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why is too high growth rate bad in economics?

February 23, 2009 at 2:35 pm (Economics)

Economic growth according to “investorwords.com” is defined as A positive change in the level of production of goods and servicesby a country over a certain period of time.

Many economist argue that economic growth is solution to all the economic problem and policies of the government must be set in that direction. Many other argue that economic growth wont solve the problem of inflation and unemployment and other inequalities in a country.

How much economic growth is good and what is the limit. Economic growth means growth in production of a country. Any production requires land, labour, capital and entreprenuer. In order to have economic growth consumption of land(natural resources) will increase. However there is scarcity in terms of natural resources. so as population increase more production is required. But since the natural resources are limited, as population increase, the productivity of labour will decrease as each will have less land. Less input that is.

One question that should be looked at more carefully is what do we mean by limited.  In a way natural resources grow as well. Well first there are still many unexplored lands in earth, which have potential of oil or other mines. Then there is recycling. There is also technology which makes production more efficient.( ie.with less input there is higher output). There fore these factors actually will renew natural resources to an economist eye.

But nature does it at its own paste, and it does not synchronize it self with our demands. Therefore we should synchronize our selves with nature and technology. 

Usually people regard high economic growth as a good thing and do not see the down sides to it.In practice a growth of 6% to 8% is ideal. Anything above 10% is dangerous and harmful. When malaysia was in its boom, the aim of malaysia growth was 7%. The growth however at some point went as high as 8.8% . Then he took measures to bring down this growth to a low level. 

The reason behind this is that, when the growth is above 8%, the speed of growth is so high that production is exploiting something. Its either is natural resources, Labour or something else. Its like overclocking a system and making it very fast for a while but the whole system will burn out.

To have a better understanding lets look at an analogy. Assume your production is getting water from a waterwell by using pumps. this well very slowy increases its water storage through under ground waters. If we are happy with the growth and then put 10 pumps inside a well in order to produce faster and increase our income, after a short while  we probably will dry up the well. Loose our customers. Our investment in the capital of 10 Pumps will go to waste since production is stopped. However if we put one pump instead and be happy with the slow growth, the well wont dry up. the growth will be smaller but it will be very long lasting. This will give us more returns in the end.

Nature also has a certain pace for absorbing pollution. If our production and production of pollution is faster than nature our environment will eventually be turned into a junkyard. That will damage cycle of reproduction of natural resources.

High growth rates have side effects as well. Many economic policies aiming at increasing the production level provoke the demand( Fiscal, Monetary  policies), that is they create situation where demand increase that is the curves shift to right in order to pull up the supply. This will cause increase in prices, and if the supply is inelastic in that country have inflations.

As inflation is the driving force for supply. China’s economic growth hit the all time high of 14%, chinese government took measure to decrease the growth. China’s economy is based on cheap labour. There fore cheap labor was the key resource for china’s resource. There fore the the excessive growth I speculated long ago was sign exploitation of china of its cheap labour. there are 1.3 billion people working in china. However not all of them are benefiting the growth. The inequality in china is rising fast, and this has led to internal problems within. Even though china is keeping a strong grip on the country and leaving all the media out, still we hear a lot about internal problems and the protests and the killings in china. Makes one wonder how much more is going on in there?
In conclusion,growth rate has to be kept at a moderate rate.Exttreme high growth rate will lead to inflation, pollution, and destruction of environment,depletion of resources ,inequality and in long term unemployment.

 

 

M.Ebrahim Sadeghian F.


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Artificial Boom

February 23, 2009 at 11:32 am (Economics)
Tags: artificial, boom, economy, politics, public policy, world

Artificial Boom(by M.Ebrahim Sadeghian F.)

Many economies suffer from short term policies which are based on self interest of 4 year period government. 4 years is relatively a short time for constructive economic policies to be applied .  In countries where there two or three strong parties are competing for a votes, they will take on policies which are attractive to people’s eyes, so that they can get elected for the next round.  
Many of these policies are really harmful in long run but are constructive in short term( ie. appear constructive).

overall it will do more harm than good. Economics policies must be used in interest of general public. But no system is perfect and in many governments policies are used for a party’s gain.

A common strategy is  the artificial boom policy. In this policy government uses monetary and fiscal policies in order to cause an artificial boom.By pumping money into the economy through cutting taxes short and dropping interest rates;government increase people’s PPP(purchasing power parity)this will suddenly pull up the aggregate demand. In this policies change rates are usually abnormally big. In short time after the policies have taken place,great changes are felt by people. Prices go up, production goes up, employment goes up, people will start new businesses since loans are very cheap. It will seem like the economy is developing very fast. Unfortunately economic literracy of many societies are very low, and people see this as boom. While its only an artificial boom. This will cause people to trust the new party with their policy and government will gain their votes.

