Gdg Growth Rate as a Factor Affecting Economic Growth

The bigger the number, the better. In economics, this cannot be truer, unless if talking about unemployment rates, inflation, or the HDI. Growing GDP is a great indicator of economic growth, as is GDP growth, but the problem is that it is only a good indicator for a year. For example, while Japan’s GDP did grow fantastically year-on-year, this growth indicator could not predict Japan’s bubble burst later on, creating stagnation for a decade. An expanding GDP is a positive, but how the GDP is expanding is the real answer to how much of the economic growth is legitimate. If an economy grows off of subprime mortgages, mortgage-backed securities with false ratings (like in the movie The Great Short), the economy is bound to dip because it is built on weak rather than solid foundations. The fact that the government can regulate and smoothen the business cycle of faster and slower growth is intriguing, as only it is truly immune from the fear factor of a contracting economy, which produces a negative feedback loop—people and companies saving more when more consumption is what will stimulate the economy—and stymies economic recovery.

Only the government can use Keynesian ideas of stimulus and lowering taxes to create more cash flow, but it is also government intervention that causes many hiccups in the economy in the first place. While the GDP and GDP per capita measures the economy as a whole, the Gini Index addresses inequality. Economic inequality can produce problems for even the elite of an economy, as if a large segment of the economy is poor, there would be less demand for products and services that companies—which are often run and owned by the economic elite—sell. While economic inequality is inevitable, business owners must recognize that too much inequality can harm their own self-interests.

While the government can redistribute income through fiscal policies of raising taxes and increasing social welfare programs, this can ultimately lower the GDP and overall economic condition of a country by contracting the money supply, leading to less investment and opportunities for economic growth. In terms of government, the bigger is far from better. A government has to carefully balance its fiscal and monetary policies, to fine tune growth, inflation, unemployment, inequality, and cash flow. Deciding when and not to intervene is imperative—not every situation requires an intervention. While the market is far from perfect in adjusting itself, intervention can sometimes prevent the market from adjusting itself when it can.