Quiz 16: Creating an Environment for Growth and Prosperity

Business

The economic growth increases the productive capacity of an economy. This means that the country can produce more goods and services from the available resources. This means that the GDP of the economy increases. If the rate of growth of GDP is greater than the growth in population, the per capita income of the economy increases. This means income per person will be higher. The more income means better living, greater access to basic amenities of life like food, education health care. This implies higher living standard for the entire population. The rule of 70 states that, if a variable grows at a % per year, it will take img years to grow as double. This calculation tells us that even a small difference in the growth rate can put an economy in more advance stage in a given time. Thus, two economies with growth rate 2% and 4% will double its per capita income in 35 years and 17.5 years respectively. Therefore, we see that a mere difference of 2% helps one economy to double its income half the time faster than another.

The economic growth increases the productive capacity of an economy. This means that the country can produce more goods and services from the available resources. This means that the GDP of the economy increases. If the rate of growth of GDP is greater than the growth in population, the per capita income of the economy increases. This means income per person will be higher. The more income means better living, greater access to basic amenities of life like food, education health care. This implies higher living standard for the entire population. There are three major sources of economic growth they are: 1. The gains from trade : Trade helps the economy to specialize in what they produce more efficiently and allow them to sell it to the customers who valued them most. This ensures lower cost of production and higher profit margins. Trade also enables the economy to consume beyond its productive capacity. Hence, trade increases country's income and ensures faster growth. 2. Entrepreneurship : The discovery and adoption of new technology and methods reflects technical advancement. The discovery and adoption of new technology or method needs huge investment and involves certain risk of failure. If the country has many entrepreneurs who are willing to take risks, the country will innovate and new techniques and methods will be invented. These new technique will make production more efficient. This means the same amount of input will now produce higher amount of output and growth will be sustained. 3. Investment : The investment both in physical and human capital is a major source of economic growth. The country that invest more in both of these capital experience higher rate of growth. This is because the investment increases the productive capacity of each input and greater output can be produce by the same input. The total product of the country increases and so does the income.

The economic growth increases the productive capacity of an economy. This means that the country can produce more goods and services from the available resources. This means that the GDP of the economy increases. If the rate of growth of GDP is greater than the growth in population, the per capita income of the economy increases. This means income per person will be higher. The more income means better living, greater access to basic amenities of life like food, education health care. This implies higher living standard for the entire population. The investment both in physical and human capital is a major source of economic growth. The country higher rate of investment in these two capitals; experience higher rate of growth than the country which did not. This is because the investment increases the productive capacity of each input and greater output can be produce by the same input. The total product of the country increases and so does the income. Thus, higher investment provides foundation for economic growth. The lower income country without the initial aid from the high income counterpart cannot provide this investment. Thus, foreign aid is necessary for these countries. However, the study have shown that the foreign aid was largely ineffective and in marginal cases proven detrimental to the poor economy. Many large countries often dump their agricultural excess into the poor countries in the name of aid. This distorts the market for agriculture in these countries and retard growth. On the other hand, as the political consideration drive the aid, it seldom transferred into investment in capital. Hence, foreign aid is still an area of debate as whether it can provide economic growth or not.

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