Quiz 7: Economic Growth: Theory and Policy

Objectives of stabilization policy The stabilization policy is a short-run operation which ensures stability in the economy. This is accountable for the GDP progress; where the actual GDP has to meet the reasonable potential GDP. The stabilization policy is involved in stabilizing the economy with government initiatives and enactments with the help of Federal Bank to stabilize the price level, unemployment rate, and so on. This can be cumulated as follows: • Regulating business cycle • Regulating interest rates • Responding to economic shocks These factors ensure that there is a controlled aggregate demand. The improvisation and progress in the above factors up brings the economy and helps the economy to have a healthy economic progress in short run.

Following table shows the labor output per hour for various countries: The labor productivity growth rate is computed by using the following formula: ……(1) Where, = Current period output = Previous period output Labor productivity growth rate: Country A Substitute respective values in Equation (1) to find the labor productivity growth rate for the Country A. Hence, the growth rate of Country A is Labor productivity growth rate: Country B Substitute respective values in Equation (1) to find the labor productivity growth rate for the Country B. Hence, the growth rate of Country B is Labor productivity growth rate: Country C Substitute respective values in Equation (1) to find the labor productivity growth rate for the Country C. Hence, the growth rate of Country C is Labor productivity growth rate: Country D Substitute respective values in Equation (1) to find the labor productivity growth rate for the Country D. Hence, the growth rate of Country D is Yes, in case of Country C, the initial productivity was lower, but it achieved higher productivity growth rate. Country C's initial productivity per hour was $2, but it registered a 50 percent growth rate, which is highest among all the four countries.

Economic growth Economic growth refers to total increase in the output of goods and services produced by the economy form one period to another. Property rights and political stability Property rights are those rights enacted by law for individuals and organizations on possessing, buying, selling, and utilizing a property. Political stability of the state with reference to economic growth means where the economy is reliable; stable, and predictable. Over that statement, the political circumstance has to be irk-free and friendly to the business environment. Heights of possible economic growth The possible economic growth in the states where there is no political stability and established property rights is less or negative compared with that of the states that have political stability and established property rights. Both are basic requirements of the business environment. The following factors are the key to the economy to grow faster on a positive node: • Increase in investment • Global marketing • International ventures • Friendly atmosphere with international countries • Political policies • War and issues free • Safety and security The above all is possible only when there is political stability and established property rights. The more stable the economy, the more the economic growth and vice-versa. Practical difficulties Any unstable political state fails to have a sound trade or business. It is evident in recent scenario: even domestic wars, terrorism, and political rivals create problem to the business setups. The uncertain political policies and poor property rights might affect the business setups. Uncertainty is the plug that stops the investment flows; this can be eradicated only with the help of stable political power and established property rights.