Economic Growth

Economic growth is defined as a real increase in the gross domestic product (GDP) of a country occurring over a period of time. This means that national income (adjusted for inflation) has increased and there has been a physical increase in economic activity. If real incomes rise, then consumers enjoy higher real spending power, so ultimately real economic growth transmits itself into greater demand for goods and services. Nominal growth is defined as economic growth including inflation, while real growth is nominal growth minus inflation. Economic growth is usually brought about by technological innovation and positive external forces. Economic growth rate is the pace at which economic growth increases during a given interval. The quantities most commonly used to measure economic growth rate are GNP and GDP.

Let us consider positive and negative implications of economic growth. Growth is a widely held economic goal. The growth of total output relative to population means a higher standard of living. A growing economy is in a better position to meet people’s wants and resolve socioeconomic problems both domestically and internationally. Apart from inflation risks, economic growth is highly desirable for the business community as it generates many opportunities for firms and has a positive impact on national economy.

First of all, as sales increase, profitability is likely to increase, enabling firms to report improved financial results to shareholders. In turn, investors’ confidence is likely to improve, making it easier for firms to issue new share capital.

Secondly, expansion or economic growth is easier to manage due to rising shareholders’ and high banking confidence. Growing sales across the economy result in the reduction of business failure rates and make corporate lending less risky. Higher returns on capital employed also provide a greater source of internal funds.

Besides, a rise in consumers’ real incomes generates an ideal opportunity for firms to launch new, innovative products. Consumers, with greater prosperity and confidence, purchase more of new goods.

Apart from that, the improved financial performance enables firms to direct more resources to reinforce fundamentals such as training, R& D and brand positioning.

And finally, consumer price sensitivity is eroded to some extent during robust growth periods. With rising incomes, consumers are more casual about their spending decisions. This may provide an opportunity for firms subtly to increase prices.

As for negative implications we should consider that economic growth can generate too much business optimism. Therefore, many consumers will spend above their means. If this continues, there is likely to be some ‘painful correction’ in the economy, although this time it will be in the personal rather than the corporate sector.

A further problem arising from economic growth is the probable build-up of inefficiencies in business. Cost control becomes less important if sales rise healthily, as profits are likely to be increasing naturally. Managers may concentrate on expansion, investment and recruitment, leaving average costs to increase while productivity improvements decrease.

Economic growth brings an entirely different set of problems to firms. Often these are ones that may not immediately threaten the survival of the business, but may start to breed a more complacent* culture, possibly leading to longer-term problems.

Inevitably, in economic downturns, objectives will change. More emphasis is likely to be placed on budgetary control, productivity improvements and restructuring to squeeze costs lower, enabling firms to operate from a more competitive platform.

Despite this, there is no doubt the business community would opt to have strong rather than negative growth in the economy – as this is the environment most favorable for profitability and growth objectives.

Notes: * complacent adj – самоуспокоенный

Ex. 1. Match the Russian word combinations with their English equivalents.

Ex. 2. Classify the impacts of economic growth from the list below as positive or negative for the economy. Comment on your choice.

1) reinforcement of fundamentals such as training, R& D and brand positioning;

2) erosion of consumer price sensitivity;

3) a lot of business optimism;

4) an increase in average costs and a decline in productivity improvements;

5) breeding a more complacent culture;

6) an increase in profitability;

7) launching new, innovative products.

Ex. 3. Identify the following statements as a)the anti-growth view b) the view in defense of growth c) the environmental concerns view. Express your attitude to the issues.

1. Growth causes pollution, global warming, ozone depletion, and other problems.

2. Growth leads to improved standard of living.

3. Some argue that growth harms the environment.

4. " More" is not always better if it means dead-end jobs, burnout, and alienation from one’s job.

5. Growth helps to reduce poverty in poor countries.

6. Growth actually has allowed more sensitivity to environmental concerns and the ability to deal with them.

7. Growth has improved working conditions.

8. High growth creates high stress.

9. Growth allows more leisure and less alienation from work.

Ex. 4. Answer the questions:

1. What is economic growth?

2. In what way can too much business optimism be dangerous for a company?

3. What are the positive impacts of economic growth?

4. What are the negative implications of robust growth periods?

5. What aspects of production are likely to improve in the period of economic downturns?