can also be perceived as a benefiting aspect when non-durable goods are involved.
Economic growth will ensure that the perishable goods that are produced in an economy do not go bad before consumed, which is a rescue of the investor from making losses, thus its a business friendly concept which is certain to reduce business uncertainties which could have otherwise caused an economic loss. Economic growth through increased investment can also be perceived as a means of accelerating production. The purpose for investing is to produce goods and services in this context. The increased Investments that are reflected in economic growth will therefore increase the amount of goods and services that are produced in the economy.
One may wonder in which market are these goods and services produced are to be sold, but the answer is that they normally create market for themselves through increased level of employment that follows after an increase in investment. The increased employment means that the per capita income is certain to increase also, and this is expected to increase the purchasing power of the citizens of a given country, which is reflected in the increased demand for the goods and service, hence investments creating a market for the goods and services that are produced.
Government purchase as a component for GDP has a positive impact in economic growth, implying that an increase in the government purchase will cause an economic growth. The government purchase or expenditure accelerates the production of goods and service for the government is perceived one of the consumers of the goods and services produced in the economy. An increase in the government purchase will provide the producing firms an incentive to produce more in the economy, and they can only produce more if they increase their investments.
The increase in investment triggered by an increase in government purchase will lead to increased employment opportunities which is certain to increase the per capita income hence improved living standards according to Langford and Hansen . A positive impact of government expenditure will only be felt in the economy if the financing of the government activities was not funded by printing of money, because the printing of money will trigger inflation which will override the increase in real terms.
Output Government Purchasesii) Labor input Verses Productivity The creation of sufficient employment opportunities in the world has been a global concern, and it is aimed at improving the welfare of the citizens of a given country. The production firms will however not recruit employees arbitrary because they are profit maximizing and also operating in a competitive market, therefore they strategically absorb labour in a controlled manner which is certain to make the firm both competitive and also realizing the desired level of profits.
In other words the firms tend to operate a desirable marginal labour productivity according to Barro and Xavier . The firms will only increase the amount of labour input if the additional labour input increases or maintains a desired marginal productivity of labour. Economic growth normally implies an increase in productivity, therefore its emergence means that the firms are certain to experience increased production and this will be reflected in the increased absorption of labour as an input so as to meet the increased production requirements.
This argument is valid however in a situation where there is a constant returns labour, implying that an increase in labour input will result into a proportionate increase in output, therefore economic growth can be perceived as the only way in which employment can be created in a competitive market and also when involving the profit maximizing firms. The profit non-maximizing firms are not restrained to the number of employees that they ought to employ on the basis of production level, but rather restrained by their budget, thus economic growth is quite irrelevant on their decision making to some reasonable degree.