Explain Why There Might Be Rapid Economic Growth in a Country (10m)

Topics: Economics, Macroeconomics, Inflation Pages: 3 (849 words) Published: February 24, 2011
Explain why there might be rapid economic growth in a country (10m)

Economic growth measures the rate of change in the volume of output produced within the economy. It is a key indicator of the nation’s economic wellbeing. Rapid economic growth can be described as economic growth that occurs in a short period of time, or at a great speed. A country might experience rapid economic growth due to increases in aggregate demand which lead to actual growth, interest rates, exchange rates, as well as investment in increasing labour productivity and technology as well as full gearing of factors of production.

Rapid economic growth can be caused by actual growth, meaning an increase in aggregate demand (AD) which is the total spending on goods and services in an economy over a given period of time. . It is calculated using the formula AD = consumer expenditure (C) + investment (I) + government expenditure (G) + [exports (X) – imports (M)]. Although it is possible to discuss potential growth (increases in aggregate supply), this discussion favours actual growth because AD has the capacity to increase in a short period of time whereas increases in AS take a longer period of time to bear fruit.

The biggest sector in AD is consumption. A sudden increase in consumption will lead to a rise in AD. For example, when consumer income increases over a short period of time, say, a major bonus handout or national wage rise is given, consumer expenditure is boosted. This is especially true if the workers incomes rise faster than the rate of inflation, resulting in higher real incomes. This will lead to a sharp rise in spending thus triggering a rise in output produced to meet the increase in demand, hence causing rapid economic growth.

In a real-world context, Japan’s “low interest rates policy” in the early 50s till the 70s led to a remarkable growth rate during that period. A cut in interest rates in one country would lead to a fall in savings as the opportunity...
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