Republic of the Philippines

UNIVERSITY OF EASTERN PHILIPPINES

GRADUATE STUDIES
MASTER OF SCIENCE IN ECONOMICS
______________________________________________________________________

Student: RIZALYN C. CRISTI

CHAPTER 10: ECONOMIC GROWTH AND

Objectives:

• Explain the benefits of economic growth

• Calculate the economic growth rate

• Discuss the short-term and long-term change in living standards

• List the forces driving economic growth

• Discuss the role of the government in economic growth

It is indeed a fact that all modern economies, without exception, they grow over

the long run. Economic growth is the most powerful instrument for reducing poverty and

improving the quality of life in developing countries. Both cross-country research and

country case studies provide overwhelming evidence that rapid and sustained growth is

critical to making faster progress towards the Millennium Development Goals – and not

just the first goal of halving the global proportion of people living on less than $1 a day.

Growth has the potential to create virtuous spirals of wealth and opportunity. Strong

economic growth and job prospects encourage parents to invest in their children's

education by enrolling them in school. This might lead to the creation of a powerful and

rising group of entrepreneurs, putting pressure on the government to reform governance.

As a result, strong economic expansion promotes human development. This objective of

"inclusive growth" is increasingly being addressed by Asian governments. India's most

current development plan has two key goals: increasing economic growth while also

making it more inclusive, a program that is being replicated across South Asia and Africa.

Future growth will have to be built on a more globalized environment, which brings with it

new opportunities as well as new challenges. New technologies provide opportunities for

not only catching up, but also leapfrogging. Both the production and service industries

have stronger possibilities thanks to new research. In this paper, we will examine and

discuss the advantages of economic expansion in this study. We'll look at how growth is

defined and quantified. Finally, we'll look at the key elements that contribute to a country's

long-term economic growth.

SIGNIFICANCE OF GROWTH

‘Historically nothing has worked better than economic growth in enabling societies

to improve the life chances of their members, including those at the very bottom.’1 Quoted

by Dani Rodrik. Economic growth is the most successful means to lift people out of

poverty and achieve their larger goals for a better life, according to development research

and policy over the past 50 years. I have summarized and discussed the vital significance

to economic growth.

Improved living conditions

Research that compares the experiences of a wide range of developing countries

finds consistently strong evidence that rapid and sustained growth is the single most

important way to reduce poverty. A typical estimate from these cross-country studies is

that a 10 per cent increase in a country’s average income will reduce the poverty rate by

20 and 30 percent. 2

Research on individual and groups of countries confirms the central role of growth in

determining the rate at which poverty declines. For example, a landmark study of 14

1
Dani Rodrik, Harvard University, One Economics, Many Recipes: Globalization, Institutions and Economic Growth
(2007)
2
See, for example, Adams, R (2002) Economic Growth, Inequality and Poverty: Findings from a New Data Set,
Policy Research Working Paper 2972, World Bank, February 2002, and Ravallion, M and S Chen (1997) ‘What Can
New Survey Data Tell Us about Recent Changes in Distribution and Poverty?’ World Bank Economic Review, 11(2):
357-82
nations in the 1990s revealed that poverty decreased in the 11 countries with strong

growth and increased in the three countries with low or stable growth during the decade.

On average, a one per cent increase in per capita income reduced poverty by 1.7

percent. 3 Numerous other country studies show the power of growth in reducing

poverty:

• China alone has lifted over 450 million people out of poverty since 1979. Evidence

shows that rapid economic growth between 1985 and 2001 was crucial to this

enormous reduction in poverty. 4

• India has seen significant falls in poverty since the 1980s, rates that accelerated

into the 1990s. This has been strongly related to India's impressive growth record

over this period.5

• Mozambique illustrates the rapid reduction in poverty associated with growth over

a shorter period. Between 1996 and 2002, the economy grew by 62 percent and

the proportion of people living in poverty declined from 69 percent to 54 percent.6

Opening new employment opportunities

Economic growth generates job opportunities and hence stronger demand for

labour, the main and sometimes the sole asset of the poor. In turn, boosting employment