Aggreggate supply is very inelastic comparing to Aggregate demand, This sudden rise in demand ,will be followed by a sudden rise in inflation,  so usually governments  bring the economy to its normal state after a short while, but if they are not fast enough the ecoomy will be wrecked.  A sudden inflation in an economy can be more harmful than a slow crawling one. Since sudden rise in prices will trigger spiral inflation in an economy since people speculate.The reason is that when prices are rising slowy people don’t  really notice it, but when it rises fast, people will speculate and take measures. Many will buy a lot of goods in advance, so that they wont have to purchase when prices are higher later. This will again increase the aggregate demand further and cause more inflation. The labour union will ask for higher wages, and firms will increase the prices in order to pay the increased salaries of their labour. The inflation will become like a big stone rolling down a hill, it will keep gaining momentum and it will become so fast that stopping it would mean crushing some classes of the society in order to bring the stone to a halt.

New businesses that started due to cheap loans and high demands, will loose their businesses since the demand will drop due to high inflation which reduces people purchasing power. And government in order to take the inflation under control will probably increase the interest rates in order and increase taxes. This inflation rate will increase the price of the country’s export, Hence country’s demand will fall from foreign countries if their demand is elastic. Many people will become unemployed as demands are very short during the inflation period.

So both unemployment and inflation go up, and when both are high bringing either one becomes very hard and in some cases impossible. Since both are near their threshholds( threshhold of people). Decreasing one will cause increase in the other. And if either one pass their threshholds, there will be riots and political problems.An artifical boom policy if not brought under control immediately will be very harmful to an economy.

All in all, in economy after every boom there is a recession, in this case after every artificial boom there is a real recession.

In 1923 Britian took measures to prevent this situation. By creating restrictions for short term policies like fiscal policies or monetary policies.  They  restricted fiscal policies, by creating limits where by a ruling government has to keep in a certain range of government revenue ,interest rate ratio. This restricted the governments in using short term policies, hence ruling government will be forced to used more effective policies

 

 

M.Ebrahim Sadeghian F.

 Scarcity

Scarcity is the base of economics. From Scarcity we understand what is the problem and why do we need economics to solve it.In other words in life scarcityو is always the problem and economy the solution.

Needs- Essential eg.Food(Limited)

Wants-New cooler phone with 8GB memory card(Unlimited)

Human nature is such that we always want more. Don’t ask why. I am not a philosopher.


The truth hearts but if we want to use those resources we have to make a choice between our needs and wants. According to those choices we will use resources and satisfy some of our wants and forget about the other wants.


The wants that we will sacrifice are opportunity cost. If you have 10 bucks and you want credit for your phone and your stomach has been growling. You may choose not to eat and buy the credit due to some emergency and others may choose to eat and don’t buy the credit.So if you buy the credit, satisfaction from food is your opportunity cost and if you buy the food not having the power to call your friends is the opportunity cost.


Now in order to allocate resources in an efficient way to satisfy all of our wants we need the science of Economics.


We need economics to eat more, have more and spend more , as simple as that. Sounds materialistic but like it or not you have to pass this subject.

 

M.Ebrahim Sadeghian

Economics Decisions

To solve the problem of scarcity we need to ask ourselves four questions, what to produce?How to produce?for whom to produce?

Usually in Economy books these questions are explained in detail but thats just redundant as the questions are quite obvious.

But you have to look at these questions from a producers point of view and a governor's point of view. 

These questions are answered by two Market Systems. The Free market and the command market.

M.Ebrahim Sadeghian

 Market Systems

There are two system which answer the four economic questions. The Free market Economy, the planned Economy. In reality non of them exist, but to understand how private and government work together, we have to look at the elements and then look at the compound which is the reality. Closest to free market is USA and the closest to Planned market is North Korea


There are 5 or 6features which are actually one, that you have to remember for advantages and disadvantages of both systems. Now if you want full essay marks at least memorize 5 features.(To get high marks you have to understand and memorize )


  1. Factors of production are owned by who

  2. Systems aim

  3. Goverments role

  4. Who makes the decisions

  5. how the prices are set

  6. consumer satisfaction


So these are the main questions that should be asked and advantages and disadvantages of both Free market and Central market are from the questions above.


Free Market


Features:

  1. Factors of production are owned by private individuals

  2. It is profit motivated

  3. Government only sets the rules and doesn’t intervene

  4. Private individual makes all the decisions(the four questions)

  5. The price is set through price mechanism

  6. consumer sovereignity

Advantages