3
Operationalizing Pro-Poor Growth (OPPG) Programme (2005), ‘Pro-Poor Growth in the 1990s: lessons and
insights from 14 countries’
4 Lin (2003), Economic Growth, Income Inequality, and Poverty Reduction in People's Republic of China, Asian
Development Review, vol. 20, no. 2, 2003, pp. 105-24
5 HBhanumurthy and HMitra (2004), Economic Growth, Poverty, and Inequality in Indian States in the Pre-reform
and Reform Periods, Asian Development Review, vol. 21, no. 2, 2004, pp. 79-99
6 Arndt, James, and Simler (2006), Has Economic Growth in Mozambique Been Pro-Poor?, Food Consumption and
Nutrition Division Discussion Paper 202
has been critical to providing faster growth. Because to the global economy's strong

expansion over the last ten years, most of the world's working-age population is now

employed. Real wages for low-skilled jobs have increased with GDP growth worldwide,

which indicates that the poorest workers have benefited from the increase in global trade

and growth. 7 The link between growth and employment is not only about the number of

jobs produced by growth; it is also about the sorts of jobs created. In particular, there

have been worries that the number of jobs in the informal freelancing sectors expands

with growth alongside gains in the official sector, especially during this pandemic. A surge

of demand for online workforce has been seen these past years at the height of the

pandemic. Though 2020 started out with historically low unemployment rates (3.6% in

January 2020), the impact of the pandemic on the overall economy and job market is

undeniable, and many people turned to freelancing to help fill the gap.8 Informal

employment has long been thought to be involuntary – a sector where ‘surplus' people

scrape by while ‘queuing' for a limited number of better formal sector positions. While

informal work is preferable to none at all, it is widely regarded to be a distant second to

official employment.

The informal sector is primarily driven by a mix of overly regulated labor markets

and low levels of development. Careful labor market liberalization will lower the cost of

employment for formal sector businesses and raise the percentage of formal employment.

Of course, people currently engaged in the formal sector may pay a price for this. As a

7
Global Economic Prospects, 2007
8
FlexJobs - https://www.flexjobs.com/blog/post/stats-about-freelancing-find-freelance-work/
result, there is a trade-off between the quantity of formal employment and the advantages

it offers, and nations will need to carefully examine change in this area.

Improved Health and Education

There is overwhelming evidence that higher incomes lead to a better quality of life,

not least in terms of the Millennium Development Goals on health and education. Key

research findings here include the following:

• Higher levels of income reduce infant mortality.9 India demonstrates the strength

of this relationship: a 10 percent increase in GDP is associated with a reduction in

infant mortality of between five and seven percent. 10

• Educational outcomes such as test scores and the rates at which children repeat

a year’s schooling or drop out of school are significantly affected by per capita

income.11

• There is usually less disease in wealthier countries. For example, the prevalence

of HIV/AIDS is 3.2 per cent for the least developed countries, 1.8 per cent for low-

income countries, 0.7 per cent for middle-income countries and 0.3 per cent for

high-income countries.12

• Life expectancy is clearly positively related to the level of per capita income,

according to cross-country evidence.13

9
Pritchett and Summers (1995)
10
Bhalotra (2006), Childhood Mortality and Economic Growth, WIDER research paper No. 2006/79
11
Ibid. Barro and Lee (1997)
12
UNDP (2004), ‘Human Development Report 2004’, United Nations Development Programme
13
Barro and Sala-i-Martin (1995) Cited in Easterly (1999), Life During Growth, World Bank.
MEASURING ECONOMIC GROWTH

Economic growth is the increase in the market value of goods and services

produced by an economy over time, the percentage rate of increase in the GDP.

Short-run Economic Growth

The business cycle refers to changes in production, commerce, and economic

activity across the economy over a period of months or years. The business cycle is the

short-term fluctuation in economic growth. Economists use it to distinguish between short-

run variations in economic growth and long-run economic growth. The cycle is made up

of increases and decreases in production that occur over months and years. The changes

in the business cycle are a result of fluctuations in aggregate demand.14

14
Lumen Courses – Growth: https://courses.lumenlearning.com/boundless-economics/chapter/assessing-growth/
Long-run Economic Growth

The percentage rate of increase in real gross domestic product is used to quantify

long-run economic growth. The GDP is defined as the market value of all officially

acknowledged final products and services produced in a specific period of time inside a

country. The GDP is calculated using one of three methods:

• Product (output) approach: adds together the outputs of every class of enterprise

to provide the total.

• Income approach: calculates the sum of all the producers’ incomes.

• Expenditure approach: the value of the total product must be equal to the people’s

total expenditures.

In principle, all of the approaches should yield the same result for the GDP of a

country. For example, the equation for the expenditure approach is: GDP = C + I + G +

(X – M).

Written out in full, the gross domestic product (GDP) equals private consumption (C) plus,

gross investment (I), government spending (G), and the exports minus the imports (X –

M). For economic purposes, the economic growth is calculated and compared to the

population, also known as per capita income (indicator of a country’s standard of living).

When the per capita income increases it is called intensive growth. When the GDP growth

is only caused by increases in population or territory it is called extensive growth.15

15
Lumen Courses – Growth: https://courses.lumenlearning.com/boundless-economics/chapter/assessing-growth/
SHORT TERM vs LONG TERM

The critical need to ensure wholesale, qualitative improvements in national

economic growth demands paying close attention to information that characterizes

success in this area. The need to witness the fruits of one's work, their influence on one's

quality of living, and the dynamics of the most significant macroeconomic indicators as

quickly as possible characterizes today's social thought and attitude. Short-term growth,

as the name implies, refers to an increase in a country's output in terms of GDP over a

certain (typically one-year) period of time. The yearly percentage change in GDP is used

to calculate it. While Long term growth is when the country's productive potential is

increased, the potential of the country's GDP is increased. Due to an expansion in either

the quality or quantity of factor inputs, the country is now able to produce more.16

ECONOMIC GROWTH DRIVERS

There are three main factors that drive economic growth:

• Accumulation of capital stock

• Increases in labor inputs, such as workers or hours worked

• Technological advancement

The contribution of each of these three variables to the economy is measured by

growth accounting. As a result, the percentage of a country's economic development that

comes from capital, labor, and technology may be split out. Both conceptually and

experimentally, technological development has been demonstrated to be the primary

engine of long-run growth. The reason for this is actually pretty simple. According to the

16
Explain the difference between short term growth and long term growth – David J.
https://www.mytutor.co.uk/answers/7084/A-Level/Economics/Explain-the-difference-between-short-term-
growth-and-long-term-growth/
law of diminishing returns, the additional production gained by adding one more unit of

capital or labor will ultimately fall if other input parameters remain constant. As a result, a

country cannot maintain its long-run growth by simply accumulating more capital or labor.

Therefore, the driver of long-run growth has to be technological progress.

For each country, per capita

output growth is first broken down into

the respective contributions from capital

stock, labor inputs and technological

advancements (represented by total

factor productivity, or TFP).2 Next, we

divide our sample into two periods:

before and after the financial crisis. This

allows us to check if drivers of growth relate to the economic performance of a country,

especially during or after the recession. Finally, we plot average gross domestic product

(GDP) growth after the financial crisis against the average contribution to output growth

of labor, capital and TFP before 2007, as shown in the figures. 17

17
What Drives Long-Run Economic Growth? - YiLi Chien, 2015
THE ECONOMIC FUNCTIONS OF A GOVERNMENT

The founders of our country envisioned a very restricted role for the government

in economic issues in order to safeguard and encourage economic as well as political

freedom. Individual buyers and sellers, not the government, make the majority of

economic choices in a market economy, such as the one created by our Constitution.

Economists, on the other hand, identify six key government tasks in market economies.

Governments maintain the legal and social framework, provide public goods and services,

redistribute income, mitigate externalities, and stabilize the economy.

Government plays a vital role in the regional economy. There are solid reasons for

public sector involvement in economic development, including:

• Spillovers. The market will produce too much when private sector buyers and

sellers overlook negative spillovers, such as pollution, and too little when they

overlook positive spillovers, such as the overall gains for a region from investments

in education and training.

• Information market failures. Free market theory assumes buyers and sellers

have perfect information about all elements of production, employment and

consumption decisions. Reality often falls short of that ideal.

• Existing but underused capacity. If public infrastructure or private resources are

left idle, a community misses out on the economic potential of those existing

investments.

• Social impacts. Growth can have long-term positive impacts on the economic

well-being of places and people, especially less-educated, low-skilled individuals.

for economic development action – good or bad.

CONCLUSION

This paper presented how Economic growth is vital to a country and its

government. It plays a great role in the society particularly in the underprivileged sector

in the Philippines or any other country. An increase in the economy means more

opportunities for employment thus will improve the living standards and boost morale.

This will only be possible with the help of the Government, that is responsible for

maintaining the legal and social framework, providing public goods and services,

redistribution of income, mitigating externalities, and economic stabilization.

Material capital generation, human capital formation, and invention creation are all

factors that contribute to economic progress. To put it another way, the amount and kind

of capital and labor invested, as well as how they are used for production and innovation,

influence economic growth. As a result, while addressing economic growth, it is

necessary to look at the complete process. Furthermore, the goal of economic growth is

not equated with the maximum of GDP or GNP in this perspective, nor is so-called

"economic growth supremacy" supported. It's common to conceive of values that can't be

assessed by GDP or other metrics as economic policy goals.